On Tuesday 11 August, Adi Gokal held an online seminar for a group of ULI UK Young Leaders to discuss ESG-linked debt facilities for real estate businesses. Adi is the corporate finance manager for Great Portland Estates plc, a FTSE 250 property investment and development company owning £2.6 billion of real estate in central London.
Having read Accounting & Finance at LSE, Adi Gokal started working at a small private equity real estate business in Mayfair. This sparked an interest in the property world, but wanting to stay on the finance side, Adi decided to undertake his ACA at Deloitte. After this he was head-hunted to join GPE.
Firstly, Adi reflected on the two most recent CEO letters to shareholders from Larry Fink of Blackrock. He cited Fink’s most recent letter regarding the investment risks presented by climate change that could accelerate a significant reallocation of capital. Fink’s letters and that of other key shareholders noted a turning point as Environmental, Social and Governance (ESG) investing was brought to the attention of companies as an economic imperative.
GPE’s business has sustainability at its core and looks to manage the needs of its occupiers, investors and communities to maintaining the long-term value of its business. Along with this, sustainable financing has also evolved rapidly in the UK over the past few years and the GPE corporate finance team decided it was an opportune time to enter into an ESG-linked debt facility.
Various different options for green financing were explored but Adi & his team decided to link GPE’s existing credit facility to ESG-linked KPIs (measured against the whole portfolio). Annual targets for each KPI were pre-agreed with the bank group, and if GPE outperforms these targets, the interest rate payable on the facility will decrease. If GPE underperforms, the interest rate will increase. Any interest rate increase or decrease will be given by GPE to a charity focussed on environmental initiatives.
The main purpose of this was to create long term behavioural change which other “green” financing options (that are linked to specific projects rather than portfolio wide measures) can sometimes miss, which can lead to something known as ‘greenwashing’.
Adi noted that the response from banks was very positive and each bank was keen to be involved in this innovative financing.
Some interesting questions were asked by the audience, such as the chance of ESG-linked financing filtering into the residential market. Adi responded that this is starting to happen with some high street banks offering green mortgages to encourage energy efficiency in the home.
In conclusion, Adi anticipated that the market for ESG-linked/green financing will continue to evolve and hopes to see increased uptake from companies. He noted that currently only 1-2% of the whole global bond market is “green” despite a surge in demand and awareness. No doubt this is an area of huge potential for the real estate finance world!