• Sustainable debt issuance is well below the levels needed to align buildings with net zero pathways – over the past five years, just 9% of total real estate debt issuance was labelled as sustainable debt.²

• Lenders are underestimating the risks to value associated with obsolescence and future building performance. Amid increasing climate risks, investment is needed now to not only retain value, but to create it. We estimate that, in the Global North, CRE owners will require debt financing of nearly US$2 trillion in the next two decades to retrofit office properties and close the supply gap.³

• Lenders will need to close the information gap. Advanced modeling capabilities can offer banks and lenders a strategic advantage.

• Governments have a larger role to play by providing direct finance mechanisms, cultivating private-public partnerships and creating transparent policy infrastructure.

At last year’s COP28 in Dubai, the first global stock-take to assess progress towards goals in the Paris Agreement highlighted that more financial support is needed to realize climate commitments across all sectors, including real estate. Decarbonizing real estate takes investment – and companies will need to find or borrow significant amounts to retrofit and upgrade real estate portfolios. JLL calculates the EMEA industrial market alone could require US$80 billion of debt funding to retrofit existing stock that is over 10 years old,⁴ and in the Global North, CRE owners will require debt financing of nearly US$2 trillion in the next two decades to retrofit office properties and close the supply gap. For institutions that offer better spreads through green financing, typically 10-15 bps, this could represent total initial savings in interest of US$2-3 billion for investors.

Given the pressures to decarbonize buildings, mounting climate risks, ambitious corporate NZC commitments and increasing regulation, the green debt market should be taking off – but global debt issuance is stagnating. In the past five years, only 9% of total RE debt was linked to sustainability⁵, and this has reduced over the last two years. While non-sustainability labelled loans may include green elements, there is not enough capital currently allocated to improving building performance. But, with market conditions expected to improve during 2025, now is the time to leverage the upturn to finance decarbonization projects. In the short term this will support green premiums, and in the longer term it will ensure value retention.

Unlocking green finance requires better accounting for future ESG risks, financial products that are fit for purpose and more input from the public sector to drive forward regulations and provide financial support. Interventions that simultaneously motivate multiple stakeholders will be the catalyst to unlocking green finance. 

Accounting for future risk: the value and lender gap

Making climate finance fit for purpose

The role of the public sector

Lenders currently face challenges in gathering accurate ESG data for CRE assets, crucial for assessing future risks beyond current market valuations. The ECB (European Central Bank) flagged that asset values consequently do not reflect the costs to improve building performance or mitigate future climate risks. In response, the International Valuation Standards (IVS) has mandated that valuations consider ESG-related factors from January 2025.

Lenders need better data on loan attributes like building type, age and energy performance to improve risk assessment and strategic planning. Without this, banks can't accurately assess their Scope 3 emissions or the costs to decarbonize their loan books. They risk holding loans for potentially stranded assets if borrowers don't retrofit buildings. From our analysis of 46,600 buildings across 14 cities, 65% of office and 75% of multifamily buildings face stranding risk by 2030 without action to improve building performance.⁶ These buildings need financing to decarbonize - this puts banks in a unique position to turn the current model on its head and drive decarbonization across real estate.

Investors and banks have the same incentive: maintaining high-quality, low-carbon properties in their portfolios. With CRE valuations set to incorporate ESG factors from 2025, the impact of future sustainability-related risks will be considered alongside current market value. This shift will allow banks to identify underperforming assets, estimate necessary capital expenditures and collaborate with building owners to develop sustainability-linked financing products, driving investment in improving building performance.

For banks to offer better incentives for borrowers, governments must play a larger role. Private capital will only go so far. Extensive retrofitting may not be economically viable for some owners, but ensuring these buildings do not fall into disrepair is essential for a just transition. This is where the public sector needs to step in through:

a. Incentive and funding schemes to help pay for retrofits and reduce costs
b. Private-public partnerships to support projects that are not commercially feasible for property owners
c. Transparent policy infrastructure that helps lenders make informed decisions

Governments will need to play a more significant role in financing the transition through incentives such as tax breaks, funded programs, and grants to bolster investment into ESG initiatives. While there are ambitious examples of government intervention, they are insufficient to move the needle at a global scale:

One example of sustainable finance quick on the uptake is the U.S. program C-PACE (Commercial Property Assessed Clean Energy). C-PACE represents special assessment financing enabled by state-level legislation and is offered by private lenders for asset owners to undertake retrofit improvements in buildings. It provides long-term, fixed-rate loans that transfer with property ownership. C-PACE enhances the capital stack and lowers costs; through 2023 over US$7 billion has been invested across 2,300+ projects.⁷

Similarly, U.S. government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac offer green mortgage loan products that provide discounts or better pricing for borrowers who invest in improving building performance. Programs like C-PACE, Fannie Mae and Freddie Mac make retrofitting assets, such as affordable housing, more economically viable by providing favorable financing options to encourage retrofits.

Private-public partnerships enable corporations to make investment decisions with the security of public backing:

• Canada Infrastructure Bank provides long-term financing for green projects at favorable rates by leveraging federal carbon pricing funds.
• Germany's KfW bank manages the Federal Subsidy for Efficient Buildings (BEG) grant, part of the German Climate Protection Programme 2030. It supports both efficient renovations and new construction.
• In the UK, the BBP (Better Buildings Partnership) has created guidance for building owners on incorporating sustainability risks and opportunities within acquisition decisions. Such tools could enable investors to better understand the potential value-add of acquiring and retrofitting these properties and provide lenders with a more comprehensive overview of the current energy performance and capex required to derisk the asset.

• Philanthropies are another avenue for financial support. In Europe, the Laudes Foundation has created Built by Nature, a fund offering grants up to €250,000 per initiative to accelerate demand for timber buildings. ;

Beyond buildings, there is ample opportunity for cities and local governments to partner with private businesses to advance the wider energy transition.

Case Study: Washington Metropolitan Area Transit Authority (WMATA)

Situation: WMATA wanted to explore a potential path to reduce regional carbon emissions while creating a new revenue stream to support its transit mission.

Approach: JLL assisted WMATA in assessing options to monetize the solar potential at its parking facilities and analyzed alternative financing and ownership structures. WMATA partnered with JLL and a developer to install solar panels at four parking lots (at no cost to WMATA). The developer owns the solar arrays and secures its own customers but shares its revenue with WMATA.

Result: The 17 acres of solar PVs will generate enough energy to power at least 1,500 single-family homes. The project will provide an additional revenue stream to WMATA over 25 years.

c. Creating transparent policy infrastructure

Governments have a key role in creating transparent policy infrastructure that helps lenders make informed decisions. JLL’s Global Real Estate Transparency Index (GRETI) 2024⁸ spotlighted how national and city governments are ramping up regulations and disclosure requirements to fast-track the decarbonization of buildings, with many jurisdictions evolving from voluntary guidelines to mandatory disclosures.

Increasingly stringent global and regional climate disclosures will require building owners to report on the energy use and emissions of their assets, driving up the cost of inaction. In Europe, the EU Taxonomy and SFDR⁹ are driving investment into sustainable products, which will increase demand for green loans – according to BloombergNEF, nearly half of sustainable debt issuance in 2024 was in the EMEA region.

Case Study: Net Zero Transition Fund

Situation: A global RE investor with ~US$80 billion AUM wanted to set up a market-leading net zero transition fund aligned with disclosure requirements of SFDR Article 8.

Approach: JLL developed the fund’s strategic framework through a thorough market review to maximize capital attraction and differentiation.

Result: The fund strategy supports the transition to a low-carbon economy while providing a clear and credible pathway to achieve it, ensuring it is differentiated from other Article 8/9 funds in the market, meeting investor expectations and ensuring additionality

As building performance standards become commonplace, mandates to ensure transparency need to follow. More visibility into actual energy performance of buildings would provide clarity for both lenders and borrowers, creating the business case for green finance products.

Additionally, governments need to make regulatory compliance simple – local, regional, national and global government bodies must harmonize current frameworks to make it easy for the private sector to adhere to and plan for these policies.