The Net Zero Imperative: Decarbonizing Housing and Infrastructure Finance

As the age-old adage goes “everything good begins with a dialogue” and with World leaders and global stakeholders converging to hatch out protocols and agreements about the climate, CoP26 presents another ample opportunity to not only discuss but also to decisively act towards securing our collective existence for the immediate and long-term.

According to recent figures from the International Monetary Fund, it will cost somewhere in the neighborhood of 0.2% to 1.2% of global GDP to effectively address the long-term cost of mitigating climate change and ensuring a sustainable future by significantly pushing back global carbon emissions by a target range of 1.5°C- 2°C between the year 2030 to 2050.

In a bid to reduce the ambiguity of the financial commitments as stated by the IMF, current global GDP per capita at $10,925.73 when amplified against a rising global population of 7.9billion narrows down the financial commitment to about $86 Trillion (0.2% or 1.2% being the required commitment will amount to the equivalent of $172.63 Billion or $1.04 Trillion).

Diagram 1: Graphical Layout of Global GDP Per Capita from 2010-2020 (Courtesy Statista)

In committing capital towards the reduction of greenhouse gas emissions, it is important to note the role and appetite for housing and critical infrastructure as essential development needs. According to publications from IFC and IEA, residential and commercial buildings have been noted for being responsible for about 15% to 30% of greenhouse gas emissions with the possibility of increasing at current rates to anywhere from 45% - 50% by 2050 if left unchecked by continuous use of harmful building materials, construction methods and processes.

According to foremost energy researchers at the International Energy Agency, the consumption of essential building materials like concrete, cement, and lead-based paint also contributes about 11% towards energy and embodied energy-related greenhouse gas emissions. This is because housing construction and critical infrastructure provision consume and makes use of over 50% of globally available cement and concrete blocks, 40% of globally available iron rods, in addition to other metal and plastic related materials with inherent carbon footprints particularly in response to rising demand for infrastructure and housing and across emerging markets and other global markets.

These findings are particularly relevant as studies indicate that housing and infrastructure demand will continue to rise well into the future with over 60% of housing and infrastructure demand emanating from emerging market regions in Africa and Asia to be specific.

Diagram 2: Graphical Layout of expected Capital Reallocation (Courtesy Mckinsey Global Institute)

Given the prospects, it is therefore imperative that addressing the challenge of greenhouse gas emissions emanating from housing stock development and infrastructure provision presents a clear opportunity for systemically decarbonizing the built environment through Net-zero targeted financing. Such a bold move could result in a minimum of 40% reduction and attainment of both market and economy-specific decarbonization targets by 2050.

The required cost for financing the Net-Zero transition is a critical and essential spend that appears to present a risk and socio-environmental perspective. For instance, according to the Mckinsey Global Institute, reallocating investments towards net-zero activities (developing and retrofitting housing stock and infrastructure) in emerging markets will require an extensive investment of at least $12 Trillion between 2020 and 2050 while the attendant cost of foregoing this investment will likely spell more climate uncertainty that could give rise to more socio-environmental challenges.

?Asset and Investment Managers would be typically concerned about the required adjustments from investing in traditionally high emissions assets like housing, energy, and infrastructure towards Net-zero or Carbon neutral assets with little impact on the environment, there is a need to balance critical issues like “how to fulfill growing consumer demand and investment returns without materially and substantially disrupting or depleting the eco-system?”.

?In other words, how will financiers deal with the “Constraint Optimization” issues that come with preventing the proliferation of investments in essential and in-demand (carbon-heavy housing and infrastructure)? while reallocating investments towards the creation of Net-zero assets that are yet to achieve user acceptance and adoption. There is no doubt that such a paradox presents a quagmire for fund managers, regulators, and lenders in their urgent need to accomplish a trade-off or balancing act while racing towards Net-Zero.

The beauty in this Paradox is the commitment to make a seeming impossibility happen. Hence, the required trade-off would see infrastructure developers, asset managers, investors, and advisory professionals collaborate towards creating value and alignment of purpose with critical users and stakeholders in mind. This is essentially important because strategic choices, financial models, capital allocation, and sustainability are all intricately intertwined.

Though green and sustainability linked products are yet to become second nature with mortgage lenders and financial institutions, the required urgency to get to Net-zero targets already set by governments, regulators, and development finance institutions dictates that lenders and financiers must rapidly come up with the appropriate mix of green consumer, housing and infrastructure products and solutions.

?The need to transition quickly by financiers and mortgage lenders also comes with its benefits aside from accomplishing climate targets. The transition will position and create human capacity development across economies via the introduction of a new set of skills and jobs, help reduce inequalities, improve physical and mental health outcomes on the back of already proven benefits from green buildings, and a sustainable Infrastructure focused economy.

?As earlier stated, there is a need for a drastic reallocation of finance at private, public, and developmental levels towards unlocking the benefits of a green economy. This would of course happen alongside policies and advocacy campaigns to drive green product development, requisite demand, and give confidence to the financial and development sectors.

Also, efficiently decarbonizing the housing and infrastructure space should not be only addressed from the angle of financing new developments of green housing and infrastructure. There are also ample opportunities in tapping into financing housing and infrastructure improvements and certification for efficiency. Financiers and mortgage lenders should be encouraged and incentivized to provide cheaper or preferential finance and mortgages to borrowers who own homes or infrastructure that they intend to improve and certify in alignment with the Net Zero Imperative.

Financiers need to take a strategic approach towards driving the Net-zero imperative by including a sustainability approach not just in their policy requirements but by also providing support, consumer awareness, information on green technology, associated improvement costs, and carbon savings along with funding options on mortgage and infrastructure loans.

The financing options that currently support the new wave of green infrastructure and mortgages have thus far been aimed at disintermediating assets that are already green. However, the imperative should also involve financiers taking into consideration tolerable lending and risk assessment metrics regarding prospective borrowers that intend to carry out energy-efficient housing and infrastructure improvements.

Financiers could and should consider various incentives that can be instituted to promote green lending for retrofitting purposes. It is important to note the strides and efforts put forward by development finance practitioners like the International Finance Corporation with the green building transformation programme.

?Through the Excellence in Design for Greater Efficiencies (EDGE Methodology) financiers, green building, and infrastructure developers are beginning to align their interests. This is critical from a practitioner and Expert perspective as a major drawback for the adoption of green buildings and infrastructure on the supply and demand sides of housing and infrastructure development is the fear of designing a certified project that fails to attract funding or patronage due to a lack of commitment from financial stakeholders.

Given traditional credit review processes and evaluation methods, financiers, investors, and private equity practitioners would need to pivot and adjust their credit assessment metrics with improved and broadened frameworks for evaluating green and sustainability-focused housing and infrastructure. This is not only necessary but also imperative if we are to cross the Net-zero finish line collectively and successfully.

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?About the Author

Abel Owotemu is a financial services professional with execution-driven experience in Strategy, Innovation, Sustainability, Climate & Corporate Finance, Transaction Advisory, Wealth Management, and Public-Private Partnerships. Abel’s career spans roles in treasury operations management with stints in Infrastructure, Commercial, Retail, and Investment Banking at leading Financial Institutions. Abel is a Certified Global Investment Analyst as well as a Project Management Professional and a leading IFC-World Bank Certified EDGE Consultant.

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