Energy-efficient buildings typically come with a higher development price tag which will tend to favour investors with easy access to cheap capital. For local developers, the higher upfront cost of constructing an energy-efficient building or undertaking comprehensive renovations makes the case for investing less attractive, despite anticipated savings on bills over time of ownership. At the household level, it is hardly possible to collateralise these future bill savings when negotiating a mortgage with banks. This issue is particularly acute in the social housing segment and/or in EMDE. Multilateral development banks have identified this problem and have been looking at ways to address the housing needs of a rapidly growing urban population in a sustainable way.

While the cost of capital is not necessarily the first barrier to investment in energy efficiency in the building space, a country like Colombia provides a good example of how sound public policies and regulation, combined with innovative private sector-led financing, have the potential to trigger investment in the green building space. The country introduced green building codes in 2015, and a wave of banks followed through with the development of innovative finance products.

First Bancolombia, the country's largest bank, issued a series of green bonds where the proceeds were used to provide loans to developers at rates that were 0.5-2% less than commercial rates, on the condition that the project receive a preliminary certification from an established green building scheme such as the Leadership in Energy and Environmental Design (LEED) or the IFC’s EDGE mechanism.

Second, commercial banks in the country (Bancolombia, Davivienda, BBVA, Banco Bogotá and Caja Social) started developing green mortgage products, which provide better financing terms (lower interest rates, longer tenor, smaller down payment) than a traditional mortgage in exchange for the borrower’s willingness to purchase an energy-efficient property or invest in renovation.

The combination of sensible regulatory policy, innovative financing for developers and the development of green consumer finance had impressive results in Colombia. The IFC reports that from a non‑existent base in 2017, certified green buildings accounted for about 20% of new construction in 2021.

The inaugural issuance of the green bond from Bancolombia was subscribed by IFC as a pilot initiative, but the two subsequent tranches were oversubscribed and attracted more than 70 investors, proving that an appetite exists within the financial markets for local currency green financing products. This successful proof of concept allowed Bancolombia to expand and diversify its investor base and as a result of the oversubscription, reduce its financing costs. The bank has since issued additional series of sustainable debt with the view to finance social housing and other impactful projects.

The experience with green mortgages proved they are important to lower the cost of borrowing for efficient buildings or renovation, even in the low-interest-rate environment. They provide a unique way for an investor to leverage lower energy expenditures and the higher resale value that green buildings typically carry. Rising financing costs and global inflation make the case for green mortgages even more appealing to reduce costs.