In previous posts I’ve discussed sustainable housing as a much-needed solution to both the climate and housing crises, but understanding how to deploy this approach at scale requires a deeper investigation into the types of financing available to support green construction development. Many homeowners and developers have long been deterred from building sustainably due to the widely held notion that green materials and products are too expensive to justify the upfront investment. There is certainly some truth to this sentiment, especially for the Global South, where lack of affordability and availability prevents the easy adoption of sustainable practices. And while the back-end cost savings associated with energy efficiency, water efficiency, and renewables can often outweigh the upfront costs over time, many builders in the informal, self-build housing market cannot afford to wait for those benefits to materialize.

To overcome these cost barriers, upfront resources and incentives by financial institutions are urgently needed at the pre-construction phase. Emerging evidence from the International Finance Corporation (IFC) increasingly points to the profitability of the green building sector, with investments in the sector estimated to reach $24 trillion by the end of the decade [1]. In addition to reducing energy consumption and its associated operational costs, green buildings can achieve higher sale premiums, stabilize tenant occupancies, and manage climate-related risks and hazards, altogether safeguarding investments for the long-term.

Green financing for housing development can come in many forms, including government incentives like tax credits, grants, and subsidies, specialized loans at discounted rates, and green bonds earmarked for sustainable construction projects. Green affordable housing bonds are specifically tailored to affordable housing developments that meet certain sustainability criteria, the proceeds of which can be used to implement energy-efficient building practices and appliances as well as high-performance insulation and thermal regulation devices.

Green housing bonds are being deployed in Kenya, for example, as a financial tool to raise funds for environmentally-friendly, low-carbon, and climate-resilient housing projects. The Kenya National Treasury promotes green bonds as a way to attract institutional investors and allocate capital for sustainable investments, and also offers a 100% tax exemption on interest income for bonds and securities used to fund green building projects [2]. In 2019, Acorn Holding, a Kenyan property development company, made use of this program by issuing East Africa's first green bonds, a $50 million, 5-year note [3]. The bonds successfully raised funds to provide 5,000 university students with affordable housing in Nairobi that incorporated green features and resource-efficient designs, attracting a range of local and global investors interested in supporting Kenya's sustainable housing market.

The IFC, one of the world’s largest green bond issuers disbursed $940 million in housing finance bonds in FY23 [4]. IFC has committed to ensuring these funds not only support large-scale commercial development but also residential housing projects, particularly for the affordable housing sector in emerging markets. In India, for instance, IFC’s green housing bonds are supporting first time home buyers in low and middle income groups who have been unable to access traditional financing through banks and large housing finance companies.

Mobilizing finance for green housing construction has, in many ways, been viewed as a catch-22: financial institutions are reticent to invest heavily in such projects without a stronger proof-of-concept demonstrating that the green housing market has the capacity to deliver on its promises, but such capacity can only be achieved with the requisite financial resources. But this self-perpetuating cycle is breaking down. The profitability and investability of the international green construction market is becoming more evident, and an increasing body of evidence and data is highlighting the substantial cost and energy savings associated with green housing development.

At iBUILD, we are capitalizing on our ties to housing financiers, developers, builders, and governments to develop a digital solution that puts more green financing in the hands of those most in need of affordable housing funds. Our platform allows developers, workers, and builders to manage their green construction projects from start to finish, provides the infrastructure to quantify net gains in sustainability, and verifies those gains in a reliable and transparent way to report uncorrupted results and data to housing financiers to unlock financial benefits. Understanding that most developers and self-builders are first and foremost interested in meeting the bottom line, we must ensure the economics work out favorably in a way that incentivizes and rewards successful, green construction practices and operations. By supporting construction stakeholders, particularly self-builders, to demonstrate and verify their sustainability commitments, we can help bridge the gap between the financial institutions looking to increase their investments in green housing sectors and the homeowners most in need of immediate housing finance.