Banks and debt providers: the key to unlocking green finance in real estate

Real estate faces a huge gap in financing its net zero plans at the pace and scale needed to make them fit for a low-carbon future.

This is not just about capital investment, but rather using debt as leverage to support action.

Over 90% of the $5.8 trillion of real estate debt issued in the last five years has no climate key performance indicators (KPIs) attached.

Financial institutions have long been viewed as part of the problem for climate change. It’s time to reframe that narrative. Amid growing climate risks and mounting regulations, banks and other financial lenders are uniquely positioned to drive the decarbonization of real estate. This can be achieved by unlocking funds to successfully retrofit 80% of existing buildings that will still be here in 2050 thus managing risk more effectively.

JLL estimates that in the Global North alone, commercial real estate owners will require nearly $2 trillion in debt financing over the next two decades to retrofit office properties. For the Europe, Middle East and Africa (EMEA) industrial market, it will take $80 billion just to upgrade existing stock over 10 years old.

Yet the money is there – it’s just a question of making it available in a way that makes sense for lenders, borrowers and the environment.

This will involve action in three key areas:

Even with soaring numbers of net zero commitments, green finance take-up remains low. Of the $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.

This is due in part to a lack of stakeholder alignment on pricing and strategy. Current green finance offerings often fail to provide sufficient incentives for borrowers. Partnerships between banks, borrowers and real estate advisors could better shape loan terms to encourage adoption, with advisors ensuring asset-specific KPIs to demonstrate direct benefits.

One innovative example is the Green Buildings Tool launched by Australia's Commonwealth Bank. This free tool for customers recommends actions and estimates costs needed to improve energy efficiency, decarbonization and onsite renewables, helping businesses overcome the initial consultancy cost hurdle.

The banking world must also evolve in other areas. Today, many lenders underestimate the risk of poor emissions performance and building obsolescence. This oversight poses a threat to their loan portfolios and hinders the flow of finance for large-scale retrofitting projects.

The problem lies in gathering accurate ESG data on buildings, which is crucial to assess future risks beyond current market valuations and avoid holding loans for stranded assets. A JLL analysis of 46,600 buildings across 14 cities shows that 65% of office and 75% of multifamily buildings face stranding risk by 2030 without action to improve building performance.

To close this information gap, advanced modeling capabilities, such as those offered by real estate advisors, are increasingly helping banks and lenders assess and mitigate risks.

While some lenders are still overlooking transition risks, regulators are not. From January 2025, the International Valuation Standards (IVS) is mandating that valuations include ESG-related factors.

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 to improve building performance.

The private sector can’t unlock green finance at scale alone. Governments have a crucial role through providing direct finance mechanisms, cultivating public-private partnerships and creating transparent policies. Most lenders want more regulation in this space.

Several government initiatives are already showing promise. In the US, the Commercial Property Assessed Clean Energy (C-PACE) programme has invested over $7 billion across more than 2,500 projects, offering long-term, fixed-rate loans that transfer with property ownership. Similarly, government-sponsored enterprises like Fannie Mae and Freddie Mac offer green mortgage loan products with favourable terms for borrowers investing in building performance improvements.

In Europe, the German government's Federal Subsidy for Efficient Buildings (BEG) grant, managed by KfW bank, supports both efficient renovations and new construction. The UK's Better Buildings Partnership has created guidance for building owners on incorporating sustainability risks and opportunities within acquisition decisions.

While these initiatives are a great start, more is needed to drive change globally. More tax breaks, funded programmes and grants could help bolster investment in environmental, social and governance initiatives.

Transparency is another critical factor. JLL's Global Real Estate Transparency Index 2024 highlights that many countries and states are now moving from voluntary guidelines to mandatory disclosures on buildings’ emissions performance. The cost of inaction for building owners will rise quickly in years to come.

As the market rebounds from recent economic challenges, there will be an opportunity in 2025 to initiate decarbonization projects and accelerate the low-carbon transition. Taking action is increasingly the smart business choice to realize financial benefits from operational cost-savings to long-term value protection.

Lenders and banks must equally recognize the economic benefits of mobilizing climate finance and unlocking the vast potential of sustainable real estate.

The road ahead is not without obstacles. Challenges remain in aligning stakeholder interests, standardizing sustainability metrics and scaling up successful pilot programmes. However, the potential rewards – both for the planet and for companies today – are substantial.

Real estate has all the necessary tools, expertise and technology to decarbonize effectively. Banks have the power to drive innovation, incentivize green retrofits and reshape the entire landscape of real estate finance. Together, we really can decarbonize the built environment in ways that work for the planet, people and business.