Freddie Mac has been cautiously dipping into the Green Bond Market . over the past few years. The government-backed mortgage company first issued green bonds for energy retrofits at apartment buildings in 2019. In 2021, it expanded into single-family homes, and earlier this month, the company announced it had sold $600 million in such bonds.
Freddie Mac and its sister company Fannie Mae own more than 60 percent of home mortgages in the country. These two companies purchase home loans from lenders and pool them into financial products called “mortgage-backed securities” which they then sell to investors. Green bonds are products that are sustainable or energy efficient in nature. Green bonds are meant to finance sustainable projects. Investors can expect that Freddie Mac’s green bond will drive investment into energy-efficient homes. The devil is in details.
One, the Freddie Mac program offers mortgages to homeowners with rooftop solar panels. All new construction in states like California must be built using rooftop solar .. This means that any mortgage for a newly built house in California will automatically be eligible for Freddie Mac’s green programs. It also recently began accepting homes with a rating of 60 or lower on the HERS index, an industry standard used to measure energy efficiency. The average rating for the approximately 300,000 homes that were rated in 2020 was 58.
A rating of 60 is a reasonable target compared to goals set by sustainability projects in the past, but it’s insufficient to reach the emissions reductions outlined in the Paris climate accord, said Jesse Keenan, an associate professor of real estate at Tulane University. “They need to be in the low 50s.”
The green bond market has experienced explosive growth over the past decade. Businesses have turned to the green bond market to promote their sustainability credentials, despite regulatory and economic pressures on them to think about the environmental impact of products. Fannie Mae, Freddie Mac and other banks have been given incentives to offer green products. The Biden administration released a roadmap last year to address climate risks within the financial system, as well as in housing markets.
However, there is almost no regulation of stocks or bonds that are environmentally sustainable. Companies have set their own standards. It can sometimes be difficult to know if a green bond is actually financing climate-friendly projects. For instance, a Grist investigation of Fannie Mae’s green bond program for apartment buildings found that about 20 percent of properties in the program saw its energy metrics either stagnate or decline after enrollment. And a recent Bloomberg report found that a prominent ratings company that sticks sustainability labels on stocks and bonds doesn’t actually measure the impact of the product on the planet.
It is not clear if Freddie Mac’s single-family home program is driving energy efficiency investments. The company has not released environmental metrics that can be used to assess the homes’ energy use before