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Financing Commercial Real Estate's Net Zero Transition With Green Bonds

Authors: Carli Schoenleber, Martin Silber

Contributors: Jackie Royds (graphic design)

May 4, 2023

In 2023, the global climate change response faces a critical challenge: inadequate financing. Despite unprecedented levels of corporate support, political will, and technological innovation, by 2030, at least $4 trillion in annual clean energy financing is needed (more than three times the level) to keep the world on track for net zero emissions by 2050.[i] Additionally, population growth and urbanization will demand an estimated 75% increase in building floor area by 2050.[ii] To align with global climate targets, the International Energy Agency® estimates the buildings industry will need an additional $14 trillion in upfront capital investment.[iii]

Many have pointed to green bonds to help fill this gap. Green bonds are fixed-income debt instruments used to finance climate-related and other environmental projects. Green bonds have become increasingly popular throughout the past decade, growing from just 37 billion issued in 2014 to nearly 580 billion in 2021.[iv] By the end of 2022, the green bond market was cumulatively worth $2.2 trillion.[v] Yet, green bonds still only comprise a small fraction of the entire bond market and some argue green bonds lack adequate standards to significantly accelerate greenhouse gas (GHG) emissions reduction targets.[vi][vii]

With a focus on commercial real estate (CRE) decarbonization initiatives, the article explores the current green bond landscape and its potential to help finance the net zero transition. We also discuss the implications of new climate policies like the Inflation Reduction Act and challenges green financing must overcome to maximize positive environmental impact.


Today’s green bond landscape

Issued by organizations like governments, corporations, and financial institutions, green bonds are similar to conventional bonds, but they are created specifically to finance projects that have environmental benefits. Since the European Investment Bank issued the first green bond in 2007, similar bond types have emerged, including climate bonds, sustainability bonds, social bonds, and sustainability-linked bonds.[viii] Initially, green bond issuance was dominated by Europe and the U.S., but more recently, green bond issuance has also proliferated in Asia-Pacific markets (see Figure 1 ); in 2022, China had the highest proportion of green bond issuance (18%), followed by the U.S. (13%) and Germany (13%).[v]

Figure 1. Green bond issuance by region ($billion): 2015 and 2021 / source: Climate Bonds Initiative

Green bonds have become increasingly attractive for both issuers (i.e., companies) seeking financing and investors seeking to align portfolios with ESG goals. Because green bonds are generally evaluated in a similar fashion to traditional bonds, they can offer investors a “double bottom line” in that they provide environmental benefits and competitive financial returns.[ix] For CRE companies reliant on equity financing, green bonds provide an opportunity to diversify and expand funding sources for ESG initiatives. Issuing green bonds can also help a company demonstrate its commitment to sustainability, transparency, and risk management, improving the company’s reputation among the public, investors, and other stakeholders. Hence, green bonds are being increasingly integrated into companies’ ESG strategy.[x]


Reporting frameworks and standards

Just as adhering to the standards of net zero emissions initiatives (e.g., ULI Greenprint, NZAM, SBTi) can lend credibility to a CRE net zero program, companies can attract more investors when they align their green bond framework (i.e., bond issuance documentation) with a green bond reporting framework or standard.

Green Bond Principles

The Green Bond Principles (GBP) is the preeminent green bond reporting framework. Applied on a voluntary basis, it was created by the International Capital Market Association (ICMA) in 2014 to “promote transparency and disclosure” through green bond best practices and recommendations.

To align with the GBP, issuers must demonstrate bond proceeds are used for a “green” project (e.g., green buildings); create a process for project evaluation and selection; manage proceeds transparently; and publicly report annually. To further improve credibility, the GBP recommends issuers assure alignment through a pre-issuance external review. To align projects with the goals of the Paris Climate Agreement, (i.e., limit global warming to 1.5 °C or below), issuers can apply ICMA’s Climate Transition Finance Handbook alongside the GBP.

Climate Bonds Standard

The Climate Bonds Standard is a standard that builds off the GBP but has more rigorous requirements. Importantly, the Climate Bonds Standard is associated with a certification scheme where only Paris Agreement-aligned projects are eligible, based on a taxonomy and sector-specific screening criteria (see buildings criteria). Obtaining and maintaining certification is dependent on receiving ongoing third-party verification and reporting annually throughout the lifetime of the bond.[xi] As of 2022, about 20% of green bonds were issued under the Climate Bonds Standard.[v] In April 2023, version 4.0 of the standard was released, which extends certification eligibility to non-financial entities, assets, and sustainability-linked debt instruments.[xii]

European Green Bond Standard

New to the green bond landscape is the European Green Bond Standard (EUGBS), an EU regulation that reached political agreement in January 2023 and is expected to go into force in 2024.[xiii] Once established, private and public entities can use the voluntary standard to demonstrate green bond projects align with the European Green Deal and EU net zero targets.[vi] The EUGBS has similar requirements to the Climate Bonds Standards in terms of external review, reporting, and Paris Agreement alignment for climate projects, but it goes further in requiring that issuers dedicate 85% of bond proceeds to EU Taxonomy-aligned economic activities.[xi][xiv] Adopted in 2020, the EU Taxonomy is a classification system that outlines which economic activities are “environmentally sustainable” based on technical screening criteria.

Despite it being voluntary, once implemented, the EUGBS will likely evolve to define industry best practice globally, not unlike the trajectory of other EU sustainability regulations (e.g., EU Taxonomy, SFDR).

Given this high bar for positive environmental impact, the EUGBS represents a significant leap forward in mitigating greenwashing across EU financial markets. Despite it being voluntary, once implemented, the EUGBS will likely evolve to define industry best practice globally, not unlike the trajectory of other EU sustainability regulations (e.g., EU Taxonomy, SFDR).


Opportunities to finance CRE decarbonization projects with green bonds

Given the key role buildings and construction play in contributing to global GHG emissions (37% of energy and process-related carbon emissions), the CRE industry is well suited to identify climate-focused projects for green bond issuance.[xv] This is especially the case for companies already centering decarbonization and climate risk management across operations and long-term strategy. Data from the 2021 S&P Global CSA Assessment shows 26% of reporting real estate companies had set a net zero target and 43% had set an emissions reduction target.[xvi] The 2021 NAREIT® member survey similarly revealed 59% of surveyed real estate investment trusts (REITs) had a GHG emissions reduction target and 27% had an operational carbon neutrality or net zero goal.[xvii]

This means a significant percentage of CRE companies are already collecting portfolio information on factors like energy consumption, energy use intensity, and ENERGY STAR® ratings — data that can leveraged to identify, issue, and report on climate-focused green bond projects. For example, Boston Properties® (one of the largest office REITs) plans on achieving a 2025 operational carbon neutrality goal through four key strategies: energy efficient operations, renewable energy, electrification, and carbon offsets.[xviii] The company has also cumulatively issued over $1 billion in green bonds, focusing proceeds on energy and decarbonization projects for LEED® certifications (e.g., sealing building envelope, rooftop photovoltaic system), strategies that also support their net zero goals.[xix][xx]

Beyond green building certifications, CRE companies can leverage other GBP project categories to synergize green bond projects with the company’s existing decarbonization strategy (see Table 1 below).[xxi] Commercial building projects and assets eligible for bond certification under the Climate Bonds Standard include those on a Paris Agreement-aligned decarbonization pathway, those that align with such a pathway during the bond’s lifetime, or retrofit projects that significantly reduce emissions.[xxii] As the EUGBS further raises the bar for green bond integrity by requiring EU Taxonomy alignment, companies will have greater opportunity to attract financing for projects that align with the goals of the Paris Agreement and the Intergovernmental Panel on Climate Change’s 2050 net zero target.

Table 1. Green Bond Principles (GBP) alignment with CRE decarbonization strategies


Policy and regulatory drivers

As the green financing landscape rapidly evolves, it is worth exploring how the growing green bond market could be impacted by landmark climate policies like the U.S. Inflation Reduction Act (IRA) (2022) and U.S. Infrastructure and Jobs Act (2021).[xxiii] Together, the policies will provide $430 billion in funding, most of which is earmarked for climate change mitigation and adaptation.[xxiv] With a significant proportion of this funding focused on green buildings (e.g., 179D energy efficient tax credit), the Rocky Mountain Institute® estimates the U.S. could cut global building sector emissions by 33–100 million metric tons, contributing to 10–30% of the U.S’s 50% emissions reduction target by 2030.[xxv]

...increased funding for building decarbonization could improve acceptability of sustainable building practices, thereby shifting market expectations toward stricter green building codes, standards, and regulations.

On one hand, increased funding for building decarbonization could improve acceptability of sustainable building practices, thereby shifting market expectations toward stricter green building codes, standards, and regulations — potentially leading to more green bonds issued, stronger investor demand for green financing, and a higher expectation for projects to mitigate emissions. With this unprecedented level of climate change funding, it is also plausible that these policies could reduce the CRE sector’s reliance on green bond financing for net zero projects; instead, CRE companies may prioritize bond issuance for non-climate-focused projects, such as ecosystem restoration or affordable housing.


Challenges surrounding greenwashing and additionality

Despite the opportunities to finance decarbonization projects with green bonds, it is also important to consider major critiques of today’s green bond landscape, namely regarding greenwashing.[vi] Under the popular Green Bond Principles, issuers must demonstrate that green bond proceeds are used for green projects, but issuers are not ultimately accountable for a sustainable outcome. This framework stands in contrast to sustainability-linked bonds (a smaller and newer market), which hold the issuer accountable for achieving specific, pre-determined sustainability performance targets (e.g., GHG emissions mitigated).[vii]

The concept of additionality relates to another key critique of green bonds. In Making Green Bonds Serve the Climate Goals, part of a UN Environment Programme Finance Initiative and EIT Climate-KIC thought leadership series, Dr. Massamba Thioye posits that the current green bond framework isn't structured to facilitate additional emission reductions beyond what could be achieved under “prevailing baseline financing conditions.” Because green bonds must still be fiscally attractive to financiers, Thioye argues, “[green] bonds will simply replace financing that would be available in their absence.”

In turn, Thioye recommends adjusting the green bond framework to mirror the renewable electricity market. Just as buyers are willing to pay a premium for green electricity in exchange for renewable energy certificates (RECs), mitigation outcome securities (MOSs) — certificates transferred to the green bond buyer when a GHG mitigation target is reached — could help incentivize investment in climate mitigation projects that would otherwise be unattractive to financiers. Noted by the Financial Times®, other experts suggest that a carbon pricing mechanism is ultimately needed to “generate transition risk which, in turn, provides an incentive for investors to buy green bonds.”[xiii]



With climate change becoming a greater priority for corporations, investors, and policymakers, there is more demand than ever for climate-focused green financing, especially in the real estate sector. Green bonds present opportunities for companies to finance decarbonization projects while also enabling investors to align portfolios with global climate targets. Reporting frameworks such as the Green Bond Principles, Climate Bonds Standard, and the forthcoming European Green Bond Standard can both lend credibility to green bond projects and support alignment with the Paris Climate Agreement. However, issues around greenwashing and additionality should be addressed to ensure green bonds accelerate GHG emissions reductions.

Commercial real estate is a carbon-intensive sector that is also vulnerable to climate risks, and as such, is well positioned to issue green bonds for decarbonization projects. As the green financing and climate policy landscape evolves, real estate companies should aim to leverage their existing ESG data to strategically identify climate-related green bond projects that also align with the company’s decarbonization roadmap.


Authors and contributors

Carli Schoenleber

Carli is an ESG Content and Engagement Specialist for Verdani Partners. She has a decade of experience in the sustainability field, working across diverse roles in environmental communication research, environmental planning, marketing, and wetland science. She holds a B.S. in Environmental Science, Policy, and Management from the University of Minnesota and a M.S. in Forest Ecosystems and Society from Oregon State University.

Martin Silber

Martin is an Executive Director of Technology for Verdani Partners. He has 20+ years of expertise in financing sustainability projects and developing strategic systems and processes, that includes working on behalf of project developers and investors, working across a diverse set of clients including start-ups, the U.S. Army and Navy, and leading consulting firms. Martin is a Certified Public Accountant, C.P.A, and holds a B.S. in Economics, M.S. in Accounting, M.S. in Tourism Administration focused on Global Environmental Policy and Analytics, and an M.B.A, focused on Small Business/Entrepreneurship & Innovation.

Jackie Royds Jackie is a graphic designer with a strong visual sense, knack for problem solving, and exceptional collaborative skills. She is passionate about applying her creative aptitudes toward creating high-quality annual reports, white papers, newsletters, and presentations.

References [i] International Energy Agency (2021). Net zero by 2050: A roadmap for the global energy sector. (web) [ii] International Energy Agency (2021). Net zero by 2050: A roadmap for the global energy sector. (report) [iii] International Energy Agency (2019). Perspectives for the clean energy transition. [iv] Climate Bonds Initiative (2022). Interactive data platform. [v] Climate Bonds Initiative (2022). Sustainable debt global state of the market 2022. [vi] Jones, H. (March 1, 2023). EU agrees world’s first bond issuance rules to combat greenwashing. Reuters. [vii] Wilkes, T., Furness, V. (November 8, 2022). Explainer: Decoding COP27: The many shades of green bonds. Reuters. [viii]European Investment Bank (July 5, 2022). 15 years of EIB green bonds: Leading sustainable investment from niche to mainstream. [ix] Mbogo, B. (August 31, 2022). How green bonds can bridge financing gap in infrastructure projects. Business Daily. [x] Robinson, S. (December 8, 2021). Sustainable financing through green bonds is pivotal to realising a net zero economy. The Global Treasurer. [xi] Climate Bonds Initiative (2019). Climate bonds standard version 3.0: International best practice for labelling green investments. [xii] Climate Bonds Initiative (2023). Climate bonds standard version 4.0: Globally recognized, Paris-aligned certification of debt instruments, entities and assets using robust, science-based methodologies. [xiii]Bounds, A. (2023). New standards keep the greenwash off green bonds. Financial Times. [xiv] European Commission (January 3, 2023). Sustainable finance: Commission welcomes political agreement on European green bond standard. [xv] United Nations Environmental Programme (November 9, 2022). 2022 global status report for buildings and construction. [xvi] Lefebvre, S. (August 16, 2022). More real estate firms are embracing climate targets. S&P Global. [xvii]Nareit (2022). REIT industry ESG report 2022. [xviii]Boston Properties (April 22, 2021). Boston Properties Announces New ESG Achievements and Initiatives; Commits to Carbon Neutral Operations by 2025 and Establishes Board of Directors Sustainability Committee. Business Wire. [xix] Molotsky, B.A. (July 2, 2021). ESG – Green bonds and green financing continues torrid pace of uptake – $2.36 trillion anticipated by 2023. Duane Morris. [xx] Boston Properties (September 30, 2020). Green bond allocation report. [xxi] ICMA (June, 2021). Green bond principles: Voluntary process guidelines for issuing green bonds. [xxii]Climate Bonds Initiative (2023). Commercial buildings criteria overview. [xxiii]Lombardi, A. & Oriol, R. (August, 2022). The U.S. Inflation Reduction Act signals potential opportunities for climate bonds. Lord Abbett. [xxiv]U.S. White House (March, 2023). Economic report of the president. [xxv] Smedick, D., Golden, R., & Petersen, A. (August 31, 2022). The Inflation Reduction Act could transform the US buildings sector. Rocky Mountain Institute.


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