The role of green financing in real estate investments.

Buildings are at the heart of the climate transition. After all, it’s where people spend most of their time. Chances are, you’re reading this inside a building. See?

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In the EU alone, buildings account for around 40% of annual energy consumption and 36% of energy-related greenhouse gas (GHG) emissions – roughly 15% of total EU emissions. Globally, the buildings and construction sector is responsible for 37% of energy- and process-related CO₂ emissions. In other words: if we don’t get buildings right, we don’t get climate right.

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But if we’re to realise climate goals in the near and long term, stakeholders in the building sector need to be proactive. That’s exactly where green financing comes in. Green financing can be a godsend for real estate, both in terms of regulatory compliance and long-term investment performance. It’s a way for property investors and developers to:

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• Access capital tied to clear environmental performance
• Future-proof portfolios against tightening regulation
• Capture rental and valuation premiums associated with green, energy-efficient assets

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In this piece, we’ll dig into these benefits and break down the green financing options that turn climate ambition into bankable projects.

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What is green financing in real estate? And why does it matter?

Green financing refers to debt or equity instruments where the capital raised is earmarked for projects with clear environmental benefits. There are different types of green financing instruments, which can be provided by banks, financial institutions, niche investors, or governments. For example, a loan to drag an old, inefficient building into the 21st century could be considered green financing. 

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In the EU, the concept of green financing is tightly linked to the EU Sustainable Finance Framework and especially the EU Taxonomy. It defines what counts as an environmentally sustainable economic activity, including construction, acquisition, and ownership of buildings.

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On a global stage, the UNECE provides a set of principles to guide green financing for sustainable real estate projects, typically structured so that: 

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• Use of proceeds is restricted to eligible “green” activities (for example, major energy upgrades for better energy efficiency)
• The borrower commits to measure, verify, and report performance over time
• In some products (like sustainability-linked loans), the cost of capital is tied to whether key performance indicators (KPIs) are met (e.g. energy intensity, embodied carbon, certification level)

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According to the UN, green financing can be instrumental in achieving the Sustainable Development Goals (SDGs). But more importantly, with more investors prioritising sustainability in their investments, green financing may just be the only option for developers. This is evident in the fact that green investments reached an eye-watering, record-breaking USD 2.1 trillion in 2024. 

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And lastly, stricter regulations like the EU’s Energy Performance of Buildings Directive are pushing real estate portfolios to become greener, which, in turn, is driving demand for green financing.

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Types of green financing instruments

Property investors and developers can access a growing range of green instruments:

Green bonds

Green bonds are fixed-income instruments where proceeds are dedicated to environmentally beneficial projects. In Europe, they are popular for financing low-carbon buildings, energy-efficient refurbishments, and district heating networks. In fact, in 2024, 6.9% of all bonds in the EU issued by corporations and governments were green bonds. 

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The EU Green Bond Standard and ICMA Green Bond Principles provide a framework for credible issuance (use of the money, project selection, management of proceeds, and reporting).

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Green loans

Green loans follow similar principles to green bonds but are structured as loans rather than securities. They are becoming increasingly common in European real estate debt, but also globally, with banks and investment institutions leaning more toward green investments. As per a report by the European Banking Authority, 42% of financial institutions in Europe have green loans and similar offerings. 

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Like bonds, green loans are earmarked for sustainable projects. The scale of the loan can vary based on the project, lender, and borrower. For example, some banks offer small green loans to homeowners for sustainable improvements, while some issue large loans worth millions for construction projects. You have to meet a set of criteria to qualify for these loans – for example, EPC ratings or green certifications. 

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Sustainability-linked loans 

Sustainability-linked loans (SLLs) don’t ring-fence the use of proceeds, but instead link the loan margin to the borrower’s sustainability performance. This could be something like:

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• Reducing portfolio energy intensity by X%
• Increasing share of EPC A/B buildings
• Achieving green building certification

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If the borrower meets (or exceeds) the agreed-upon KPIs, margins decrease, meaning they pay less interest. These are more flexible than green loans, which have fairly strict entry requirements.

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Green mortgages

At the retail level, banks offer green mortgages with favourable terms for:

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• Financing newly built, energy-efficient homes
• Renovating existing homes to meet high efficiency standards

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Unlike unsecured loans, these loans are secured by the property. These are often aligned with EU Taxonomy criteria or national definitions of “nearly zero-energy buildings.”

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Typical requirements for green financing

The actual requirements of a green financing instrument can vary by provider. In many cases, lenders turn to established frameworks and principles for determining the eligibility of a project or endeavour for green financing. 

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In the EU, many banks and institutions use the EU Taxonomy as a starting point, as it provides clear guidelines on real estate projects, assets and what counts as ‘green.’ For buildings, the EU Taxonomy defines technical screening criteria for:

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• New construction
• Renovation
• Acquisition and ownership of buildings

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For new buildings, here are the typical requirements: The primary energy demand is at least 10% to 20% lower than national Nearly Zero-Energy Building (NZEB) requirements or within the top 15% most energy-efficient buildings in the local market.

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For existing buildings:  Major renovation must deliver substantial energy savings (30% or more), or achieve a top EPC class.

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The Taxonomy also imposes “Do No Significant Harm” (DNSH) criteria and minimum social safeguards.

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Note: EPC ratings are set nationally and can vary by country. In many cases, certain building types aren’t covered by the national EPC schemes, which can make green financing a challenge for them.

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Besides EPCs, some lenders may require green building certifications like BREEAM, DGNB, LEED, and Nordic Swan Ecolabel. For instance, they may require a new project to be built according to the requirements of a specific certification and achieve a specific rating. 

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In Nordic markets, the requirements can be even more granular. For instance, a financier may want to look at whole-life carbon or embodied carbon limits for construction projects to qualify for financing. Again, these limits can vary by country.

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What are the benefits for property investors and developers?

Green financing obviously has environmental benefits for all stakeholders involved. However, there are also financial benefits to securing sustainable bonds, loans, and other instruments, as well as making new and existing properties more environmentally friendly. 

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Access to more capital

Developers and real estate investment fund managers can tap into a fast-growing capital pool, as more independent and institutional investors are gravitating toward sustainable investments. In a survey by Morgan Stanley, 77% of investors globally showed interest in sustainability. 

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Banks and other financial institutions are also propping up their green financing commitments in order to reach their ESG goals. That means a significant portion of lending may be dedicated to sustainable investments. For real estate stakeholders, taking the green route with new developments and retrofits opens up new opportunities for finding the capital they need.

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Green rental premium

Green properties are in high demand and typically earn a premium on rental income. That premium can range from 11.6% in a city like London to 9.9% in Asian markets. Both residential and commercial buildings can potentially benefit financially from this higher rental value. Businesses, in a bid to lower their carbon footprint, would want to lease green-certified buildings. Similarly, residents may want to lower expenses for energy (and reduce their emissions) by opting for such units. 

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On the other hand, buildings that aren’t green, or worse, poorly performing in environmental benchmarks, may struggle to be fully occupied. 

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Futureproof assets

Green buildings (as a result of green financing) are less exposed to risk, both in terms of environmental threats and financial liabilities. With ESG reporting becoming mandatory for many companies and environmental regulations becoming stricter, environmentally unfriendly real estate assets risk becoming stranded. 

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And that is obviously bad news for any stakeholder with a vested financial interest. 

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Green financing, green buildings, and energy data

Energy consumption is the primary GHG footprint of buildings, and it’s what separates a green asset from a non-green one. Energy data is what helps make sense of it all. 

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Whether you’re applying for a green loan or mortgage, or another instrument – especially for existing buildings – chances are there’s heavy involvement of energy data. It’s how you show the work, meet the benchmarks, and eventually make the building green for stakeholders. 

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comundo powers energy data collection for many real estate portfolios with a granular level of detail and fast automation. But it doesn’t end at energy data – our platform translates that data into accurate GHG emissions, so you have the numbers sorted. 

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Learn more about comundo and its features to get the granular energy and emissions data you need – without the manual work you hate – and use it to unlock green financing.

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