SPECIAL BRIEFING
Developed for the Green Bond Knowledge Platform for Japan

Financing low-carbon buildings and energy
efficiency in the green bond market
Japan is a key player in the development of energy efficiency measures and technologicalinnovation. There are substantial opportunities to leverage green bonds to finance low-carbon
buildings and energy efficiency in the country. Issuance across the world shows that capital
markets can be accessed to finance energy efficiency and buildings. Financing climate
adaptation and resilience also presents opportunities for Japan.
Introduction to Building sector green bonds

About this briefing

The imperative: The decarbonisation of the buildings sector isparamount. It accounts for around 28% of total global energyrelated CO2 emissions, according to the UN’s “Towards a zeroemission, efficient, and resilient buildings and construction sector”
2017. The projected world population growth, combined with theneed for greater energy access across the globe will dramaticallyincrease the overall energy demand in the sector and its related
carbon emissions.

This briefing provides an overview on how fixed-income
instruments have been used to finance investments in lowcarbon buildings. All 2018 data is as of 30 November 2018.

The opportunity: Directing significant proportions of investments
towards low-carbon buildings and energy-efficient equipment andbuilding materials provides substantial opportunities to offset
future energy demands and CO2 emissions. Using green bonds toraise financing leverages a market that has gained increasingprominence and acceptance.

Securitisation and financial corporates
dominate buildings green bond isuance
50

Loan

40

Sovereign
Government-backed entity

USD Billions

30

Local government

20

Development bank

10

Financial corporate0

Non-financial corporate
ABS

2016

2017

2018

Size of the buildings green bond market: In 2017, 59% of allenergy efficiency investments went towards the buildings sector,
according to the IEA’s World Energy Investment 2018 report.
In the green bond market, issuers have allocated proceeds to fundlow-carbon buildings and energy efficiency, employing a variety ofgreen bond structures and initiating a green securitisation market.
As of end November 2018, USD126bn had been allocated to low
carbon buildings assets and projects. Securitisations – asset
backed securities (ABS) and mortgage backed securities (MBS) –represent a significant share of the green bond market. Financial
corporates – particularly mortgage banks and property lenders –have allocated USD24.2bn for low carbon buildings from theirgreen bond issuance.

Green bond proceeds can be fully allocated to finance projects
in a specific sector, or they can be ‘split’ across a number ofsectors. Usually, issuers’ intention on proceeds allocation isset out in pre-issuance documents, such as the green bondframework, a second-party opinion (SPO) or otherdocumentation (e.g. bond prospectus).
To provide a representative picture of the sector, only green
bond proceeds that have been allocated to low-carbon
buildings have been taken into account. This means thatreported figures are not representative of full green bondissuance amounts, but rather, of amounts specificallyallocated to low-carbon buildings.

Sector overview
In the green bond market, low-carbon buildings have been
financed by a wide range of entities. In the last few years, ABS
issuers as well as financial and non-financial corporates haveplayed a significant role in the sector contributing more than 65%
of total proceeds allocated to low-carbon buildings. Developmentbanks, central and local governments and government-backed
entities are also active issuers. Most deals have financed housing
and multifamily properties, but financing has also gone tocommercial buildings (offices, logistics) and specialised buildings,
namely hospitals, airport facilities, schools and universities.
The green securitisation market has gained particular significancewith ABS issuance of USD40bn allocated to buildings. These deals
aggregate pools of loans, leases or similar contractual receivables
to a deal size big enough to justify the transaction costs of bondissuance. Fannie Mae and PACE-scheme issuers are responsible
for a significant share of green ABS issuance, but there have been
also green RMBS and green CMBS bonds (see p3).
Suitable projects for low carbon building green bonds include
new construction and the refurbishment of existing properties.
New buildings need to meet energy efficiency targets and/or
obtain a recognised building certification. Products such as LED
lighting, technologies such as district heating, equipment meeting
industry certification schemes may be suitable for green bondissuance if they target energy performance improvements of at

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least 20%. Certain building materials such as FSC certified woodbuilding materials could also qualify.
In addition to energy efficiency upgrades, Fannie Mae’s Green
Rewards, Property Assessed Clean Energy (PACE) and some otherprograms, also target improvements in water use and efficiency.

financial services group, debuted with a EUR1.5bn Certified
Climate Bond; SpareBank 1 Boligkreditt with a EUR1bn Certified
Climate Bond. Both cover pools comprise residential assets, which
comply with the 2010 and 2017 Norwegian building codes.

Covered bonds have boosted bank issuance

Property companies started issuing in 2013

SFF (Svensk FastighetsFinansiering) entered the green bondmarket in 2015. The financing vehicle is a JV for 5 listed property
companies, and has raised USD747m in multiple bonds to financetheir investments across Sweden. Proceeds are allocated fully tofinance commercial low-carbon buildings, mainly offices, thathave achieved at least LEED “Gold” or BREEAM “Very Good’.

Property companies across the world haveissued green bonds

USD Billions

6

Other

5

Singapore

4

USA

3

China & HK

2

Sweden10France2013 2014 2015 2016 2017 2018

Note: 'Other' includes (in descending order of total issuance) Luxembourg,
South Korea, Australia, Japan, Canada, Germany, Malaysia, South Africa,
the Netherlands, Belgium and Norway

In total, USD15.5bn have been raised by property companies tofund green buildings and upgrades in 16 countries. Issuers from
Sweden and France top the rankings, but 2018 volumes featurestrong issuance from Hong Kong and Singapore companies.
Dutch property company OVG raised EUR80m in 2016 to financethe redevelopment of existing commercial properties into four
sustainable office buildings. The loan was Certified under the
Climate Bonds Standard for Low Carbon Buildings (Upgrades).
In 2018, global logistics real estate fund manager Prologis issued
USD763m, a first for logistics. Building certification under LEED,BREEAM, HQE, DBJ or similar is required for assets to qualify.
In Australia, the Monash University has issued three Certified
Climate Bonds for a total of AUD400m, with proceeds allocated to
new low-carbon buildings, energy efficiency upgrades and solar
generation for facilities on the university campus. The projects
result in 42% saving in emission intensity per square meters,
which is in line with the CBI buildings criteria.

Banks step up green property financing
2018 has seen increased issuance from banks with property
lending operations and total buildings-related issuance reached
USD24.2bn. This is largely due to a rise in green covered bondissuance as Norwegian mortgage lenders entered the market.
Berlin Hyp (the first green Pfrandbrief issuer), Deutsche Hypo and
DNB Boligkreditt account for c.70% of mortgage covered bondvolume. DNB Boligkreditt, the mortgage arm of Norway’s largest

10
USD Billions

Vasakronan (Sweden) was the first non-financial corporate andfirst property company to enter the green bond market. Since
2013, it has issued 15 green bonds with a total of USD2.3bn
allocated to low-carbon buildings.

Unsecured GB in MTN
Subord secured
Sr unsecured

50Private placement
Covered bond

2016

2017

2018

German mortgage bank MünchenerHyp issued its first EUR500m
green Pfandbrief in 2018 to finance residential and commercial
mortgages. Barclays was the first financial institution in the UK toissue a Certified Climate Bond financing residential mortgages forproperties scoring in the top 15% in the EPC rating system.

Covered bonds provide a funding option forbanks and real asset security to investors
Covered bonds are highly-regulated securities in Europe withsuperior credit rating. They achieve lower funding costunsecured debt thanks to a dual recourse structure where bondinvestors have a general claim against the issuer, as well as aclaim over a dedicated ‘cover’ pool of assets. Cover poolcomposition s regularly monitored, which benefits investors.
In May 2018 Landshypotek Bank (Sweden) issued the first
forestry covered bond. The cover pool eligibility criteria feature
PEFC and FSC certification for large holdings and green forest
management plans for small holdings.

Green bonds finance a wide range of lowcarbon public infrastructure
Local and central governments play a key role in financing lowcarbon buildings, as they often have the statutory duty to provide
public infrastructure. Central and local governments haveallocated USD11.8bn to buildings (or 18% of their green bondissuance). Universities, schools and hospitals are prominent
examples of public buildings funded with green bonds.

Mortgage-backed securities consitute thehighest share of building green bonds
MBS
Covered bond

7%
11%

7%
5%

US Muni

8%

ABS
Term loan
Private placement

1%
1%

62%

5%

Sukuk
Other

The Swiss Canton of Geneva, for instance, issued a CHF620m(USD610m) green bond in late 2017 to finance the new University
Hospital building, the extension of the maternity hospital andUniversity of Geneva’s “CMU” new building, all developed
following energy high performance standards (HPS).

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Developed for the Green Bond Knowledge Platform for JapanIn Sweden, state-owned company Specialfastigheter has issued aSEK1.25bn (USD150m) green bond to finance properties related
to the prison and probation service, defence and judicial system,
institutional care and other special operations. Buildings have tobe certified at Miljöbyggnad Gold or Silver level to qualify.
Over USD5bn have been allocated to buildings by US local
governments and agency issuers. For example, eight US state
universities have used US Muni green bonds to fund upgrades tocampus buildings, as have some school districts.
The New York State Housing Finance Agency (HFA) has issued
USD812m in 10 Certified Climate Bonds to fund affordable
housing with low-carbon impact across New York State. Eligible
projects are compliant with the Climate Bonds Standards for lowcarbon buildings, and meet local building codes such as the NYC
Local Law 84, or the ENERGY STAR energy rating scheme formultifamily residential infrastructure.
California Health Facility Financing Authority (Kaiser Foundation
Hospitals) has issued USD983m in two green bonds to financemedical facilities that have received or are expected to receive
LEED gold or platinum certification.
US local governments have also issued green bonds for buildings.
Denver City & County Board of Water Commissioners issued
USD143m for the redevelopment of Denver Water’s main
operating and administrative complex, for example. The newbuildings are expected to be LEED certified.
Most sovereign green bonds have earmarked proceeds to fundlow-carbon buildings: over USD6.3bn from Ireland’s National
Treasury Management Agency, the Republic of France and theRepublic of Indonesia. In 2018, the Republic of Lithuania issued a
EUR20m sovereign green bond solely to finance a loan to the
Public Investment Development Agency to fund the renovationand energy efficiency improvements in 156 apartment buildings.

The green securitisation market
ABS issuance accounts for a third of green bond issuance for lowcarbon buildings. A securitisation can be defined as ‘green’ when
the underlying cash flows are related to low-carbon assets or theproceeds are used to finance such assets. However, ABS arecomplex bond structures which require specialist structuringexpertise and an ABS investor base. Consequently, most deals todate are from more sophisticated bond markets.
Fannie Mae’s Agency MBS and US PACE ABS are prominent
examples, but issuance also includes green RMBS from theNetherlands and Australia, and CMBS in China and the USA.
Although not included under buildings, there have also been US
and Australian ABS deals secured on residential rooftop solar.
US government agency Fannie Mae does not provide green loans
itself. Rather, it supports the secondary residential mortgage
market in the US by purchasing pools of mortgages, which it
aggregates and uses as collateral in green MBS, which it sells toinvestors. It has issued USD47bn to refinance mortgages secured
on buildings with a green building certification or improvements
to reduce energy and/or water consumption by at least 25%.

Diversity of mortgage-backed structures
Agency MBS are issued by US government agencies, primarily
Fannie Mae and Freddie Mac. They purchase a significant
volume of mortgage portfolios from originating lenders andrefinance them in the MBS market. Green initiatives send astrong signal to lenders, particularly when they incentivising
best practice such as certification for buildings and lending forenergy efficiency. Both Fannie Mae and Freddie Mac offer
preferential terms to “green” multifamily mortgage pools.
Residential mortgage-backed securities (RMBS) are secured
on large pools of residential mortgages. Dutch lender Obvion
issued the first green RMBS in 2016 and has now issued three
Green Storm RMBS deals totalling USD1.9bn. In 2018, National
Australia Bank issued an AUD2bn RMBS with an AUD300m
green tranche. All have been Certified against the Climate
Bonds Standard for Low-Carbon Buildings.
A common barrier to scaling up green RMBS is the lack of dataor access to energy performance data. In the UK, for example,
pressure from lenders to make data publicly available has
resulted in new green bond transactions.
Commercial mortgage-backed securities (CMBS) deals
secured on commercial mortgages. Property types include
office, shopping centres, multi-family housing, logistics, etc.
CSAIL, a joint platform of Credit Suisse and Natixis, issued thefirst CMBS deal with green subordinated notes. They are
secured on a LEED Platinum certified office building on WallStreet in New York City. However, it is China that recorded thefirst green CMBS – a three tranche deal secured on a LEEDGold Certified office building owned by China Energy
Conservation and Environmental Protection Group (CECEP).

1.5
USD Billions

Zürcher Kantonalbank , on the other hand, issued CHF325m tofinance mortgages and real estate loans as well as housing
cooperatives. Both Swiss transactions require properties to becertified under the MINERGIE certification scheme.

PACE ABS reached USD5.3bn

2014
2015

1.0

2016

0.5

2018

0.0

2017

Renew
Financial

Renovate Ygrene Energy
America (HeroFundFunding)(GoodGreen)

Other

PACE – Property Assessed Clean Energy – is a US programme,
aimed at improving energy and water efficiency in residential andcommercial properties. Typical PACE projects include instalmentof heating and cooling systems, lighting improvements, solar
panels, water pumps, insulation, etc.
PACE lenders provide loans, and some refinance their loans via
green bonds. California is at the forefront of PACE ABS issuance,with most PACE lenders issuing bonds. Renovate America is thefirst and largest PACE ABS issuer. PACE ABS issuance amounts to
USD5.3bn with a number of established capital providers
responsible for setting-up and financing PACE programmes.
Additionally, around USD3.8bn of solar ABS bonds have been
issued to finance the installation of residential solar systems.
Prominent issuers are Tesla Energy, Vivint Solar and Solar Mosaic.

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As part of the H2020 project, the European Commission is funding
the EuroPACE project which seeks to introduce PACE in Europe.
The Climate Bonds Initiative is part of the Consortium working on
EuroPACE as green bonds represent an effective financial tool tocapitalise the programme.

A third of green bond proceeds raised by
Japanese issuers go to low-carbon buildings

Opportunities in Japan
Japan has a long tradition of expertise in energy efficiency andtechnological innovation. Since the explosion of the Fukushima
nuclear reactor in 2011, Japan energy efficiency measures havebecome increasingly important in meeting energy demands andJapan’s pledge to reduce CO2 emissions.
Japan has witnessed a property construction boom with 24.1m
new dwellings being built between 1991 and 2013. The Japan
Sustainable Building Database provides a list of best practice
examples of low-carbon buildings, including technical details and a
CASBEE score, which reflects the environmental performance ofthe building as evaluated by the CASBEE rating system.
New energy efficient buildings and building upgrades could be
funded with green bonds. However, the green bond market in
Japan is still fairly small at USD9.2bn of issuance to the end of
November 2018. Proceeds allocated to low-carbon buildings
represent about a third of total issuance, or around USD3bn.

USD Billions

4

Banks dominate Japanese green bondissuance in 20183

Non-financial
corporate
Financial corporate

2

Development bank1

Government-backed
entityLocal government02014 2015 2016 2017 2018

Development Bank of Japan is the biggest issuer in the sector,
having allocated almost USD2.2bn under four green bonds tofinance loans for the construction of buildings, which received a
DBJ Green Building Certification of at least 3 stars out of 5.
Mitsubishi UFG, Sumitomo Mitsui Banking Corporation and
Sumitomo Mitsui Trust Bank are the top three financial
corporates. Between them, they have allocated USD706m to lowcarbon buildings and building energy efficiency.
Tokyo Metropolitan Government has issued two green bonds
and allocated USD36m (or 35% of issuance) to finance smart
energy, urban development and improvement of the living
environment. Additionally, around 30% of proceeds have been
allocated to climate adaptation projects such as the developmentof tsunami protection facilities, development of Tokyo port
facilities and islands coastal protection facilities and developmentof medium and small size rivers.

3%
8%
1%
1%

23%

31%

USD9.2bn
cumulative

Buildings
EnergyTransport
Water
Waste

33%

Land Use
Adaptation

Airline company Ana Holdings and the Nomura Research Centre
have raised bonds specifically to finance buildings. Ana Holdings
allocated the proceeds to the construction of a new energy
efficient training centre designed to achieve a 33% Energy
Reduction Ratio under the Tokyo Metropolitan Government’s
Green Building Program, corresponding to a Rank 3 (the highest of
three levels). The Nomura Research Institute, on the other hand,financed the acquisition, construction and fit out of Yokohama
Nomura Building in Yokohama business area.

Conclusions and outlook
In recent years, bond structure diversification in the green bondmarket has shown that capital markets can be accessed to financeenergy efficiency and buildings projects. Japan being at theforefront of energy efficient technological innovation as well as
low-carbon buildings construction, has the potential to leveragegreen bonds to finance the buildings sector.
Additionally, green bonds offer opportunities to finance climate
adaptation projects. For instance, Louisiana Local Government
Facilities and Community Development Authority issued a
USD12bn to finance coastal restoration and protection throughthe placement of granite rock barriers along the coast to reduce
shoreline retreat and promote natural vegetative colonisation.
Climate change poses threats and risks in Japan, where the Great
Earthquake of 2011 had catastrophic impact. Strong action isrequired to address these risks, and investments in climate
adaptation and resilience can be funded with green bonds. The
Tokyo Metropolitan Government is the first Japanese issuer toallocate green bond proceeds towards climate adaptation, butultimately all buildings need to become resilient.
Financial innovation is happening all the time in green finance.
The new FTSE EPRA NAREIT Green Indexes, launched in December
2018, include Japanese property companies and allow investors toinclude sustainability in financial considerations for property
companies and factor in different industry building certification
schemes. Japan’s strong commitment to sustainability could feed
into investors’ increased appetite for green investments, andgreen properties.

© Climate Bonds Initiative, January 2019www.climatebonds.net

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