green finance taxonomy for buildings

Green finance taxonomy (GFT) is an official classification or catalogue that defines a minimum set of assets, projects and sectors that are eligible to be defined as “green” or environmentally friendly.  

The development of a local GFT for buildings was intended for use by investors, issuers and other financial sector participants to track, monitor and demonstrate the credentials of green activities. 

Local environment  

In South Africa, buildings contribute to 15% of emissions and building-related emissions per capita are above the G20 average (Climate Transparency, 2020). The accelerated adoption and uptake of green building practices and construction, especially with regards to energy-efficiency and energy-sourcing practices, is essential to support South Africa in meeting its energy-efficiency targets and build sector resilience. 

Green value 

green finance taxonomy for buildings

There is a strong business case for accelerating the green buildings market, with growing evidence to suggest that green buildings have a higher value and lower risk – lower operating and maintenance costs over the longer term, lower rates of default, lowered risks of becoming a stranded asset and potential for higher returns on investment (IFC, 2019). 

Certification 

In South Africa, several green building certifications have been established and with them, a well-developed understanding that a green building is one that considers energy and resource efficiency and environmental responsibility across its lifecycle. 

These definitions and performance requirements were incorporated into the first edition of the South African Green Finance Taxonomy (SA GFT), published in April 2022. 

Global perspective 

Globally, investor groups and significant asset owners are making commitments to net-zero carbon targets, as are corporates in South Africa. Consequently, the demand for green/net-zero certified buildings is expected to increase over time. 

This shift towards green buildings with strong climate change mitigation performance will have a significant impact on the real estate sector. It will need to adapt and transform to ensure demand is met with supply, and current building stock does not risk becoming vacant and ultimately a stranded asset. 

Finding the funding 

Investments in green buildings are a small fraction of the opportunity and insufficient to meet climate targets, despite growing interest of investors in the market. Financial institutions have themselves pushed forward with initiatives, such as green loans for buildings and issuing green bonds for buildings, although these consider the broad definition of “green” and not only climate change mitigation. 

The scope of the SA GFT has focussed primarily on climate change mitigation and climate change adaption. 

green finance taxonomy for buildings 

Defining “green” 

As sustainable finance becomes mainstream, increased interest in finance taxonomies as tools helps to provide clarity and certainty in selecting investments into new buildings and retrofits, aligned to sustainable outcomes. A taxonomy can support investors and owners to manage the risks associated with a low-carbon transition, as it brings about regulatory and economic changes, rendering inefficient assets less and less profitable. 

While the SA GFT technical standards may not be the tool best suited for addressing many of the barriers and needs, it is an essential complement to the areas of work and progress in the sector. 

Differentiated approach 

The SA GFT was originally drafted to align with taxonomic “best practice” referencing the European Union’s (EU’s) green taxonomy. However, the definition of green buildings was not wholly appropriate for the South African content. Instead a dual approach of being “taxonomy aligned” while appreciating the need to encourage market transformation from a very low base with limited green building activity was suggested. 

Noting that the South African building portfolio is presently highly inefficient, even introducing “entry-level” green performance requirements, depending on the rate of adoption, would have a marked impact on the environmental and energy security performance, and realise use and cost benefits to occupants and owners. 

“Greenness” 

The aim of the definition provided by the SA GFT is to “set the bar” around which market activity should rally and drive deep cuts in emissions from the building sector across the economy. Current green building standards, such as LEED in the United States of America (USA), BREEAM in the United Kingdom (UK) and Green Star in South Africa and Australia tend to focus on a broader definition of what constitutes “green”. 

While there is indeed a range of categories and measures of “greenness” that benefits the environment and society in different ways – such as improved air quality, waste management, biodiversity management and occupant wellbeing – the urgency of the climate crisis and rapid reductions in emissions required to meet national net-zero targets necessitates action in the building sector on this front. 

There is opportunity to support and upscale the substantial efforts already undertaken by industry actors, to address different obstacles in the different buildings and operations segments. The first edition SA GFT – while imperfect – is making a start, focussed on where there is the most opportunity to do so, then building out from there. 

 

Issue: How to encourage domestic net-zero carbon market transformation. 

Solution: Green finance taxonomy defines green building at a national level, setting the bar for market stakeholders towards achieving South African decarbonisation plans. 

Full acknowledgement and thanks go to:

www.carbontrust.com for the information in this article. 

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