Green Buildings and Green Bonds

Channels: Green Bonds

Companies: Berlin Hyp

People: Bodo Winkler

In 2019 Berlin Hyp issued its seventh and eighth green bond – a Green Pfandbrief with an eight year tenor and a ten-year senior preferred bond. The total of eight benchmark-sized green bonds with an accumulated outstanding amount of EUR 4bn makes the bank remain the most active European commercial bank issuer of green bonds. All of these debentures have one thing in common. They follow Berlin Hyp's unified Green Bond Framework, established in 2016 and updated several times during the following years, making it stricter every time.

Berlin Hyp's Green Bond Framework and eligible assets criteria

Bodo Winkler, Head of Funding & Investor RelationsAll eligible assets are loans for the acquisition, the construction or the refurbishment of green buildings on Berlin Hyp's balance sheet and are part of its mortgage cover pool in the case of Green Pfandbriefe. In addition, Berlin Hyp makes every effort to invest an amount equivalent to the net proceeds of the green bonds in new eligible assets and (in the case of Green Pfandbriefe) to include these into its mortgage cover pool. The eligible assets remain on the bank's balance sheet. Investors do not bear the credit risk of the assets and rank pari-passu with existing covered bondholders (in the case of Green Pfandbriefe) or senior unsecured bondholders. Berlin Hyp's green bonds are fully aligned with the Green Bond Principles and are included in the main green bond indices, such as Barclays MSCI, S&P, BAML and Solactive.

Eligible assets consist exclusively of loans for energy efficient, sustainable commercial real estate. In order to classify properties as green buildings, Berlin Hyp defined maximum energy demand levels for various building categories (see table on the right). These limits are subject to constant surveillance by the bank's own Green Building Commission. In April 2018 they have been re-defined, i.e. lowered and split into energy demand for heating/warmth and energy demand for electricity.

The bank then was the first green bond issuer to divide energy efficiency into its single components. Compliance with the thresholds is proven by energy performance certificates (EPC) which the bank asks its borrowers to provide as an integral part of the loan origination process. In addition, the bank asks its customers for sustainability certificates issued by re-known institutions such as LEED, BREEAM, DGNB and HQE. In order to be eligible for the green finance portfolio these have to reach a certain minimum (see table). Finally Berlin Hyp excludes various controversial businesses in its green buildings.

Green Buildings – an important green bond category

As Berlin Hyp is a specialized commercial real estate financier, it is just consequent that loans for green buildings form the only eligible asset category used by the bank. Meanwhile, green buildings have developed to be one of the most important asset classes in the green bond market. According to data of UniCredit and the Climate Bonds Initiative (CBI) USD 66bn of green bonds have been used to finance or refinance green buildings or loans for green buildings in 2019. This number represents 28 per cent of the total 2019 green bonds issuance (USD 234.9bn).

Buildings are responsible for 30 to 40 per cent of all CO 2 emissions in Europe, depending on calculation methods employed. These numbers make clear why the asset class is such an important constituent of the green bond market.

Property typeEnergy demand heating/cooling kWh/(m2*a)Energy demand electricity kWh/(m2*a)
Residential New Residential properties 60 -
Old residential properties
Office Office buildings without air conditioning 100 80
Office buildings with air conditioning
Retail Retail buildings (shopping malls, department stores) 60 75
Other retail buildings
Hotels   95 60
Logistics buildings   30 35

What is a green building?

In the context of green bonds, the term 'green building' is closely linked to energy efficiency. Sustainability certifications as the above stated ones, are predominantly relevant for commercial real estate and are often seen as additional eligibility criteria. Although the focus on energy efficiency is common to all green building related green bonds, there still isn't a single unified definition of what makes a property a green building. Anyway, the market seems to experience a process of harmonization.

In December 2018 the Energy Efficient Mortgages Initiative (EEMI), led by the European Mortgage Federation and the European Covered Bond Council, published a first definition of energy efficient mortgages. It stipulates that renovations must lead to a decrease of energy demand or consumption of at least 30 per cent for the mortgage loan financing this renovation to be considered energy efficient. At the beginning of 2019 Berlin Hyp transferred its Green Pfandbrief trademark to the Association of German Pfandbrief Banks (vdp) with the aim to enable more issuers to come to the market on the basis of common criteria. In summer 2019 member banks agreed on a common minimum standard that includes different approaches and gives certainty to green covered bond investors what they can expect when they buy a green German covered bond (=Green Pfandbrief), no matter who is the issuer.

Eligible external sustainability certification
LEED Gold or above
BREEAM Very Good or above
DGNB Gold or above
HQE High Level or above

The reference to the top 15 per cent is also a key aspect for the CBI. Its low carbon building criteria only accepts those 15 percent with the lowest carbon intensities in a regional market. City-baselines developed by the CBI are trajectories that also include the term of a green bond (re-)financing green buildings. The longer the term of the bond, the lower is the maximum allowed carbon intensity. This approach aims to ensure that a green, energy efficient building represents the top 15 per cent in its local market at least until the maturity date of the bond. Unfortunately, it faces difficulties to be applied by European lenders as it only allows the use of real consumption data whereas European EPCs in many cases provide demand data, which makes them independent from user-specific energy consume behavior.

Although the above explained criteria and minimum standards are to be seen as important steps to more harmonization of green building definitions they still leave room for different approaches and qualities. It is one of the expectations in the market that the new EU Taxonomy will provide more clarity and encourage a more common understanding. This will only be possible, if it sets a unified standards which takes regional differences into consideration, is strict enough to support the EU climate targets, and at the same time is feasible for lenders. A science based approach like the one of CBI is desirable, if it allows for using available data in order to determine quality and impact, i.e. demand or consumption figures.

Source: Climate Bonds Initiative, UniCredit Research, 14 January 2020

Calculating Impact

As shown, definitions on what is a green building reveal differences, and so do approaches to determine their impact. The Green Bond Principle's Handbook on a Harmonized Framework for Impact Reporting from June 2019 provides guidance for reporting on the impact of green buildings and energy efficiency. But assumptions and calculations by green finance lenders differ from each other. For this reason, an energy efficient green building financed by a syndicate of two different lenders can produce different carbon avoidance figures in their impact reports.

While impact reporting for financed renovations should always compare a building's energy performance and carbon emissions before and after the renovation, financing the construction or acquisition of a green building asks for more complex calculations. Berlin Hyp is the only issuer in the green bond market that measures the carbon avoidance through its green bonds by employing two different baselines, one representing the European average of existing commercial real estate, the other one being derived from the reference values given by the German energy savings regulation (EnEV). In 2019 the CO2 avoided by an investment of EUR 1mn in a Berlin Hyp green bond was between 12.6 and 38.8 t/p.a., depending on which baseline investors choose and whether they want to base calculation on the whole financed property or solely on Berlin Hyp's initial LTV. The bank's methodology has undergone constant refinements during the last years, making it more and more precise. The 2019 reporting for the first time contained individual calculations of carbon emissions avoided due to the energy demand for electricity and the energy demand for heating of green buildings. Moreover, due to increased data requirements, with the addition of information on the energy source for heating in each individual building the bank has become able to apply building-specific factors for the conversion of energy savings into avoided carbon emissions depending on a building's individual energy source. This way of reporting is seen as best-in-class by many in the market, and Berlin Hyp has been awarded three times in a row "Best Green/SRI Issuer for Post- Deal and Impact Reporting" by Global Capital in 2017, 2018 and 2019.

More convergence of calculations of carbon avoidance by energy efficient green buildings will be one of the big tasks of the coming years. Together with ongoing harmonization of definitions this will lead to more clarity among real estate lenders and green bond investors, and thus, support the market and the asset category.

vdp minimum standards for Green Pfandbriefe


New construction financing:

  • At least the statutory energy standards for new buildings at the time of financing

New construction / acquisition of existing properties:

  • Energy efficiency class B or better, or
  • Energy demand no greater than 75 kWh/m², or
  • Project is co-financed by KfW funding programs for energy efficient construction or renovation, or
  • Top 15 per cent of national residential property stock with regard to energy consumption/demand

Acquisition of existing properties:

  • Compliance with comparative values published by the German Federal Ministries for Economic Affairs and Energy, and for the Environment, Nature Conservation, Building and Nuclear Safety on 7 April 2015, or
  • Sustainability certification top category (LEED, BREEAM, DGNB etc.), or
  • Top 15 per cent of national commercial property stock with regard to energy consumption/demand


  • Reduction in energy demand/consumption of at least 30 per cent and
  • New energy demand/consumption in line with EU climate objectives


  • Reduction in energy demand/consumption of at least 30 per cent and
  • New energy demand/consumption in line with EU climate objectives