Climate-friendly construction and capital constraints: A problem of asymmetric information?

Other conference contribution, 2013

Energy efficiency investments in the built environment are a key issue to meet set climate goals. For real estate developers access to debt financing is imperative. Borrowing capacity is therefore related to the likelihood that environmental targets are met. In this interview study we investigate whether the views on investments’ debt capacity may differ between different parties in the real estate market, and how that can affect developers’ access to finance. We find that property owners and banks come to different conclusions about the borrowing capacity of energy efficient construction projects. There is reason to believe that energy efficient buildings often are profitable, insofar that the larger investment outlays are compensated by larger discounted future cash flows, but that investments are impeded by a lack of funds. We also investigate whether property appraisers as well as environmental certification can serve as certifying bodies to overcome borrowing constraints induced by informational asymmetries. We do not find that they fill that role in Sweden today. The capital constraints could be problematic for developers who are hindered to make value increasing investments, society at large as it may lead to underinvestment and increased external costs, and for the banks themselves as they risk allocating capital to inferior assets.