Accelerating the decarbonisation of the built environment through Property Linked Financing
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Decarbonising the built environment: A $51 trillion investment gap
The built environment and construction sector is responsible for 37% of global emissions, making it by far the largest emitter of greenhouse gases.[1] An estimated USD $51 trillion of investment is required to decarbonise the built environment between 2030 and 2050.[2] In the UK, buildings account for 23% of UK greenhouse gas emissions and an estimated investment of £360 billion is needed to upgrade the UK’s inefficient buildings by 2050.[3]
However, the current landscape of financial solutions struggles to address the major barriers to energy efficiency and resilience improvements. These barriers include the high upfront costs of energy efficiency improvements, long payback periods of low carbon technologies, and split incentives between landlords and tenants.
Addressing the investment gap will require innovative financial solutions that overcome these barriers, support property owners on their net-zero journey, and provide attractive risk-adjusted returns to financial institutions. One such solution is Property Linked Finance (PLF).
An innovative financial solution: Property Linked Finance
PLF – an innovative financial solution designed to support the decarbonisation of residential and commercial buildings – provides an opportunity for global capital to invest into local projects that reduce emissions from buildings.
PLF is long-term, affordable finance that is linked to the property, rather than the property owner, where the obligation to meet PLF payments transfers to the new owner on the sale or transfer of the property. PLF can fund projects that improve the environmental performance of a property, including the installation of low carbon technologies, increased energy efficiency, and enhanced climate resiliency measures.
PLF addresses the major barriers to retrofitting by covering up to 100% of the hard and soft costs of a retrofit project, and offering payment terms that match the useful lifetime of the green measures. It can typically be passed through leases to tenants, with the finance linked to the property. The latter is particularly important, as property owners will only pay for the energy efficiency measures up until they sell their property or the measures have been paid off, and the new buyers will benefit from a more energy efficient and comfortable property in return for continuing to make regular payments towards the upgrades.
PLF solutions have been developed in the United States, Canada and Australia, and are currently being developed by the Green Finance Institute (GFI) in the UK and Spain.
Pockets of excellence: PLF solutions around the globe
United Kingdom
PLF could play an important role in supporting the decarbonisation of the UK’s building stock, which is facing a £360 billion investment gap to 2050. Research commissioned by the GFI in 2023 found that, if scaled, PLF could support between £52-70 billion of investment into building decarbonisation across England, Scotland and Wales in the residential market alone[4].
A recent report by the GFI, Lloyds Banking Group and NatWest Group identified the key features for a UK PLF solution, including the need for PLF to run with the land (i.e. the payment obligation should transfer to the new owner on sale) and for the solution to be non-accelerating (i.e. limits the liability in the event of non-payment to the amount in arrears at the time and not the total outstanding balance).[5]
The report recommends the creation of a Property Linked Finance Local Land Charge, which would automatically link the finance to the property although as this will require primary legislation, the report also recommends exploring a Restriction on Title to pilot PLF for commercial properties.
The next steps to create a thriving PLF market in the UK include: testing and refining the solution with a pilot for commercial properties using the Restriction on Title method, introducing enabling legislation to create the Property Linked Finance Local Land Charge; priming the market (including financial institutions, conveyancers, property owners, regulators and local authorities); and continually improving and iterating the market.
United States
PLF is inspired by the US Property Assessed Clean Energy (PACE) market, which can cover 100% of eligible projects hard and soft costs through a fixed rate, fully amortising financing for up to 30 years. Property owners make payments via an assessment on the property’s tax bill – a different approach to that being explored in the UK – which can automatically transfer upon sale. PACE assessments are filed with the local municipality as a senior lien on the property, and are enabled by state legislation and at the local level by cities and counties.
PACE has enabled the investment of over USD $16 billion of capital into improving the energy efficiency and resilience of over 400,000 buildings in the US, according to the US trade body PACENation, generating over 220,000 job-years and USD $30 billion of economic impact.
Australia
Environmental Upgrade Agreements – the name for PLF in Australia – are voluntary agreements made between a commercial building owner, a financial institution, and a Council to deliver building improvements that can generate significant savings and be used to repay the upgrade finance.
As of 2022, over AUD $111 million in energy savings had been delivered via Environmental Upgrade Agreements, preventing 632,274 tonnes of greenhouse gas emissions (equivalent to taking 395,171 cars off the road for a year).[6]
Canada
PACE is currently available in Nova Scotia, Ontario and Alberta. Provincial legislation is required to authorise municipalities to use PACE recuperation mechanisms to finance upgrades to private properties. Once this legislation is established at the provincial level, municipalities need to determine the programme specifications to implement PACE through by-law amendments.
The Canadian PACE market is at a nascent stage with PACE enabling legislation enacted in several municipalities, however wider adoption is needed within municipalities to take full advantage of this programme.
Spain
With 87% of Spain’s buildings being energy inefficient[7] and contributing towards 30,6% of total energy consumption[8], to meet the Energy Performance of Buildings Directive (EPBD) goal of a zero-emission building stock by 2050, extensive energy renovations are necessary. To address this, the Spanish National Plan for Energy and Climate projects the renovation of 1.37 million dwellings by 2030. This ambitious target requires an additional investment in the country of €32.4 billion between 2021 and 2030, requiring significant private capital to be mobilised[9]. To address this, scalable and replicable private financing schemes must be developed.
Building on the success of PACE in the United States and PLF findings in the UK, GFI España is innovating a tailored adaptation of PLF for Spain. This adaptation leverages a dormant legal framework rooted in Roman law to create a PLF mechanism in Spain for financing energy efficiency upgrades in properties. By utilizing established legal frameworks within Spanish law, a new PLF asset product known as the PACE Canon (or ecological fee) could be introduced.
The PACE Canon (or Prestación Adscrita a un Canon Ecológico) aims to develop a private-sector-driven financing structure for energy efficiency upgrades in Spain, applicable to both residential and commercial properties. Building on existing PACE models internationally without requiring regulatory changes. This initiative will assess the feasibility of implementing this structure within the Spanish legal framework, with the goal of creating a new asset class, to generate stable, long-term cash flows.
Under the PACE Canon, the initial capital would be provided to the owner as a permanent benefit rather than a loan, generating periodic payments as rent or canon for deep retrofit investments over typically 20 years, secured by a charge over the property. Importantly, these periodic payments cannot be accelerated. This mechanism, which attaches to the property and transfers with ownership, offers an off-balance-sheet financing solution akin to a property tax or ongoing operational expense.
This model aims to deliver affordable, inclusive financing based on property value, with obligations tied to the property itself for added security. Its scalable, adaptable design allows for easy implementation across EU and Latin American markets, supporting climate goals, enhancing resilience, and creating local jobs.
A global asset class: Unlocking PLF’s true potential
PLF is a proven solution with growth occurring in new and existing markets; however, it has been slow to scale in comparison to the size and urgency of the climate crisis. Existing markets have taken 7.3 years on average to exceed $100 million of capital deployed, due to fragmentation across geographies, submarkets and project types.
A co-ordinated global effort to scale PLF into a global asset class is imperative. Establishing clear objectives, unifying principles and pathways to develop local PLF products, and active support for current and future PLF markets – within a context of differing cultural, legal and economic contexts – is required to provide local markets the opportunity to benefit from PLF. By shortening the learning cycles and creating an international community of best practice, PLF has the potential scale from regional ‘pockets of excellence’ into a global asset class.
If you are interested to learn more about the GFI’s work to establish PLF in the UK and Spain, or our programme to scale PLF into a global asset class, please get in touch at info@gfi.green.
[1] Building materials and the climate: Constructing a new future, UNEP
[2] The net-zero transition, McKinsey & Co
[3] Sixth Carbon Budget, Climate Change Committee
[4] Property Linked Finance a new financial solution to decarbonise the UKs homes and buildings
[5] A greenprint for Property Linked Finance in the UK, Green Finance Institute
[6] Property Linked Finance a new financial solution to decarbonise the UKs homes and buildings
[7] España suspende en eficiencia energética en los hogares
[8] Informe de Inventario Nacional de Emisiones de Gases de Efecto Invernadero, Edición 2024 (1990-2022)
[9] Plan Nacional Integrado de Energía y Clima (2023-2030)
