REITs' Fading ESG Financing Boon

Green Bonds Give Balance Sheets an Undeserved Lift

Florida Governor and Former Presidential Hopeful Ron DeSantis

In the low-rate stupor of 2020 and 2021, the rapid ascendancy of ESG investing left no industry untouched. With the cost of money effectively zero, using capital to catalyze long overdue projects that would bring the world up to date in terms of best environmental practices seemed, briefly, like apolitical common sense. The massive scope of the built environment meant that even marginal efforts could yield optically large results. According to Brendan Wallace at Fifth Wall, building operations in the United States accounts for 40% of all energy consumption. Wallace told the New York Times in 2021,

The real estate industry has been, to some extent, the culprit that has been hiding in plain sight...and now it’s starting to occupy a place in the spotlight.

This spotlight brought capital with it. Fifth Wall closed a $500 million venture fund to focus on climate-related PropTech in 2022. Invesco launched a green building ETF although it failed to attract many assets. In truth, sustainable investing via equity allocations has remained niche. The real capital that flowed into sustainable real estate initiatives did so via debt capital markets in the form of "green bonds.” REIT green bond issuance peaked in 2021 at nearly $12 billion, representing nearly 16% of total REIT bond issuance.

In fact, REITs ended up representing more than 20% of total green bond issuance. They did so because of the relative effortlessness required for REITs to qualify their activities as “green”. The mechanics of issuing a green bond are basically declaring it green and committing to reporting on the allocation of the proceeds used in Eligible Green Projects as defined by the International Capital Markets Association (or similar entity).