Banks can save the world by unlocking climate finance

The state of play

At last year’s COP28 in Dubai, the first global stock-take to assess progress towards goals in the Paris Agreement highlighted that more financial support is needed to realize climate commitments across all sectors, including real estate. Decarbonizing real estate takes investment – and companies will need to find or borrow significant amounts to retrofit and upgrade real estate portfolios. JLL calculates the EMEA industrial market alone could require US$80 billion of debt funding to retrofit existing stock that is over 10 years old,⁴ and in the Global North, CRE owners will require debt financing of nearly US$2 trillion in the next two decades to retrofit office properties and close the supply gap. For institutions that offer better spreads through green financing, typically 10-15 bps, this could represent total initial savings in interest of US$2-3 billion for investors.

Given the pressures to decarbonize buildings, mounting climate risks, ambitious corporate NZC commitments and increasing regulation, the green debt market should be taking off – but global debt issuance is stagnating. In the past five years, only 9% of total RE debt was linked to sustainability⁵, and this has reduced over the last two years. While non-sustainability labelled loans may include green elements, there is not enough capital currently allocated to improving building performance. But, with market conditions expected to improve during 2025, now is the time to leverage the upturn to finance decarbonization projects. In the short term this will support green premiums, and in the longer term it will ensure value retention.

Lenders currently face challenges in gathering accurate ESG data for CRE assets, crucial for assessing future risks beyond current market valuations. The ECB (European Central Bank) flagged that asset values consequently do not reflect the costs to improve building performance or mitigate future climate risks. In response, the International Valuation Standards (IVS) has mandated that valuations consider ESG-related factors from January 2025.

Lenders need better data on loan attributes like building type, age and energy performance to improve risk assessment and strategic planning. Without this, banks can't accurately assess their Scope 3 emissions or the costs to decarbonize their loan books. They risk holding loans for potentially stranded assets if borrowers don't retrofit buildings. From our analysis of 46,600 buildings across 14 cities, 65% of office and 75% of multifamily buildings face stranding risk by 2030 without action to improve building performance.⁶ These buildings need financing to decarbonize - this puts banks in a unique position to turn the current model on its head and drive decarbonization across real estate.

Investors and banks have the same incentive: maintaining high-quality, low-carbon properties in their portfolios. With CRE valuations set to incorporate ESG factors from 2025, the impact of future sustainability-related risks will be considered alongside current market value. This shift will allow banks to identify underperforming assets, estimate necessary capital expenditures and collaborate with building owners to develop sustainability-linked financing products, driving investment in improving building performance.

Green finance is crucial for decarbonizing the built environment, but take-up is low. Of the US$7.1 trillion in sustainable debt issued over the last five years, only 7% was in real estate, with just 12% of green bonds used for decarbonizing buildings. While there are many underlying factors, one of the biggest barriers to uptake is stakeholder alignment on pricing and strategy.

The price mismatch

Today’s green finance products are not advantageous enough for most investors to care about in isolation. There is a price mismatch in the market where lenders do not have the data to support better rates for green projects, and the current rates aren’t attractive enough to mobilize take-up.

Sustainability-linked loans offer discounts for sustainable KPIs, and the borrower must establish a baseline and report on progress. Historically, the discount of these loans alone was not enough to incentivize borrowers to sign up for the additional loan terms.

Case Study: Sustainability-linked financing

In a sustainability-linked financing deal in Singapore, the sponsor was upgrading the HVAC system to qualify for a basic green certification. The banks involved in the financing asked the sponsor why they were not trying to go for a higher classification. They replied that based on their due diligence, the higher classifications would not get them enough in higher rent or value to justify the cost.

The strategy setting

Many borrowers are unclear on how to strategically set measurable KPIs, and most lenders don’t have set KPIs or a system in place in which to monitor them; they rely on self-reporting or third-party validations. Partnerships between banks, borrowers and real estate advisors could shape loan terms to incentivize adoption, with advisors ensuring asset-specific KPIs demonstrate direct benefits.

Case Study: Commonwealth Bank

While some sustainable finance products to retrofit buildings exist, challenges remain for businesses in identifying practical measures that both reduce resource consumption and create long-term efficiency gains. Australia’s Commonwealth Bank launched their Green Buildings Tool (free for customers) which recommends actions and provides estimated capex to improve energy efficiency, decarbonization and onsite renewables to avoid that first consultancy cost hurdle. The Bank’s Business Green Loan supports businesses to finance property upgrades identified through the Green Buildings Tool.

Creating alignment

There is a need for stronger, consistent approaches and advice to incorporate and consider these sustainability factors, better enabling the analysis of existing portfolios as to the impact on value now and the predicted future risk to impacts on yields, cost of debt, cost of capex and cash flows.

JLL Risk Advisory is working with lenders across the globe to assess and then rapidly analyze these risks using AI and proprietary models on existing portfolio and new loans. This approach allows lenders to clearly assess risks with minimum input from the borrowers and without needing to perform building-level audits across the entire portfolio, thus reducing time and costs.

Case Study: International Bank

Situation: An international bank wanted to understand which assets across its portfolio were most exposed to brown discounts and which had the greatest opportunity for green premiums.

Approach: JLL Risk Advisory undertook an ESG impact assessment to review the portfolio across a range of relevant factors to quickly identify assets needing immediate intervention and compare decarbonization versus ‘business as usual’ scenarios.

Result: The bank was able to identify the top 10% of assets to prioritize to either avoid a discount or achieve a premium, and have greater clarity on the impact of future value linked to ESG.

For banks to offer better incentives for borrowers, governments must play a larger role. Private capital will only go so far. Extensive retrofitting may not be economically viable for some owners, but ensuring these buildings do not fall into disrepair is essential for a just transition. This is where the public sector needs to step in through:

a. Incentive and funding schemes to help pay for retrofits and reduce costs
b. Private-public partnerships to support projects that are not commercially feasible for property owners
c. Transparent policy infrastructure that helps lenders make informed decisions

a. Government incentives and funding schemes

Governments will need to play a more significant role in financing the transition through incentives such as tax breaks, funded programs, and grants to bolster investment into ESG initiatives. While there are ambitious examples of government intervention, they are insufficient to move the needle at a global scale:

One example of sustainable finance quick on the uptake is the U.S. program C-PACE (Commercial Property Assessed Clean Energy). C-PACE represents special assessment financing enabled by state-level legislation and is offered by private lenders for asset owners to undertake retrofit improvements in buildings. It provides long-term, fixed-rate loans that transfer with property ownership. C-PACE enhances the capital stack and lowers costs; through 2023 over US$7 billion has been invested across 2,300+ projects.⁷

Similarly, U.S. government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac offer green mortgage loan products that provide discounts or better pricing for borrowers who invest in improving building performance. Programs like C-PACE, Fannie Mae and Freddie Mac make retrofitting assets, such as affordable housing, more economically viable by providing favorable financing options to encourage retrofits.

b. Public-private partnerships

Private-public partnerships enable corporations to make investment decisions with the security of public backing:

• Canada Infrastructure Bank provides long-term financing for green projects at favorable rates by leveraging federal carbon pricing funds.
• Germany's KfW bank manages the Federal Subsidy for Efficient Buildings (BEG) grant, part of the German Climate Protection Programme 2030. It supports both efficient renovations and new construction.
• In the UK, the BBP (Better Buildings Partnership) has created guidance for building owners on incorporating sustainability risks and opportunities within acquisition decisions. Such tools could enable investors to better understand the potential value-add of acquiring and retrofitting these properties and provide lenders with a more comprehensive overview of the current energy performance and capex required to derisk the asset.
• Philanthropies are another avenue for financial support. In Europe, the Laudes Foundation has created Built by Nature, a fund offering grants up to €250,000 per initiative to accelerate demand for timber buildings. 

Beyond buildings, there is ample opportunity for cities and local governments to partner with private businesses to advance the wider energy transition.

Case Study: Washington Metropolitan Area Transit Authority (WMATA)

Situation: WMATA wanted to explore a potential path to reduce regional carbon emissions while creating a new revenue stream to support its transit mission.

Approach: JLL assisted WMATA in assessing options to monetize the solar potential at its parking facilities and analyzed alternative financing and ownership structures. WMATA partnered with JLL and a developer to install solar panels at four parking lots (at no cost to WMATA). The developer owns the solar arrays and secures its own customers but shares its revenue with WMATA.

Result: The 17 acres of solar PVs will generate enough energy to power at least 1,500 single-family homes. The project will provide an additional revenue stream to WMATA over 25 years.

c. Creating transparent policy infrastructure

Governments have a key role in creating transparent policy infrastructure that helps lenders make informed decisions. JLL’s Global Real Estate Transparency Index (GRETI) 2024⁸ spotlighted how national and city governments are ramping up regulations and disclosure requirements to fast-track the decarbonization of buildings, with many jurisdictions evolving from voluntary guidelines to mandatory disclosures.

Increasingly stringent global and regional climate disclosures will require building owners to report on the energy use and emissions of their assets, driving up the cost of inaction. In Europe, the EU Taxonomy and SFDR⁹ are driving investment into sustainable products, which will increase demand for green loans – according to BloombergNEF, nearly half of sustainable debt issuance in 2024 was in the EMEA region.

Case Study: Net Zero Transition Fund

Situation: A global RE investor with ~US$80 billion AUM wanted to set up a market-leading net zero transition fund aligned with disclosure requirements of SFDR Article 8.

Approach: JLL developed the fund’s strategic framework through a thorough market review to maximize capital attraction and differentiation.

Result: The fund strategy supports the transition to a low-carbon economy while providing a clear and credible pathway to achieve it, ensuring it is differentiated from other Article 8/9 funds in the market, meeting investor expectations and ensuring additionality

As building performance standards become commonplace, mandates to ensure transparency need to follow. More visibility into actual energy performance of buildings would provide clarity for both lenders and borrowers, creating the business case for green finance products.

Additionally, governments need to make regulatory compliance simple – local, regional, national and global government bodies must harmonize current frameworks to make it easy for the private sector to adhere to and plan for these policies.

Closing remarks

Green finance has an opportunity to be a powerful catalyst for decarbonization in the built environment. As the market rebounds, investors and lenders will increasingly recognize the economic potential that climate finance can unleash. Lenders are uniquely positioned to lead this change by reevaluating how risk is assessed across their portfolios, thereby gaining a clearer understanding of the funding required to align buildings with performance standards. Through considering the impact of future ESG risks alongside market values and partnering with stakeholders, we can create innovative financial solutions that encourage investment at scale. To truly unlock climate finance in a meaningful way, we will have to ‘break the bank’ by rethinking the role financial institutions can play in mobilizing investment into the low carbon transition.

_{[1] Climate/green finance is a broad term covering green, social, sustainability and sustainability-linked bonds and loans. Climate finance refers not just to the cost of physical risk associated with extreme climate events, but also the cost to transition the built environment from energy hungry buildings powered by fossil fuel to efficient buildings connected to clean energy, going above and beyond regulations
[2] JLL research
[3] Based on estimations of the debt-to-equity ratio of the cost of retrofitting office stock across 17 major countries
[4] JLL Research, based on deep retrofit capex for total sqm of stock over 10 years old
[5] JLL Research, BloombergNEF
[6] ‘Low carbon buildings create economic value’, JLL. The research compares building-level energy use and emissions data across 14 global markets: Amsterdam, Paris, Rotterdam, Sydney, Melbourne, Singapore, Boston, Chicago, Denver, New York, Los Angeles, San Francisco, Seattle and Washington, D.C.
[7] C-PACE Alliance
[8] JLL Global Real Estate Transparency Index, 2024 
[9] Sustainable Finance Disclosure Regulation}