Cadwalader’s Michael Ruder Presents at NYU's 54th Annual Conference on "ESG and the Capital Markets"

November 22, 2021

Post-pandemic ESG and other investment strategies, global debt and alternate debt finance were among the key themes at the NYU School of Professional Studies Schack Institute of Real Estate’s 54th Annual Conference on Capital Markets in Real Estate on November 16 at the Plaza Hotel in New York City.

Under the central theme of “Capitalizing on the Recovery,” the conference focused on the outlook for New York City and featured an address by Larry Silverstein, Chairman of Silverstein Properties, who expressed great bullishness on the future of New York City, and a panel headlined by Marc Holliday, Chairman and CEO of SL Green Realty Corp. (“SL Green”), who provided great insight on his vision for remaking Midtown East for the 21st century.

Cadwalader Special Counsel Michael Ruder participated on a panel hosted by the CRE Finance Council (“CREFC”) titled “ESG and the Capital Markets.” Joining Ruder on the panel were Leland F. Bunch, Managing Director, Bank of America Securities, Inc.; Sairah Burki, Managing Director, Regulatory Affairs, CREFC; Jason Rozes, Partner, Dechert LLP; and Lisa Bozzelli, Director, Multifamily Capital Markets, Fannie Mae. The panel was moderated by Lisa Pendergast, Executive Director, CREFC.

The panel kicked off with a scientific discussion of the risks that climate change presents to real estate, and the impact that real estate has on climate change. The panelists went on to discuss ESG initiatives within CRE finance; the CRE-backed green bond market; the important role of second-party opinion providers such as Sustainalytics in green CMBS; and new CMBS “social bonds” issuances backed by affordable multifamily housing.

The panel discussed the regulatory and legislative framework across investing, lending and borrowing, with one panelist noting that, although further ESG laws might pass the U.S. House, they are unlikely to pass in the Senate, and noted the likelihood of the SEC issuing climate risk disclosure regulations in early 2022.  Along those lines, the panel then addressed NYC Local Law 97, which is set to hit many NYC property owners with fines starting in 2024 unless their buildings are retrofitted with energy-efficient improvements. Ruder recommended that lenders who are lending on NYC properties into 2024 and beyond should consider obtaining energy assessments or energy audits as part of their standard property condition assessments, and noted that some engineering consulting firms are already offering these services as an add-on to their standard PCA reports.

The recently closed $3 billion One Vanderbilt green CMBS transaction involving borrower SL Green was discussed by the panelists at length. Ruder spoke of his involvement as counsel to Wells Fargo as the issuer on the One Vanderbilt transaction, the largest single property CMBS deal ever issued, which he described as the “highlight of his career.” Ruder noted that, despite initial concerns about whether the market for CMBS would digest a $3 billion green CMBS deal backed by NYC office while COVID-19 concerns still lingered, the transaction was viewed as a tremendous success that generated a lot of favorable press. From an ESG standpoint, Ruder explained, the “green bonds” designation on the CMBS helped support market interest and was a factor that helped with building the book, and the transaction ultimately “fired a starting gun” for competition among private label CMBS lenders to compete for loans backed by LEED-certified buildings. Ruder also discussed his dealings as intermediary between the CMBS issuer and Sustainalytics, the second-party opinion (“SPO”) provider engaged on the transaction. He explained the learning curve among deal parties resulting from the unfamiliar and evolving nature of the green CMBS process and discussed the value of an experienced counsel’s role in bridging the technical knowledge gap between issuers, investors and SPO providers.

Other key takeaways from CREFC’s ESG panel include:

  • CREFC’s Sustainability Initiative administered an ESG Survey this past summer among its members, which confirmed the rise of ESG initiatives among survey respondents. Client demand, firm values and reputation were reported to be the key drivers behind this rise, and a vast majority of respondents reported environmental and climate impact as their top focus.
  • While the current focus of the market is on the “E” of “ESG,” Social and Governance have been gaining traction.
  • The panel anticipates a rise in ESG-focused regulation by municipalities, similar to NYC Local Law 97, and other administrative regulation such as SEC disclosure requirements.
  • Impact reporting data is crucial to the success and growth of green bonds. Data needs to be quantified so assets may be compared to each other by investors. There is currently a lack of standardization among SPO providers and investors on what is “green enough,” though CREFC’s Sustainability Initiative is working to address the standardization issue by creating sustainability data sets that can be incorporated into the CREFC Investor Reporting Package.
  • Fannie Mae’s Green Building Certification Program and Green Rewards lending program are incentivizing borrowers to commit to energy and water consumption reductions at their multifamily properties. Fannie Mae was one of the first market participants to focus on green lending and investing, but there has been increased participation in the green bonds market over the past 18 months.

Finally, a central theme emerged throughout the ESG panel’s discussion: transparency. The panelists emphasized that standardization and data reporting are essential to developing key ESG metrics in capital markets as ESG investing continues to grow over time. There has been a clear increase in market participation and support surrounding green assets, fostering the need for a blueprint moving forward.