IFC’s EDGE: Products for the Housing Value Chain, Part 2

Published: Wednesday, May 6th, 2015 by Lenora

Continuing our last post, IFC’s EDGE software has gained traction quickly because it brings a range of real estate players to the table around green building. Even with a great tool like EDGE, how can an organization like the IFC drive adoption? They still have to disseminate the tool across users to strengthen the business and institutional landscape. No small challenge, even with the capital and convening power of the IFC.

Canopus’ Constelação Residence in Brazil - an IFC EDGE project

Canopus’ Constelação Residence in Brazil – an IFC EDGE project

The IFC has strong financial incentives to encourage market participants to adopt EDGE. The institution already has already invested in $800mn in green building projects. EDGE helps the IFC build a sustainable and profitable real estate pipeline. The IFC, in turn, can leverage its global platform of clients and collaborative partners to deploy EDGE. Ultimately, the IFC creates more value for its clients by strengthening relationships between developers and end users. A virtuous circle.

In pursuit of that value-added, the EDGE team has already started to engage developers, financial institutions and investors. Financial institutions, like the IFC and the banks that directly finance projects, can also make the use of EDGE a condition of the project – another way to encourage the uptake of green building in emerging markets. Using these ideas, the EDGE team is already developing integrated investment and technical assistance products specifically for developers and investors to promote sustainable building.

The products are paying off. In Kenya and Mexico, there has been some progress on developing green mortgages. IFC has a project in Housing Finance Company of Kenya to encourage green mortgages. Mexico’s Infonavit is encouraging financing for energy and water efficient homes with financing from development banks KfW and IDB. Exemplary clients are beginning to green their portfolios, including Value & Budget Housing Corporation in India and Vinte Vivienda Integrales and Hoteles City Express in Mexico.

The EDGE criteria are critical to making this happen. Imagine if every developer and bank tried to implement a green housing or green mortgage project on their own. Of course, each could go to their national green building council and build a framework specifically for each building type and class.

Instead, EDGE lets each player in the ecosystem roll out clear, measurable and (hopefully) verifiable criteria without remaking the wheel each time a new organization starts a program. Banks can use it as a standard to determine if developers align with the goals of their green mortgage program. The developer secures an EDGE certificate to illustrate compliance. That certificate can then unlock specific green product features in the bank’s financing.

Of course, all these projects need the right asset management to maintain the value of green building benefits over time. The EDGE team is working on how to best integrate asset management after the developer exits a project and the building owner takes the reins.

Beyond Software to Systems. A software package, however well-developed, can’t replace the human linkages that drive adoption. The IFC team that built EDGE is convinced that a whole package of services and interventions is needed to get to their goals.

So, the EDGE software is just one of a larger set of engagements. These include collaboration with governments on building and energy efficiency codes, working in-country to develop standards and certification, engagement with developers on project development and the integration of the EDGE software and efforts to encourage private financial institutions to build new financial products. This portfolio approach is becoming more broadly programmatic so it can address the whole range of challenges to mainstreaming green buildings in rapidly growing emerging markets.

Priority markets have been selected for this multi-pronged approach – primarily countries with rapid growth and substantial size in their real estate markets. IFC is going into ten countries in Phase One (see below) with all their available “services” in conjunction with global certifying partners. Some markets have already rapidly developed certain elements of these programs. India has built an active certification market already, for example. The second phase will dramatically expand EDGE’s reach.

 EDGE Rollout: Phase One Phase Two
 Colombia Peru Bangladesh Ivory Coast Nigeria
 Costa Rica Philippines Brazil Kenya Pakistan
 India South Africa China Lebanon Sri Lanka
 Indonesia Vietnam Egypt Mexico Tanzania
 Panama Ghana Morocco Turkey

EDGE Enters Investor Proving Grounds. An upcoming project near Soweto township in South Africa will be a first major proof of concept, not only of EDGE’s effectiveness as a design model but also as the linchpin for an investment fund. One of the projects in the pipeline of the International Housing Solutions Fund II will see KfW invest in a separate vehicle that ensures half of the 10,000 planned homes will be built to EDGE’s green building criteria.

Getting EDGE Out. Back to the rollout, Prashant Kapoor and his team are working on uptake of the EDGE tool among professionals in rapidly developing markets, especially among developers, bankers, architects, building owners and policymakers. Especially in early stage markets, where the learning curve is still steep, EDGE’s practicality, accessibility and affordability makes a difference.

The current business model offers software and the underlying knowledge base for free. Anyone can check it out to test the ease of use. While technical analyses run behind the scenes, it illustrates immediate and measurable improvements. Developers interested in certification then pay a couple thousand dollars rather than six figures for a green building certification.

Keep in mind that the software is just an entry point. IFC can’t itself give green building certifications. The EDGE team builds out the ecosystem by empowering global and local partners in the markets where EDGE is operational to review and award certifications. Actually executing requires further effort and expense. The latter – how deeply to commit to the EDGE software’s recommendations – is at the developers’ discretion.

NJ Zinnia’s Premium Homes in India - an IFC EDGE project

NJ Zinnia’s Premium Homes in India – an IFC EDGE project

By lowering the bar to using EDGE at the start of a project, the intent is to draw the user in so that the software affects the way the developer actually does business. Due to the speed of industrialized development, currently most consideration of sustainable building elements happens at the end of the project, when it is already too late.

Like all green building certification systems, there is always the question of whether these efforts yield any real efficiency benefits. The EDGE team plans to include an independent audit for projects that have achieved EDGE certification within a certain country or region to evaluate the accuracy of projected performance.

Longer-term evaluation is challenging, of course. Building performance becomes increasingly a function of tenant behavior and asset management. Future modifications to the software and a communication strategy aimed at occupants will consider these ever-present issues.

Platform to the Future. IFC is planning no small feats. Its goal is for 20% of all new build to be resource-efficient in EDGE target markets. About 75% of that new development will be residential, which is the equivalent of nearly one million housing units. To imagine the size of the global market potential, the value for affordable housing alone is estimated to be $2.3 trillion by 2025.

That future may include smart meters and certifications for green mortgages and green bonds. IFC’s team is already working to identify a simplified metering device to bring down costs and provide a stripped-down monitor for EDGE-certified homes. The IFC is also considering becoming a Climate Bonds Initiative partner to drive sustainable and responsible investment capital into housing and social infrastructure. EDGE would then certify the underlying projects that may be financed by green bonds, a rapidly growing thematic public debt instrument. EDGE-certified homes could also underlie green mortgage-backed securities in developing markets on the not-too-distant horizon.

For those who wonder why there needs to be new software, standard and certification when green building construction is starting to grow, EDGE suggests a potentially faster ramp-up and one that’s more inclusive.

A final caveat: EDGE still can’t make housing more inclusive or ensure that there is transit or jobs or security or services. The IFC will have to recognize, as will other funders, that peripheral urban mass housing without a connective social and commercial urban fabric can undermine the best of intentions to be environmentally sustainable.

Right now, the long term is blue sky. EDGE could be spun off. It has many miles and hurdles to clear on the way to its goal of a broad and accessible green building market.