Unibail-Rodamco, a large European commercial property company, yesterday announced that it had placed a landmark EUR750mn green bond based on a portfolio of green buildings.
The bond was 3.4 times oversubscribed with the order book reaching EUR2.5bn in under 2 hours!
The initial thinking on pricing was apparently mid-swaps plus 85bp-90bp, but ended up at 78bp. That's a fantastic result, saving Unibail-Rodamco well over EUR500,000 a year in interest payments compared to the initial price expectations.
The first corporate green bond linked to property was issued by Sweden’s Vasakronan for $197m in November. The Unibail-Rodamco bond’s larger scale – still with substantial oversubscription - will fire up the green property sector; and this is a very welcome development.
Bank of America Merrill Lynch (BoAML) and Credit Agricole CIB were the Structuring Advisors and Global Coordinators; the book runners were BoAML, Barclays, Credit Agricole, Credit Mutuel CIC, Deutsche Bank, Goldman Sachs, JP Morgan, RBS and UBS.
Is it really “green”?
Energy efficiency improvements provide consumer benefits in the form of lower bills. But the urgency for roll-out is driven by the need to reduce greenhouse gas emissions generated through the built environment. In the International Energy Agency’s view, significant energy efficiency improvements are essential to being able to reduce energy sector emissions in time time to head off catastrophic climate change.
In that context, efficiency improvements need to be inline with the levels of emission reductions we need to see; being part of addressing climate change will have to involve substantial improvements rather than just any impact. For example, if all buildings achieve a 5% efficiency upgrade but a 20% increase is required to avoid 2 degrees, then 5% is not enough.
This is especially important because upgrades/investments in buildings generally happen only a few times in a building’s lifetime – once a decade or more. Modest improvements “lock-in” inadequate levels of performance.
The Unibail-Rodemco Bond documentation defines eligible assets for the bonds as new or ongoing projects or existing assets that have, or will receive, certain BREEAM Design and In-Use standards. BREEAM is a widely recognised standard for environmental sustainability in buildings in the European market.
The assets in the bond are determined by a waterfall of eligibility criteria:
- BREEAM Design Stage ‘Very Good’ or higher, representing 4 stars on a 6 point scale, and achieved by over 40% of buildings certified by the standard[1].
- BREEAM In-Use ‘Very Good’ or higher within 3-years of opening, and
- Five different Vigeo standards, each measured through demonstrable tests.
As well, in line with the Green Bond Principles, Unibail-Rodamco will disclose the environmental performance of the building each year and publish the buildings being financed. They expect to finance new and highly-rated buildings, although this is not spelt out explicitly in the bond documentation.
BREEAM is a reputable standard and Unibail’s commitment to reporting is fantastic. However, we note that BREEAM presents only a snapshot of performance and provide no assurance that the assets will continue to represent best market performance.
To ensure impact over the life of the bond, BREEAM assessments should be accompanied by clear performance hurdles and measurement. This will also provide a benchmark for the company to report against rather than reporting absolute numbers.
40% of all BREEAM buildings achieve the ‘Very good’ level ‘ it’s important that bonds like this become more ambitious over time.
Unibail-Rodamco has also added some additional criteria to the portfolio provided by Vigeo. (The Climate Bonds Initiative is supportive of the Vigeo criteria as an overlay; they provide a different view on a bond to ensure that it doesn’t breach any ESG principles such as human rights).
The criteria cover a number of issues with appropriate metrics. However, what they don’t do is
- Provide a certification that their criteria are met or
- Attempt to guarantee impact - i.e. ensure that the retrofits or new build are ‘green enough.’ This is where the BREEAM or LEED certification comes in and, hopefully in the future, performance hurdles accompanied by verification and monitoring.
To build on the BREEAM standard and ensure buildings guarantee impact, the Climate Bonds Initiative has convened an expert group on green buildings, with members ranging from IEA and EBRD to the U.S. Green Building Council. These criteria—which include global standards for green building, such as LEED—will be available this spring.
Green property bonds need monitoring and verification mechanisms accompanied by market baselines for the buildings to be measured against over the life of the bond.
(Note also the inclusion of existing assets in this successful placement; we have argued for some time that bonds are primarily a re-finance instrument, and recognizing existing assets in that context makes sense – and that investors will be comfortable with this approach.)
