We anticipate a fundamental shift in how climate finance¹ is deployed between now and the end of the decade in order to mobilize investment into decarbonizing buildings at scale, while also creating economic benefits. We have most of the ingredients to deliver low-carbon and climate resilient buildings – the commitments, the tools, the technology, the expertise and the regulatory frameworks – the missing link is how we finance the transition.

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.

“Significant progress on climate action requires a substantial increase in funding. The current mismatch between available funds and effective allocation is considerably slowing down real estate's efforts to decarbonize” 

- Nidhi Baiswar, Senior Director, Global Sustainability and Climate Leadership

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:

Green finance has an opportunity to be a powerful catalyst for decarbonization in the built environment. As the market rebounds, investors and lenders will increasingly recognize the economic potential that climate finance can unleash. Lenders are uniquely positioned to lead this change by reevaluating how risk is assessed across their portfolios, thereby gaining a clearer understanding of the funding required to align buildings with performance standards. Through considering the impact of future ESG risks alongside market values and partnering with stakeholders, we can create innovative financial solutions that encourage investment at scale. To truly unlock climate finance in a meaningful way, we will have to ‘break the bank’ by rethinking the role financial institutions can play in mobilizing investment into the low carbon transition.

Explore more of JLL's latest insights on World Economic Forum themes at our dedicated Davos page.

[1] Climate/green finance is a broad term covering green, social, sustainability and sustainability-linked bonds and loans. Climate finance refers not just to the cost of physical risk associated with extreme climate events, but also the cost to transition the built environment from energy hungry buildings powered by fossil fuel to efficient buildings connected to clean energy, going above and beyond regulations
[2] JLL research
[3] Based on estimations of the debt-to-equity ratio of the cost of retrofitting office stock across 17 major countries
[4] JLL Research, based on deep retrofit capex for total sqm of stock over 10 years old
[5] JLL Research, BloombergNEF
[6] ‘Low carbon buildings create economic value’, JLL. The research compares building-level energy use and emissions data across 14 global markets: Amsterdam, Paris, Rotterdam, Sydney, Melbourne, Singapore, Boston, Chicago, Denver, New York, Los Angeles, San Francisco, Seattle and Washington, D.C.
[7] C-PACE Alliance
[8] JLL Global Real Estate Transparency Index, 2024 
[9] Sustainable Finance Disclosure Regulation