Green Financing in Real Estate – Reality vs. Marketing
Green Financing in Real Estate – Reality vs. Marketing
February 2026
Igor Petkovic, Senior Associate
Marić & Co
When the city of Joppa rebelled against Thutmose III, one of his officers, Thutiyi, devised a plan that would echo through history. He hid soldiers in jars presented as gifts and reclaimed the city from within. The story has survived not because of its military brilliance, but because it captures something fundamental about structural change: large systems rarely shift through force alone. They require ingenuity.
The global transition toward greener construction may demand a similar kind of ingenuity.
Construction today represents approximately ten percent of global GDP and employs a comparable share of the global workforce. In emerging markets, it is projected to account for up to 16.7 percent of GDP in the coming years.[1] Buildings last for decades. Decisions made today determine not only urban skylines but also energy consumption patterns, emissions trajectories, and capital allocation for generations.
There is a broad consensus that construction must become greener. What remains less discussed is how that transition is financed.
Green building materials are designed to reduce resource consumption and environmental impact across a building’s entire life cycle.
Clean production technologies reduce emissions and waste, while improved materials enhance safety, comfort, and energy efficiency.[2] These advances are technically feasible. The question is whether they are economically viable.
Greener construction almost invariably involves higher upfront costs. Energy-efficient systems, eco-friendly materials, modelling integration, consultancy services and certification procedures increase the capital required at the outset of a project. Research indicates that both construction and maintenance costs for energy-efficient buildings often exceed those of conventional buildings, primarily due to additional equipment, materials, and integration processes.[3]
This additional cost is commonly referred to as the “green premium.”
In theory, the premium can be justified. Lower energy bills, improved asset durability, and increased property value can offset the initial investment over time. In practice, however, the premium creates friction between stakeholders. Developers bear the initial cost burden. Tenants or owners enjoy the long-term savings. Banks focus on repayment risk and capital exposure. Governments in developing economies face limited fiscal capacity.
The incentives are misaligned.
Green buildings face a significant investment deficit globally. Green finance has been presented as the instrument capable of bridging that gap.[4] Yet the existence of financing instruments alone does not eliminate structural economic tensions.
For a green real estate investment to be financially sustainable, the premium must be offset either through higher market prices, lower financing costs, or sufficiently large long-term operational savings. The difficulty lies in ensuring that those who absorb the upfront costs can realistically capture the benefits.
In markets where buyers are highly price-sensitive, developers struggle to pass the premium onto consumers. In conservative banking environments, lenders hesitate to reduce interest rates for projects perceived as more complex or risky. Governments may introduce regulatory standards, but enforcement without parallel financial support can further strain the market.
One of the most widely used instruments in this context is the green bond. The International Capital Market Association (ICMA) defines green bonds as bond instruments where proceeds are exclusively applied to finance or refinance eligible green projects in accordance with the Green Bond Principles.[5] In developed markets, green bonds have become a major channel for sustainable capital allocation.
China provides a particularly illustrative example. Through a centralised and coordinated approach, the Chinese government accelerated the development of its green financial system, including green bond markets.[6] As of March 2021, China ranked among the largest markets globally in outstanding green loans, approaching US$2 trillion, and became the second largest green bond market after the United States.[7] Centralised coordination, regulatory clarity, and strong domestic capital pools allow such systems to function effectively. However, the ability to replicate this model in smaller or more fragmented economies is limited. Developing countries often face shallow capital markets, higher sovereign risk perceptions, limited institutional investor bases, and complex administrative structures. In such contexts, green bonds may exist formally, but their ability to offset the green premium remains constrained.
Climate change adds another dimension to the discussion. Green construction plays a crucial role in mitigating emissions and reducing environmental degradation. Many Asian economies, highly exposed to climate-related physical risks, have strong economic incentives to invest in greener infrastructure.[8] For countries facing rising sea levels or extreme weather events, the cost of inaction may exceed the cost of transition. Yet climate incentives are not evenly distributed. Developing countries with smaller industrial bases have historically contributed less to global emissions. At the same time, they often face more immediate economic pressures: employment, infrastructure deficits, public debt and social stability. The cost of aggressive green transformation may appear disproportionate relative to their historical responsibility.
This divergence explains why the pace and scale of green construction vary significantly across jurisdictions.
It is also important to recognise that green construction should not be framed exclusively as a climate mitigation tool. Greener buildings provide tangible economic benefits. Reduced energy consumption lowers utility expenses. Improved insulation and systems enhance durability. Modernised infrastructure increases long-term asset value. Cities that adopt smart and sustainable technologies consistently rank higher in livability indices.
Capital markets and central banks are increasingly aware that climate-related risks affect financial stability. Through monetary policy frameworks and prudential incentives, they can influence capital allocation toward lower-carbon solutions and resilient infrastructure.[9] However, even in systems with supportive macroeconomic frameworks, micro-level incentive problems persist. One of the most persistent obstacles is the split-incentive problem. Developers incur higher construction costs. Owners and tenants benefit from lower operating expenses. Unless developers can capture part of those future savings, rational economic behavior discourages additional investment. Research shows that developers often perceive green construction as involving substantial upfront costs with uncertain recovery mechanisms.[10] Banks may hesitate to finance higher capital expenditures if projected returns remain indirect or long-term.[11] Landlords have limited motivation to invest inenergy-efficient systems when tenants pay utility bills.[12] These structural tensions are particularly pronounced in economies such as Bosnia and Herzegovina.
Bosnia and Herzegovina operates under a currency board system, which limits the Central Bank’scapacity to conduct independent monetary policy. The domestic capital market remains relativelyunderdeveloped. Administrative complexity increases transaction costs and prolongs projecttimelines. While international institutions such as the European Bank for Reconstruction andDevelopment have supported household-level energy efficiency initiatives, large-scale green realestate projects require deeper capital coordination and risk-sharing mechanisms.
Local banks must consider capital adequacy requirements and risk-weighted asset exposure. Developers operate in a market where consumer purchasing power remains constrained. Regulatory processes may introduce additional uncertainty. Under these conditions, the green premium becomes more difficult to absorb. Yet this does not render green construction unattainable. Structural challenges require structural responses. Legal and financial engineering can play a decisive role in reducing uncertainty and enhancing bankability. Carefully drafted construction and financing agreements can allocate risks more predictably. Standardised documentation frameworks reduce negotiation time and transaction costs. Cooperation among local banks and international financial institutions can distribute exposure and lower individual lender risk. Modern dispute resolution mechanisms, such as Dispute Adjudication Boards, may reduce the likelihood of protracted litigation or arbitration. Lower dispute risk improves the overall risk profile of projects, which in turn can reduce financing costs. In capital-intensive sectors, even marginal reductions in uncertainty can materially influence viability.
In smaller economies, ingenuity often compensates for scale. Coordinated action between developers, lenders, regulators, and legal professionals can mitigate some of the structural disadvantages inherent in less centralised systems. Time efficiency in project preparation directly reduces capital lock-up and interest accrual. Predictability reduces risk premiums.
Green construction is not merely a technological upgrade. It is a financial architecture challenge.
The transition toward greener cities will not occur solely because sustainability narratives are persuasive. It will occur when green projects are structured in a manner that aligns incentives, distributes risk rationally, and makes environmental ambition economically coherent. Marketing language may initiate interest. Financial and legal discipline will determine execution.
References
[1] World Resources Institute, “4 surprising ways energy-efficient buildings benefit cities,” available at: https://www.wri.org/insights/4-surprising-ways-energy-efficient-buildings-benefit-cities
Sekerin, V.D., Dudin, M.N., Gorokhova, A.E., Shibanikhin, E.A., Balkizov, M.H., Green Building:Technologies, Prospects, Investment Attractiveness, International Journal of Civil Engineering andTechnology (IJCIET), Vol. 9, Issue 1, 2018.
[2] Dong, T., Yin, S., Zhang, N., New Energy-Driven Construction Industry: Digital Green InnovationInvestment Project Selection of Photovoltaic Building Materials Enterprises Using an IntegratedFuzzy Decision Approach, 2023.
[3] Deng, Y., Wu, J., Economic returns to residential green building investment: The developers’ perspective, 2013.
[4] Debrah, C., Chan, A.P.C., Darko, A., Green finance gap in green buildings: A scoping review andfuture research needs, 2021.
[5] Lin, L., Yanrong, H., Developing a Green Bonds Market: The Case of China, NUS Centre for Banking& Finance Law Working Paper 21/01, 2021.
[6] Ibid.
[7] Ibid.
[8] Diaz-Rainey, I., Corfee-Morlot, J., Volz, U., Caldecott, B., Green finance in Asia: challenges, policiesand avenues for research, 2023.
[9] Dombret, A., Kenadjian, P.S., Green Banking and Green Central Banking, ILF Series.
[10] Kapoor, A., Teo, E.-Q., Azhgaliyeva, D., Liu, Y., The Viability of Green Bonds as a FinancingMechanism for Green Buildings in ASEAN, ADBI Working Paper Series.
[11] Ibid.
[12] Ibid.
February 2026
Igor Petkovic, Senior Associate
Marić & Co
When the city of Joppa rebelled against Thutmose III, one of his officers, Thutiyi, devised a plan that would echo through history. He hid soldiers in jars presented as gifts and reclaimed the city from within. The story has survived not because of its military brilliance, but because it captures something fundamental about structural change: large systems rarely shift through force alone. They require ingenuity.
The global transition toward greener construction may demand a similar kind of ingenuity.
Construction today represents approximately ten percent of global GDP and employs a comparable share of the global workforce. In emerging markets, it is projected to account for up to 16.7 percent of GDP in the coming years.[1] Buildings last for decades. Decisions made today determine not only urban skylines but also energy consumption patterns, emissions trajectories, and capital allocation for generations.
There is a broad consensus that construction must become greener. What remains less discussed is how that transition is financed.
Green building materials are designed to reduce resource consumption and environmental impact across a building’s entire life cycle.
Clean production technologies reduce emissions and waste, while improved materials enhance safety, comfort, and energy efficiency.[2] These advances are technically feasible. The question is whether they are economically viable.
Greener construction almost invariably involves higher upfront costs. Energy-efficient systems, eco-friendly materials, modelling integration, consultancy services and certification procedures increase the capital required at the outset of a project. Research indicates that both construction and maintenance costs for energy-efficient buildings often exceed those of conventional buildings, primarily due to additional equipment, materials, and integration processes.[3]
This additional cost is commonly referred to as the “green premium.”
In theory, the premium can be justified. Lower energy bills, improved asset durability, and increased property value can offset the initial investment over time. In practice, however, the premium creates friction between stakeholders. Developers bear the initial cost burden. Tenants or owners enjoy the long-term savings. Banks focus on repayment risk and capital exposure. Governments in developing economies face limited fiscal capacity.
The incentives are misaligned.
Green buildings face a significant investment deficit globally. Green finance has been presented as the instrument capable of bridging that gap.[4] Yet the existence of financing instruments alone does not eliminate structural economic tensions.
For a green real estate investment to be financially sustainable, the premium must be offset either through higher market prices, lower financing costs, or sufficiently large long-term operational savings. The difficulty lies in ensuring that those who absorb the upfront costs can realistically capture the benefits.
In markets where buyers are highly price-sensitive, developers struggle to pass the premium onto consumers. In conservative banking environments, lenders hesitate to reduce interest rates for projects perceived as more complex or risky. Governments may introduce regulatory standards, but enforcement without parallel financial support can further strain the market.
One of the most widely used instruments in this context is the green bond. The International Capital Market Association (ICMA) defines green bonds as bond instruments where proceeds are exclusively applied to finance or refinance eligible green projects in accordance with the Green Bond Principles.[5] In developed markets, green bonds have become a major channel for sustainable capital allocation.
China provides a particularly illustrative example. Through a centralised and coordinated approach, the Chinese government accelerated the development of its green financial system, including green bond markets.[6] As of March 2021, China ranked among the largest markets globally in outstanding green loans, approaching US$2 trillion, and became the second largest green bond market after the United States.[7] Centralised coordination, regulatory clarity, and strong domestic capital pools allow such systems to function effectively. However, the ability to replicate this model in smaller or more fragmented economies is limited. Developing countries often face shallow capital markets, higher sovereign risk perceptions, limited institutional investor bases, and complex administrative structures. In such contexts, green bonds may exist formally, but their ability to offset the green premium remains constrained.
Climate change adds another dimension to the discussion. Green construction plays a crucial role in mitigating emissions and reducing environmental degradation. Many Asian economies, highly exposed to climate-related physical risks, have strong economic incentives to invest in greener infrastructure.[8] For countries facing rising sea levels or extreme weather events, the cost of inaction may exceed the cost of transition. Yet climate incentives are not evenly distributed. Developing countries with smaller industrial bases have historically contributed less to global emissions. At the same time, they often face more immediate economic pressures: employment, infrastructure deficits, public debt and social stability. The cost of aggressive green transformation may appear disproportionate relative to their historical responsibility.
This divergence explains why the pace and scale of green construction vary significantly across jurisdictions.
It is also important to recognise that green construction should not be framed exclusively as a climate mitigation tool. Greener buildings provide tangible economic benefits. Reduced energy consumption lowers utility expenses. Improved insulation and systems enhance durability. Modernised infrastructure increases long-term asset value. Cities that adopt smart and sustainable technologies consistently rank higher in livability indices.
Capital markets and central banks are increasingly aware that climate-related risks affect financial stability. Through monetary policy frameworks and prudential incentives, they can influence capital allocation toward lower-carbon solutions and resilient infrastructure.[9] However, even in systems with supportive macroeconomic frameworks, micro-level incentive problems persist. One of the most persistent obstacles is the split-incentive problem. Developers incur higher construction costs. Owners and tenants benefit from lower operating expenses. Unless developers can capture part of those future savings, rational economic behavior discourages additional investment. Research shows that developers often perceive green construction as involving substantial upfront costs with uncertain recovery mechanisms.[10] Banks may hesitate to finance higher capital expenditures if projected returns remain indirect or long-term.[11] Landlords have limited motivation to invest inenergy-efficient systems when tenants pay utility bills.[12] These structural tensions are particularly pronounced in economies such as Bosnia and Herzegovina.
Bosnia and Herzegovina operates under a currency board system, which limits the Central Bank’scapacity to conduct independent monetary policy. The domestic capital market remains relativelyunderdeveloped. Administrative complexity increases transaction costs and prolongs projecttimelines. While international institutions such as the European Bank for Reconstruction andDevelopment have supported household-level energy efficiency initiatives, large-scale green realestate projects require deeper capital coordination and risk-sharing mechanisms.
Local banks must consider capital adequacy requirements and risk-weighted asset exposure. Developers operate in a market where consumer purchasing power remains constrained. Regulatory processes may introduce additional uncertainty. Under these conditions, the green premium becomes more difficult to absorb. Yet this does not render green construction unattainable. Structural challenges require structural responses. Legal and financial engineering can play a decisive role in reducing uncertainty and enhancing bankability. Carefully drafted construction and financing agreements can allocate risks more predictably. Standardised documentation frameworks reduce negotiation time and transaction costs. Cooperation among local banks and international financial institutions can distribute exposure and lower individual lender risk. Modern dispute resolution mechanisms, such as Dispute Adjudication Boards, may reduce the likelihood of protracted litigation or arbitration. Lower dispute risk improves the overall risk profile of projects, which in turn can reduce financing costs. In capital-intensive sectors, even marginal reductions in uncertainty can materially influence viability.
In smaller economies, ingenuity often compensates for scale. Coordinated action between developers, lenders, regulators, and legal professionals can mitigate some of the structural disadvantages inherent in less centralised systems. Time efficiency in project preparation directly reduces capital lock-up and interest accrual. Predictability reduces risk premiums.
Green construction is not merely a technological upgrade. It is a financial architecture challenge.
The transition toward greener cities will not occur solely because sustainability narratives are persuasive. It will occur when green projects are structured in a manner that aligns incentives, distributes risk rationally, and makes environmental ambition economically coherent. Marketing language may initiate interest. Financial and legal discipline will determine execution.
References
[1] World Resources Institute, “4 surprising ways energy-efficient buildings benefit cities,” available at: https://www.wri.org/insights/4-surprising-ways-energy-efficient-buildings-benefit-cities
Sekerin, V.D., Dudin, M.N., Gorokhova, A.E., Shibanikhin, E.A., Balkizov, M.H., Green Building:Technologies, Prospects, Investment Attractiveness, International Journal of Civil Engineering andTechnology (IJCIET), Vol. 9, Issue 1, 2018.
[2] Dong, T., Yin, S., Zhang, N., New Energy-Driven Construction Industry: Digital Green InnovationInvestment Project Selection of Photovoltaic Building Materials Enterprises Using an IntegratedFuzzy Decision Approach, 2023.
[3] Deng, Y., Wu, J., Economic returns to residential green building investment: The developers’ perspective, 2013.
[4] Debrah, C., Chan, A.P.C., Darko, A., Green finance gap in green buildings: A scoping review andfuture research needs, 2021.
[5] Lin, L., Yanrong, H., Developing a Green Bonds Market: The Case of China, NUS Centre for Banking& Finance Law Working Paper 21/01, 2021.
[6] Ibid.
[7] Ibid.
[8] Diaz-Rainey, I., Corfee-Morlot, J., Volz, U., Caldecott, B., Green finance in Asia: challenges, policiesand avenues for research, 2023.
[9] Dombret, A., Kenadjian, P.S., Green Banking and Green Central Banking, ILF Series.
[10] Kapoor, A., Teo, E.-Q., Azhgaliyeva, D., Liu, Y., The Viability of Green Bonds as a FinancingMechanism for Green Buildings in ASEAN, ADBI Working Paper Series.
[11] Ibid.
[12] Ibid.
