Keynote interview: Cromwell on sustainable finance
Sustainable finance is set to become the norm in real estate lending, says Cromwell Property Group.
The Australian-listed group, which has A$11.5 billion ($7.25 billion) of real estate assets under management in Europe, Australia and New Zealand, says sustainability credentials will increasingly be necessary to secure debt finance.
Cromwell recently launched a Sustainable Finance Framework, part of its ambitious sustainability goals, which include a commitment to hit net zero for Scope 1,2 and 3 emissions including embodied carbon by 2045 and 100% use of renewable energy by 2030.
Group head of ESG Lara Young (l) says: “Our long-term targets need interim steps. Cromwell covers such a broad range of jurisdictions and asset types; we needed a structure to ensure consistency and transparency in our financing of assets. Obviously, it has flexibility built in, but we want to align our financing with achieving those long term goals.”
The framework covers green bonds and loans, where the proceeds must be allocated towards eligible sustainability projects, and sustainability-linked loans, where the proceeds can be used for general corporate purposes, but cost of borrowing is linked to sustainability-related key performance indicators. Each loan or bond will be reviewed by a second party.
Suitable uses of proceeds for a green loan include energy-efficiency upgrades or installation of solar PV, while KPIs for a sustainability-linked loan might include reducing emissions or use of renewable energy.
Head of treasury for Europe Afraz Ahmed (l) adds: “The framework supports Cromwell’s commitment to create low carbon resilient buildings and enables us to further our ESG ambitions by using sustainable debt instruments. Additionally, this sort of framework supports the ambitions of banks with regard to financing.”
The perception that sustainable finance means cheaper debt is fading, he says. “Go back a year or 18 months and I would say: yes, we would get a discount for sustainable loans. Now, particularly with the European banks, it is not about discounts, but access to capital.
“Banks have their own internal capital requirements for ESG lending and are getting pressure from the ECB to only back sustainable real estate. So, I don't see many discounts anymore and in the very near future, I think they will disappear.”
For Cromwell, the motivation for the framework is for it to drive real change in the portfolio, says Young. “A big focus is on making sure the framework delivers tangible benefits, beyond certification and disclosure,” she says. “We want to drive impacts on electricity and water consumption, or waste generation for example.”
The first loan under the framework was the transitioning an existing A$130 million ($89 million) bilateral loan with Commonwealth Bank of Australia to a green loan certified by the Climate Bonds Initiative. The debt facility is for the Cromwell Riverpark Trust, which owns Energex House, a 6-star NABERS Energy rated office building in Brisbane.
The second loan was a €66 million ($70 million) green loan from HSBC for the 61,000 sq m Janki shopping centre in Warsaw, Poland. Under the terms of the agreement, Cromwell will need to report on a number of sustainability measures, including renewable energy usage, annual greenhouse gas emissions and ensure that in any given reporting year at least 50% of new leases include green clauses which cover Scope 3 emissions.
Alongside Cromwell’s Sustainable Finance Framework, the Cromwell European REIT, a Singapore-listed real estate investment trust with assets across Europe, has its own Green Finance Framework, under which it secured a €157.5 million ($166 million) sustainability-linked loan in August. The REIT may also elect to use the group framework for new bonds and loans.
The manager's ultimate goal is to move towards entirely green financing. Ahmed says: “Our ambition is that, when loans are up for refinancing, where possible they will be refinanced sustainably.”