Capital Relief for Climate-Aligned Real Estate: A Market-Based Opportunity for Canada

For the past two years, Affine Climate Solutions has worked alongside Canadian financial institutions through the Banking on Buildings Program to accelerate preferential financing for climate-aligned buildings.

From the outset, one question consistently emerged from lenders: What is the business case for offering better financing terms to climate-aligned buildings?

To answer that question, we looked at 20 years of evidence that shows how sustainability drives stronger net operating income and lowers credit risk. Our research findings are summarized in the Financing the Future report.

As our work progressed, we became aware of a limitation. Even when lenders recognize the lower risk profile of climate-aligned buildings, regulatory capital requirements can limit the extent to which those benefits are reflected in financing terms.

This led us to explore a potentially high-impact solution: targeted capital relief for climate-aligned real estate lending. By better aligning capital requirements with measurable differences in risk, this approach could enable financial institutions to expand preferential financing offerings while maintaining the safety and stability of Canada's banking system.

This work ultimately informed Affine Climate Solutions' recent submission to the House of Commons Standing Committee on Finance as part of the federal government's pre-budget consultations for Budget 2026. The submission outlines how targeted capital relief could help unlock private investment in housing, retrofit activity, and climate resilience—without relying on large new public spending programs.

What is Capital Relief?

Capital requirements determine how much capital financial institutions must hold against loans. These rules are designed to protect financial stability by aligning capital reserves with risk exposure.

However, growing evidence shows that climate-aligned buildings consistently demonstrate lower risk profiles than conventional buildings. Research across Canada, the United States, Europe, and Asia has found that high-performance buildings often exhibit:

• Lower default risk

• Stronger and more stable asset values

• Lower operating cost volatility

• Improved income stability

Where risk differentials are measurable, prudential frameworks should reflect them.

Targeted capital relief would reduce the amount of capital lenders are required to hold against qualifying climate-aligned real estate loans. This creates additional lending capacity and lowers financing costs, enabling financial institutions to offer more competitive borrowing rates for eligible projects.

Importantly, this approach mobilizes private capital through existing financial system structures rather than creating a large new federal spending program.

Why This Matters Now

Canada’s current policy toolkit for buildings has relied heavily on grants, concessional financing, and tax measures. While these programs are important, they can be fiscally intensive and difficult to scale to the level required to meet housing and climate objectives simultaneously.

Capital relief represents a complementary tool that works through market incentives rather than direct public expenditure.

The potential benefits are significant:

• Lower financing costs for climate-aligned housing and retrofit projects

• Increased private investment in low-carbon and resilient buildings

• Faster housing delivery and rehabilitation activity

• Improved energy affordability and resilience outcomes

• Stronger alignment between financial regulation and real-world climate risk

The approach also aligns closely with Canada’s evolving sustainable finance and taxonomy work by linking preferential financing conditions to measurable building performance outcomes.

Positive Reception from the Banking Sector

Through Affine’s Banking on Buildings Program, extensive consultations have been conducted with stakeholders across the real estate and financial sectors. Discussions to date have indicated positive reception to the concept of targeted capital relief within the Canadian banking sector, particularly where implementation is grounded in credible standards, measurable outcomes, and prudential integrity.

This reflects growing recognition that financial regulation can play a constructive role in accelerating market transformation while maintaining financial system stability.

What We Recommended in the Federal Pre-Budget Submission

In our submission to the House of Commons Standing Committee on Finance, Affine recommended that the federal government:

• Direct federal financial regulators, including OSFI, to explore and implement targeted capital relief mechanisms for climate-aligned real estate lending

• Base implementation on measurable building performance outcomes such as energy efficiency, emissions reductions, and climate resilience

• Invest in the standards, data infrastructure, and verification systems required to support prudent and scalable implementation

Looking Ahead

Canada has an opportunity to build on its financial sector strength and regulatory credibility to mobilize significantly greater private investment into climate-aligned buildings.

Well-designed capital relief mechanisms could help lower financing barriers, support housing and retrofit activity, improve resilience outcomes, and strengthen economic competitiveness—all while minimizing pressure on public finances.

Affine Climate Solutions will continue advancing this work through research, stakeholder engagement, and collaboration with industry and government partners.

Read the budget submission here