With 10 million new homes required to be built every year to keep pace with Indian housing demand, significant opportunities exist with regard to establishing new techniques in climate-responsive construction. Within this market, green buildings have immense investment potential for both residential and commercial use.
According to a recent consultation paper SEBI soon plans to introduce an assurance-driven reporting regime (“BRSR Core”) as a subset of the wider Business Responsibility and Sustainability Reporting (“BRSR”) framework – which, in turn, SEBI had introduced in May 2021 to ensure standardized disclosures on ESG-linked parameters. While the top 1,000 listed companies in India (by market capitalization) could make these ESG-based disclosures on a voluntary basis until now, from FY 2022-23 onwards, such disclosures are mandatory. In addition, the list of mandated reporting entities may be expanded upon later.
While BRSR Core, by design, has been formulated on the basis of ‘reasonable assurance’ (similar to an audit verification), the general BRSR framework also requires quantitative data with respect to ESG across key performance indicators (“KPIs”), such as the quantum of investment made towards reducing a company’s environmental footprint.
Based on the KPIs under the wider BRSR regime, reporting about both investments made and capital expenditure incurred in respect of green and/or energy-efficient buildings (e.g., through the use of environment-friendly and sustainable building materials, or providing for ‘smart technological’ heating or ventilation) may significantly improve ESG ratings, and thereby reduce the cost of future capital.
Investors And Financers - Real estate financers and investors may influence the market for green buildings in meaningful ways. In terms of commercial bank lending – construction finance, mortgages, home improvement loans, and green financial products for resource-efficient buildings can significantly accelerate the uptake of green buildings, along with lower interest rates and longer tenors. As a result, such banks can diversify their client base and product offerings, build higher-value and lower-risk portfolios, and access new sources of finance through green bonds, green securitizations, and green credit facilities. On the other hand, institutional investors that participate in green real estate can help inject liquidity in such markets and enable primary lenders to free up capital to develop new green lending products.
In addition, multinational development finance institutions (“DFIs”) such as the International Finance Corporation (“IFC”), can catalyse nascent markets and facilitate the entry of private investors, including foreign ones. DFIs provide a range of financial products not readily available in most markets, often in combination with technical support and capacity-building programs. These institutions can also build the government’s capacity to develop enabling environments.
The Government - The government can create a pipeline of green building assets and incentivize financers to route their capital to this sector. Specifically, it can enhance investor appetite by requiring public buildings to be green. In turn, this can build technical capacity and skills among designers, engineers, and workers, who might then become better equipped to construct privately financed green buildings.
Fiscal incentives like tax breaks, grants, subsidies, loans, and rebates, complemented by non-fiscal incentives such as preferential or expedited permits, can also be put into play. Further, mandatory building codes may ensure that green measures are incorporated from the outset.
Building Codes - While the ECBC represents a key regulatory policy with regard to space cooling in new commercial buildings (such as offices, malls, hotels, hospitals, airports, educational institutions, etc.), the results of implementation have been relatively modest, including on account of the absence of a strong enforcement regime.
A recent report by the Ministry of Environment, Forest and Climate Change (“MoEFCC”) has suggested concrete steps for public departments to: (1) integrate ECBC across government-led construction, and (2) operationalize recommendations for space cooling as issued by the India Cooling Action Plan (“ICAP”).
Nevertheless, the EC Amendment has now introduced the idea of sustainability, where a new building code related to energy conservation will provide norms for: the use of renewable sources, as well as for green buildings. Further, while the ECBC applies to a specified category of commercial buildings only, the new code will apply to office and residential buildings as well, subject to certain specifications.
Given emerging ESG trends and ESG-related organizational policies around the world, most multinational companies (“MNCs) looking to lease or set up offices in India are keen to occupy premises with green energy/sustainability ratings, thereby incentivizing Indian developers to incur additional capex to procure such ratings.
Rating Systems - A surge in the voluntary adoption of green construction practices by private real estate developers and owners can create much-needed momentum. Voluntary green building ratings systems – such as the Indian edition of the Leadership in Energy and Environmental Design (“LEED”), Green Rating for Integrated Habitat Assessment (“GRIHA”), Indian Green Building Council (“IGBC”), etc. – have proved somewhat successful in the commercial building segment, driven by green policies among larger companies.
However, India does not yet have a mandatory green construction code or a set of mandatory green building standards like in the US – where the International Green Construction Code (“IgCC”) and ASHRAE 189.1, respectively, apply in specific cases.
Enforcement - Strictly enforced labelling and energy performance certifications for buildings and appliances by the BEE can ensure better compliance with green standards, catalyse the market for energy-efficient technologies, and generate market data to help financial intermediaries’ select efficient buildings to invest in.
Further, various policy options can be adjusted to suit local legal frameworks as well as unique socioeconomic contexts. Training construction industry professionals and officials can make enforcement easier. Stakeholder engagement that incorporates the interests and expertise of the public and private sectors, respectively, can help remove some barriers to compliance. Mandating third-party certification can ensure that only legitimate recipients receive incentives without overextending public sector overheads.
The Way Forward - Future digitalization may further expand opportunities for space cooling across buildings. The diffusion of internet-connected devices in the residential and commercial sectors may allow added integration across demand and supply. From the government’s perspective, policies need to take into consideration the opportunities that arise from the emergence of digital technologies – which, in turn, can make cooling and other buildings-related energy services more sustainable. For instance, the roll-out of smart thermostats can reduce energy consumption in response to real-time price signals.
However, there are concerns with widespread digitalization as well, including in respect of data security and privacy, along with technical and economic considerations. Given the fragmented nature of local laws on construction, sustainability goals vis-à-vis buildings are often compromised in terms of implementation.
With the rise in demand for Grade A assets with appropriate green energy ratings for commercial and industrial leasing, there is much to be done in terms of addressing additional capex requirements.
This insight has been authored by Rachita Bhat (Partner) and Deborshi Barat (Counsel). They can be reached at rbhat@snrlaw.in and dbarat@snrlaw.in, respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.
.jpg)
