Opens up Germany’s vast potential for green issuance on the back of the property sector, and there’s an interesting back story to this one….
Germany & green property data: What’s it all about?
In the absence of access to national data on buildings’ energy consumption and emissions production, a proxy has been established by Climate Bonds and LBBW to help kickstart a Certified market now and Certify asset pools originated prior to 2018.
A baseline for Germany is being established by the Climate Bonds Standards & Certification Scheme’s Low Carbon Buildings Criteria Technical Working Group (TWG).
It will develop local benchmarks and emission performance trajectories for German cities to meet the Paris Climate Agreement, while the lack of data on buildings’ performance is hopefully being tackled by government and market actors.
Yes, there is a ‘but’. And it’s an important one we need to highlight.
So, let’s go in parts…
The methodology for Certifying low carbon buildings
Our international science-based Low Carbon Buildings Criteria for commercial property are based on local market and climate conditions, and require buildings to be aligned with a low-carbon trajectory.
Using available regional data, a low-carbon trajectory is established by determining the best-performing top 15 percentile of buildings in a city as a starting point, and drawing a linear trajectory to net zero emissions by 2050 from there. You can see how the sliding scale works here.
For a green bond to be Certified by Climate Bonds the underlying asset portfolio has to meet that linear line at the mid-point of the bond’s maturity.
In practice, this means we publish a kilograms CO2 / m2 hurdle rate that will bring us over time – through any given bond’s maturity – to carbon neutral buildings by the middle of this century (2050).
Climate Bonds uses an emissions metric as opposed to an energy metric as this is what’s most relevant for climate change.
But in Germany…
In the German context, we found an obstacle to our methodology, which has prevented us from Certifying other German green bonds in the past.
German cities lack databases, which can provide information on the energy consumption and emissions intensity of buildings. This is instrumental in enabling issuers to demonstrate compliance to our Criteria.
In other European countries such as the Netherlands, England & Wales or France, the necessary data is available and has allowed us to establish a proxy and trajectory.
In Germany, the building stock has traditionally been assessed according to building age cohorts, with gradually more stringent energy demand target values since 2007. Even if some buildings comply with international standards such as LEED, BREEAM, EDGE etc. or national performance certificates and regulations like EnEG (Energy Saving Act), EnEV (Directive of the EnEG), the German government lacks a national database that makes this information publicly available.
Previous green bond issuers have therefore referred to such international labelling schemes wherever possible. For example, BerlinHyp’s first green Mortgage Pfandbrief, issued in 2015, provides comprehensive reporting, which includes charts showing what proportion of the cover pool meets the different levels of building standards.
Detailed information can be found on their dedicated Green Pfandbrief web page.
The LBBW bond
In order to Certify the LBBW green bond, Climate Bonds’ TWG and Standards team worked closely with the bank to establish an alternative proxy. In order to calculate the energy demands and emissions performance of the buildings pool, an alternative methodology was applied.
LBBW, supported by specialist advisor Drees & Sommer, looked for a reliable correlation between building age class and energy efficiency. This was evidenced by two studies, Fraunhofer, GfK et al.’s report to the Federal Ministry of Economic Affairs and Energy ("Energy consumption of the trade, commerce and services (TCS) sector in Germany for the years 2007 to 2010") and "Energy efficiency in retail” published by the German Energy Agency (DENA). This process was overseen, and the results approved, by TWG representatives.
Now confident in that correlation’s robustness, LBBW filtered the distribution of buildings in the pool by building age class to identify a set of properties that could, with a reasonable degree of confidence, be considered to be (at least) among the top 15% performers.
We consider this proxy the best available in current market conditions and a satisfactory test for a refinancing pool for loans originated prior to 2018.
LBBW has committed to disclosing operational performance data and setting a decarbonisation trajectory for the asset pool that is in line with 2050 carbon neutrality.
Such ongoing performance disclosure and monitoring will ensure the asset pool remains sufficiently climate-relevant to keep meeting our Criteria on an aggregate portfolio level.
This is important, as, apart from the praiseworthy top 15% commitment for new and existing buildings, LBBW also allows for allocations to refurbishments that can theoretically have up to 40% higher energy consumption than comparable new buildings. We would like to see more ambition. So we will also keep an eye on ongoing Certification compliance here…
The next step
Still, this proxy will not be available for owned assets or for any financing of loans originating after this issue. Loans originated from 2017 onwards will require operational performance data to confirm qualifications.
The Last Word: More buildings data
The Climate Bonds Initiative and LBBW have called on the German government to facilitate public access to the energy performance data of buildings, both commercial and residential. This would allow the establishment of a proxy indicator requirement which would make it as simple as possible to demonstrate compliance with Climate Bonds Low Carbon Buildings Criteria (and a 2050 low emission trajectory), without needing to undertake any carbon or energy accounting.
We are now developing a trajectory based on the proxy used for this Certification, and we hope to be launching an official baseline later this year.
In Germany, 38% of the national energy demand is caused by buildings, and commercial buildings are one of the main CO2 emitters.
In order to achieve Germany’s ambitions climate targets, green buildings need to become a high priority in the sustainability agenda, helping deliver SDG #11 (sustainable cities and communities).
There is strong investor demand and interest in quality issuance by many institutions, so Germany has high potential to become a major market for green property bonds and green Mortgage Pfandbrief.
We now need to propel BerlinHyp’s 2015 pioneering work into more Certifiable bonds, even more prominently flagging green bank lending and refinancing opportunities to international investors. This LBBW Certification is another step in developing this market.
Meanwhile, public sector authorities need to improve the collection and availability of data about buildings’ energy efficiency and emissions for that to become easily scalable.
More data, more green lending in commercial property, less emissions. Simple.
Find out more about the Climate Bonds Certification Scheme on our dedicated page.
‘Till next time,
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