Infrastructure Bank, BMO join forces to try to kickstart decarbonization of Canada’s buildings

A new public-private partnership is testing whether a unique financing approach can kickstart climate-friendly renovations to Canada’s mid-sized residential and commercial buildings – one of the trickiest corners of the economy to decarbonize.

Last year, with little fanfare, the Canada Infrastructure Bank and Bank of Montreal BMO-T launched a joint effort to encourage building owners to invest in energy retrofits, such as replacing polluting heating and cooling systems and upgrading building envelopes and insulation. The basic premise is that the federal agency will provide low-interest loans to BMO customers – for which the CIB has allocated $100-million in total – for projects that reduce buildings’ greenhouse gas emissions by at least 30 per cent.

Now, the banks are ready to begin announcing initial projects they will back – the first of which, involving a Halifax office tower being converted to residential lofts by Sidewalk Real Estate Development, will be publicly detailed this week.

At least a couple of other projects are likely to be rolled out shortly thereafter, with the Infrastructure Bank’s financing in the range of $10-million to $20-million each.

Interviews with executives from the banks spearheading the initiative, as well as industry representatives and policy experts, made clear that much is riding on these first few investments going smoothly.

For BMO, which does not stand to earn revenues off the CIB loans (just a small cost-recovery fee), it’s a key component of an effort to establish itself as a leader among Canadian banks in helping commercial clients transition toward a low-carbon economy through broader retrofit supports and other means. It’s also meant to help BMO’s target of net-zero emissions across its lending portfolio by 2050, while increasing the long-term value of the real estate that it finances.

For the Infrastructure Bank, which was notoriously slow to get off the ground after it was established in 2017 (though its investments have more recently ramped up, including larger retrofit projects) and now faces calls by the federal opposition for its closing, the stakes may be even higher. Chief executive officer Ehren Cory said the agency is in talks with other Bay Street banks about following BMO’s lead, which would help prove the CIB is meeting its mandate of leveraging public dollars to attract private investment in sustainable infrastructure.

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And for Canada’s national climate commitments, it could help make a dent in the carbon footprint of a buildings sector that accounts for about 13 per cent of national emissions, and stands alongside oil-and-gas as one of the few industries in which emissions have kept rising rather than falling.

The impetus and the challenge for the CIB-BMO partnership is that mid-sized buildings (which essentially means multi-storey structures that are not skyscrapers) are the segment where there has been the least progress toward decarbonization, because of cultural and structural barriers.

By many accounts, emissions reduction – and the long-term financial upside of reducing energy costs – has not been on the radar of the small companies that largely control the market.

“Conservation is typically one of the last things to get on their list of priorities,” said Bala Gnanam, a vice-president with the Building Owners and Managers Association of Canada (BOMA). He added that, unlike the biggest property owners, they do not typically have employees whose jobs are focused on sustainability.

So even if they are interested in modernizing their buildings’ energy systems, it’s difficult for them to navigate the nascent retrofit market to determine which improvements to take on and how to finance them.

The banks are trying to both raise awareness of available options, and mitigate financial risk – from project cost overruns, the performance of new technologies or regulatory uncertainty – enough for owners to feel comfortable proceeding.

BMO is the lead in engaging directly with its clients by highlighting retrofit possibilities at key financial decision points. That includes when they’re acquiring new properties, renewing mortgages or undertaking renovations that don’t initially include an energy retrofit component.

The idea is that its commercial real-estate teams become advocates for relatively unfamiliar forms of investment, from which they might previously have steered clients away.

“If you think about taking an asset and making big changes to it, usually your bank might be concerned about that and say, hold on, how do I know that you’re going to get through to the other end of this retrofit?” said Jonathan Hackett, BMO’s head of sustainable finance. “We can be barriers if we’re not proactive participants.”

Where the CIB enters the picture is in enabling BMO to assure clients that retrofit projects can be cash-flow positive. Its concessionary financing of retrofit projects – in which the greater the GHG reductions, the lower the interest rate – is meant to ensure that energy cost savings quickly outweigh interest payments.

Ideally, that leads to projects that accrue economic benefits – including upgrading Canada’s existing housing stock, during an affordability crisis – beyond emissions reductions.

That seemingly applies to the Halifax project. Joe Nickerson, Sidewalk RED’s vice-president, said that the CIB’s funding of the portion involving decarbonization – which he said is just under 50 per cent of total construction – has helped make the entire residential conversion of the old Centennial office tower viable. (He also noted that avoiding a tear-down has additional environmental merit, given the carbon intensity of new construction.)

Still, it’s only a tiny portion of the country’s medium-sized building stock that could be renovated using the CIB’s initial $100-million outlay.

The quicker the initial projects proceed, the further the money will stretch. Once those projects are completed, the debt is to be absorbed by BMO, and Mr. Cory expressed hope that the CIB’s funds could turn over multiple times in the next five years.

Comparable partnerships with other banks would help, too. BMO proposed this particular arrangement, but its competitors are looking to replicate it, per the CIB.

But the Infrastructure Bank’s aim is to build sectoral momentum toward retrofits, not actually finance the many thousands that are needed.

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“Even with our significant pool of capital, it’s not nearly enough,” Mr. Cory said. “There’s got to be something catalytic in what we’re doing that starts a chain reaction.”

That would require both positive word of mouth among building owners, and a growing retrofit sector capable of handling ramped-up demand.

BMO and CIB officials acknowledged that the latter is more challenging than they initially realized.

“The overall readiness of the classical construction industry to execute on decarbonization retrofits is low, and in its early stages,” said Aaron Berg, the CIB’s director of energy efficiency investments. But he also said that gaps – such as a lack of companies that provide start-to-finish retrofit project management, leaving customers to piece them together – are starting to be filled, partly as a result of the banks’ efforts.

Although the partnership has been welcomed by green building advocates, BOMA’s Mr. Gnanam questioned whether BMO and the CIB have yet engaged widely enough with building owners through organizations such as his, to raise awareness of retrofit options while themselves gaining a full understanding of the barriers and how to overcome them.

BMO Global Asset Management head of alternatives Jeffrey Shell responded that from the bank’s perspective, scaling up retrofits is a matter of learning through experience.

“It is an iterative solution, it isn’t a fixed solution,” he said. “Every project, every engagement, requires a high level of discussion and refinement with the building owner. And every time we do it, we get better at it.”

Mr. Berg, similarly, suggested that the learning process is happening through each high-stakes transaction being conducted.

“They’re learning how to talk to their clients about this, the pros and cons, risks and benefits of doing a decarbonization retrofit,” he said.

“So there’s an entire market education that’s happening right now.”

Editor’s note: An earlier version of this story incorrectly identified BMO Global Asset Management head of alternatives as Jonathan Shell. He is in fact Jeffrey Shell.