Vornado Realty Green Bond Boosts US Market, But Lacks Ambition
By Bridget Boulle and Rozalia Walencik
Last week BBB-rated Vornado Realty (NYSE:VNO) became the second US real estate investment trust to issue a corporate green bond, following the Regency Centres (NYSE:REG) bond late last month. The 5 year, $450 million bond was structured by Bank of America Merrill Lynch. Pricing was in line with non-green bonds.
Investors included asset managers, pension funds, insurance companies and governments, of which some were regular investors and others had a specific green interest. Some non-US investors also came in.
According to the prospectus, the proceeds will be used to fund buildings and retrofits that meet the following criteria:
- New building developments: LEED Silver, Gold or Platinum certification
- Existing buildings: any LEED certification level
- Tenant improvement projects: any LEED certification level
- Capital projects that “enhance energy efficiency, at buildings which currently are LEED certified at any level”
- Capital projects at buildings not yet certified by LEED but “which improve, based on a third-party engineering study, the operating and energy efficiency of a building by a meaningful amount.”
So where does it sit on the green spectrum? It’s certainly a good start - but perhaps we need a little more ambition to have a real impact.
A green building is one that’s “environmentally responsible”, which generally means resource-efficient in terms of energy, water, and other resource usage and in waste management.
What we’re especially concerned about is energy and emissions. The most important environmental reason to cut energy use in buildings is to reduce greenhouse gas emissions from fossil-fuel-based power grids (we’re not as concerned, for example, if energy consumed is 100% on-site solar).
The International Energy Agency (IEA) allocates some 40% to emissions avoided from reduced energy consumption; buildings are the largest consumers of energy worldwide and so the biggest contributors to emissions from energy.
The IEA tells us that deep cuts in building emissions are needed to head off catastrophic climate change, and that: “Deep renovation of inefficient existing buildings is a crucial way to achieve a much more sustainable future.” However, only “about 1% of buildings are renovated each year … the overwhelming majority of these renovations do not lead to deep energy-use reduction”.
Impact investments, from our perspective, are those that lead to those needed deep cuts in emissions.
LEED certification is a flexible environmental standard that provides many ways to achieve certification, with energy efficiency one of many priorities.
But using LEED basic ("any LEED Certification") as a criteria is not contributing much to emissions reduction. In terms of greenhouse gas emission reductions, the USGBC actually recommends that a 30% energy efficiency design goal relative to its ASHRAE 90.1, as used in LEED v2009.
As we wrote in a commentary on the recent Regency green property bond, because a retrofit only happens every few years, a “shallow” or low-ambition retrofit may mean we put off, for many years, the opportunity to make the sort of deep emission cuts we need to get out of buildings if we’re to achieve deep emission cuts. Yes that’s right: shallow retrofits can save energy and money, but may be counter-productive in terms of addressing climate change. If every building in the world aimed for LEED basic certification, we wouldn’t stay within 2 degrees global warming.
In the absence of a more comprehensive energy standard at the time of issuance, targets for % reduction in emissions/energy should demonstrate actual reductions. This could be where clause v. on the use of proceeds in of Vornado’s prospectus comes in (that's the one quoted above). We’re not exactly enthused with their use of the term "meaningful amount" (talk about "open to interpretation"), but if a percentage were specified and applied across retrofits, this could be a good way on ensure both the energy efficiency and the wider environmental benefits of LEED.
Vornado haven’t done this at this stage, but it’s possible that it will be part of the comprehensive annual reporting that they have committed to (which includes detailing LEED certification of projects funded and annual updates on a dedicated page of the website). If a third party has been used to review the bond, such an approach may have been recommended.
In summary: good start, but we need to up the ambition by raising the bar on those lower level retrofits currently allowed.
The issues we’re raising here are of course why we’ve just released new Climate Bonds Green Property definitions. These were developed with an international expert group that included folks from the US Green Buildings Council (who developed LEED). The definitions are now open for public consultation - read more here.——— Bridget Boulle is Program Manager and Rozalia Walencik is Communications Officer at the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. Bridget has worked in sustainable investment for 6 years, most recently at Henderson Global Investors in the SRI team. Rozalia an holds MA in Public Relations from University of Westminster and BA in Journalism and Mass Communication from Jagiellonian University in Cracow.