A bit over a week ago Regency Centers became the first US Real Estate Investment Trust (REIT) to enter the green bonds space with a 10 year, $250m corporate bond linked to their portfolio of shopping centres. Interest rate is 3.75%; Bank of America Merrill Lvnch (BAML) was the structuring agent while joint bookrunners were BAML, JPMorgan, Well Fargo and US Bancorp.
The company has a BBB (low investment grade) rating which makes it so far unusual in the green bonds space; the high levels of demand for this bond tell us that investor appetite is shifting down the rating bands. About 25% of the bond was sold to ‘green’ investors according to ICAP.
In case you don’t know them, Regency develops, owns and operates grocery-anchored neighbourhood and community shopping centres across the US.
Bond proceeds will be used to fund new, ongoing or existing assets (under their management) which have received or are expected to receive any LEED certification label (Certified, Silver, Gold or Platinum). This relative lack of ambition is the worry. More on that below.
Our understanding is that the pipeline of buildings has been identified and the company expects distribution in the next 18 months if all is on schedule. If buildings timelines are longer, then they have existing LEED buildings to cover the remaining amount. The company will report to investors in no less than a year and ‘periodically’ thereafter.
According to investors, there were some questions around the use of proceeds being adequately ear-marked. This is largely due to the idiosyncrasies of REITs – for other green bonds, the amount is held in cash until distributed but REITs don’t hold cash and to maintain their tax status, they need to distribute 90% of their income which makes cash very difficult to hold onto. This means that they have added the line as ‘Pending the allocation of the net proceeds of the notes to Eligible Green Projects, the net proceeds will be used to repay amounts outstanding under our line of credit’. While this spooked some investors, we’re mostly concerned that the amount raised is spent on green projects, rather than the specific dollar tracked through (which almost no green bonds to date do).
This is where Svalbard, a craggy snow-capped island in the Arctic way north of Norway, comes in. I’m here talking climate bonds (surprise!) at this year’s Ny-Ålesund Symposium, and the climate scientists tell me the glaciers here are retreating and the fjords, which used to be ice-covered in Winter, are now ice-free year round. Amundsen set off from here to find the North Pole; he couldn´t do that anymore. (BTW there are signs everywhere that you can´t leave the small settlement without a gun, polar bears apparently knock people off for lunch quite regularly).
The loss of Arctic ice is one of those famous climate change ‘tipping points’, in this case where a huge chunk of the planet that has so far been ice-covered and reflecting heat turns into one that is ice free and dark blue over Summers and starts absorbing heat - which raises the annual average temperature of northern oceans. Arctic ice loss is a switch really; when the ocean around the Siberian and Canadian coast warms even a couple of degrees huge reserves of methane gas frozen on the sea floor start bubbling up. The shift can be quite sudden; the release has already started in shallower seas. That methane becomes a massive greenhouse gas jolt to the global system and bingo, temperatures go crazy and we probably lose the chance to hold back global warming to anything other than “catastrophic” levels.
The IEA tells us that to avoid catastrophic climate change we need urgent and deep cuts to emissions, including to emissions from the built environment – and quick. In fact some 40% of energy emission cuts have to come from energy efficiency, including buildings.
They also tell us that, because a retrofit only happens every few years, a “shallow” or low-ambition retrofit may mean we put off for many years the opportunity to make the sort of deep emission cuts we need to get out of buildings if we’re to achieve deep emission cuts. Yes that’s right: shallow retrofits can save energy and money, but may be counter-productive in terms of addressing climate change.
It’s great that Regency is using LEED certification as a benchmark, but improving buildings only to the basic level, LEED Certified, is a shallow retrofit. At least part of their designated portfolio is at that level. They need to up their ambition.
We would like to see a clear ongoing commitment to maintaining minimum performance in key LEED credits, such as those required by the LEED VCS standard. In fact if they’re going to keep using LEED, Regency should be using version 4 and additionally require projects to achieve at least 40% reductions below baseline (under LEED Energy and Atmosphere credit 4). This performance should be maintained and verified over the life of the Bond.
Ideally, the bond would provide annualised monitoring and verification on the carbon emissions of the assets to demonstrate the buildings are indeed best of class in their local market and that the bonds are financing assets that can be demonstrated to contribute toward a low carbon economy. That would be reasonable ambition.
Clarity about what is green would help Regency and the investors trying to figure these things out in areas where there are lots of greys. To help, in coming weeks we’ll be publishing Green Property eligibility criteria for Climate Bonds certification, backed by our $22-trillion-of-investors-represented Climate Bond Standards Board. Watch this space. But me, I´ll be watching out for polar bears.