The Greening of CRE Bonds

This financing tool is projected to hit $5 trillion in volume by 2025. Here's why.

Image by Anand Kumar via Pixabay

Green bonds have emerged as a major factor in financing green initiatives on a variety of fronts, including multifamily real estate. From their debut in 2007 through last year, these financing vehicles have grown, reaching $1 trillion in cumulative issuance in December 2020.

Since a slow start more than a decade ago, the green bond market has benefitted from stepped-up efforts to cut carbon emissions. By the end of the third quarter this year, green bond issuance topped $350 billion, outperforming 2020’s record $297 billion, according to the Climate Bonds Initiative.

That acceleration led the organization to raise its 2021 forecast to $500 billion and its 2025 projection to $5 trillion. Such extraordinary growth is the result of various global initiatives, including the Paris Agreement and the United Nations Sustainable Development Goals.

As the name suggests, green bonds have one key difference from regular bonds:  they finance projects that offer a positive environmental impact. Common examples include green buildings, renewable energy and energy efficiency projects, clean public transportation, pollution prevention and control, conservation, sustainable water and wastewater management.

In addition, tax credits are often available. Green bonds typically allow participants to issue debt more cheaply, about 10 basis points below standard bonds.


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The U.S. is the largest source of green bonds, led by Fannie Mae. Corporations like Apple, Pepsi and Verizon have gotten in on the act. State and local governments have also turned to green bonds to pay for infrastructure projects.

Debt and the buy side

Typically, green bond purchasers are institutional investors, often with an ESG mandate or an environmental focus. Other buyers include investment managers, governments and corporate investors. Green bonds are closely related to ESG initiatives and those who include them in their operations show commitment to climate change action. For their part, investors seek to understand how managers integrate ESG into investment strategy and company culture.

Green bonds represent a rapidly growing share of REIT debt offerings—16.4 percent of the capital raised through the third quarter, up from 10.3 percent in 2020, according to S&P Global. Among the recent entrants to the market are AvalonBay Communities, Healthpeak Properties and Realty Income Corp.

Eligible categories of environmental benefit are codified within such rating systems as LEED, BREEAM, Green Star, DGNB, HK-BEAM and Living Building Challenge. These programs require documentation across multiple performance categories and independent verification, which is the backbone of green bond assurance.

These frameworks for certification and energy ratings signal ‘green’ to investors. These assets are applicable both to verifying the selection of Eligible Green Bond Projects and to reporting outcomes.


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Last year, Fannie Mae issued $13 billion in green bonds, bringing its total since 2012 to $88 billion. Asset owners have two programs at their disposal: Green Rewards and Green Building Certification. Both require annual reporting of their properties’ water and energy consumption. Both can be resecuritized into a green bond. Moreover, the GSE allows borrowers to choose from an extensive list of organizations, from BREEAM USA and the U.S. Green Building Council to the Passive House Institute U.S.

Freddie Mac also offers sustainability-related bonds. Through 2020, volume  reached $3.3 billion in green bonds, focused on energy and water efficiency for workforce housing; $877 million worth of social bonds, which support affordable properties; and $971 million in sustainability bonds, attracting capital to promote economic mobility and growth and community sustainability.

Green Advantage, a five-year-old Freddie Mac initiative, is designed to serve older housing stock—often affordable and workforce housing properties—in need of energy-efficient upgrades. Through September 2020, the program’s volume totaled $60.7 billion across 596,000 units, according to the GSE.


READ ALSO: Top States for LEED Multifamily Certifications in 2021


Seeking transparency

Greenwashing—making false or misleading claims about the green credentials of a company or financial product—is a major challenge. for the market in green bonds. It creates skepticism about green bond initiatives and proclaimed ESG commitments.

Some borrowers adhere to guidelines called the Green Bond Principles, which have been endorsed by the International Capital Market Association to help bring transparency to the market. Others resort to a range of companies that offer to assess and certify bonds.

In Europe, there is the EU Taxonomy—a classification system that provides legal definitions about which economic activities can be considered sustainable. This publication is regarded as a rigorous attempt to standardize these measures.

The EU is taking transparency a step further with its voluntary European Green Bond Standard. This is intended to help the market grow by giving investors the information they need to assess and compare securities that claim to be green.

“We know that the U.S. is watching this closely—just look at the actions already taken by the Securities and Exchange Commission under the Biden administration,” observed Breana Wheeler, U.S.-based operations director at Building Research Establishment. “With the EU having established the starting rules, it will bring significant pressure on the U.S. to align with that framework and to work with the EU to strengthen its standards and ensure harmonization across markets.”

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