Although sustainable lending is nothing new - we have published a series of articles over the last 18 months considering the role of green and sustainable lending, and some of the challenges facing the market, across a number of key sectors - the role of lending in the drive towards net zero continues to be increasingly relevant.  With the Real Estate sector contributing an estimated 37% of global carbon emissions and 34% of energy demand world-wide, real estate finance has an important role to play.

Across the market, participants are becoming increasingly familiar with the more established green and sustainability-linked loan principles however, for various reasons, adoption - in particular in the mid-market - remains low. For many borrowers, the additional time for execution (both green and sustainability-linked loans require a deal more front-end work agreeing KPI's and suitable stretch benchmarks), additional costs both upfront and through the life of the loan, and additional reporting obligations including, in many cases, through third-party verifiers and the resource and costs associated with such do not justify the potential benefits of borrowing on a green or sustainable loan.

Since the green and sustainability-linked loan principles were first published there has been a recognition that there will be gaps – situations and borrowers for whom the principles and associated loans are not appropriate – that will require a different approach.  Given true green loans will only be available for green projects and sustainability-linked loans available only where suitable KPI's can be identified and met, a need for other product types was always likely to be needed.  More recently we are seeing an emergence of these additional product types with lenders and funders offering different approaches to encourage, in particular, environmental and sociable improvements on a more flexible basis than was otherwise available.  As environmental targets and requirements become ever more pertinent, in particular as Scope 3 emissions become more relevant for funders and especially clearing banks, we expect alternative lending products to become more commonplace.