The Environmental Upgrade Finance programme in Victoria, Australia, provides property-linked loans to SMEs to support environmentally friendly building upgrades for commercial and industrial properties. It operates through Environmental Upgrade Agreements involving the property owner, a lender, and the local council, with repayments collected via council rates. The structure of full project cost coverage, combined with long repayment terms makes building upgrades more financially accessible to SMEs. Funding can be used for energy and water efficiency, renewable energy installations, waste minimisation, and lighting or system upgrades.
Sustainability Victoria – Environmental Upgrade Finance programme in Australia
Abstract
Environmental Upgrade Finance (EUF), started in Melbourne in 2010, is a property-linked loan scheme designed to finance environmentally friendly building upgrades.1 It targets buildings of industrial and commercial use across the state of Victoria, aiming to overcome the financial barriers posed by the high upfront costs associated with building upgrades.
The programme uses a council-based financing model, which requires the establishment of an Environmental Upgrade Agreement (EUA) between three parties:
A property owner (a commercial business);
A lender;
The local council.
Repayment is linked to the local council rates system, with councils declaring an Environmental Upgrade Charge. Property owners repay the loan via their council rates instalments, and the council transfers repayments to the financier. To address the split incentives issue, where both owner and tenant benefit from energy efficiency gains, tenants can also become parties to the EUA and contribute to repayments.
The City of Melbourne was the frontrunner in launching EUF. To kickstart financing, it secured seed funding through the Sustainable Melbourne Fund (SMF), administered by the council, with the intent that the SMF would eventually detach itself from the council as more financiers entered the market.
EUF offers favourable financing conditions, including:
Up to 100% of project cost coverage
Long repayment periods of up to 20 years, helping SMEs manage cash flow, compared to traditional bank loans.
Interest rates are generally fixed and are often higher than those offered by major Australian banks through discounted energy upgrade financing products. However, because financing terms can extend up to 20 years, repayments are often lower than the savings generated by the energy upgrade, making the arrangement cashflow positive. Exact financing conditions are determined on a case-by-case basis, and the repayment liability is secured against the building or property rather than the business owner or council. If the property is sold, repayment obligations can be transferred to the new owner.
Funding can be used for building upgrades that generate a positive environmental impact, including energy and water efficiency upgrades, renewable energy installations, as well as waste minimisation projects.
Sustainability Victoria (SV) played a key role in raising awareness among SMEs, providing information, answering queries, and attempting to diversify the range of financiers to participate in the programme. It promoted EUF alongside other green financial products offered by existing financial institutions, as well as government-funded grant schemes, such as for financing energy audits. To improve outreach, SMF, the only EUF provider, partnered with service providers, such as solar PV equipment suppliers, who promoted EUF as a financing option to their SME clients.
Uptake has been strongest amongst commercial buildings, industrial facilities, hospitality, retail and agricultural and quasi-agricultural businesses, especially in the food and beverage sector. Among building upgrade types, solar PV has witnessed the highest demand, followed by energy efficiency equipment.
In Australia, climate and environmental responsibilities are shared across different levels of government. The federal government sets national commitments, with state governments establishing additional targets. Local councils often play a role in developing climate action plans, taking into account the state-based targets, and executing them. In Victoria, the local councils aimed to leverage property-linked loans to encourage the uptake of renewable energy sources and energy efficiency upgrades for SMEs within their jurisdictions.
EUF was first established within the City of Melbourne through enabling legislation, as part of the 1200 buildings retrofit programme, to overcome financing barriers to retrofitting commercial buildings. To kickstart the financing for EUF, the City of Melbourne utilised the Sustainable Melbourne Fund (SMF), a fund set up in 2002 with an initial investment of $5 million, to invest in projects with a broad remit, i.e. to enhance the environment and deliver economic benefits for the people of Melbourne.
In 2010, the fund adopted the EUF model as its key financing mechanism for delivering building retrofits. The introduction of the EUF framework in 2015 across the state of Victoria enabled other local Victorian councils to play a critical role in its expansion, engaging in grassroots council activism, which led to an increase in uptake, with 34 councils across Victoria adopting the scheme. To date, there have been up to 125 building projects funded through the mechanism.
In 2018, SMF evolved to become the Sustainable Australia Fund (SAF) after the City of Melbourne sold its founding shareholding, and the fund expanded nationally after securing a AUD 200m backing from Bank Australia. In 2022, SAF refinanced with the Credit Suisse bank for a AUD 100m facility; however, the relationship ended shortly after an acquisition of the bank by UBS, leading to a subsequent winding up of SAF in 2023.
Sustainability Victoria is a state government agency focused on supporting Victoria to transition to a more circular and climate-resilient economy. As such, it was tasked with spreading awareness and providing information and guidance on the programme amongst SMEs, alongside other green finance products and grant support programmes.
Whilst the programme has experienced significant uptake, it has also faced a number of challenges, including:
Lack of financing participants in the market: The design of the programme placed a heavy administrative load on potential financiers, who had to work closely with the council and adapt to the ratepayer system. Initially, SMF was only intended as the first seed funder to adopt the EUF mechanism, with other financiers expected to join. However, only a few other financial institutions sought to participate. Two other bank institutions initially participated in the programme but subsequently withdrew, pursuing in-house discounted asset financing products that were partly funded by the Clean Energy Finance Corporation (CEFC) instead. With SMF under the administration of the City of Melbourne and the remaining dominant financier, it made the EUF market reliant on one key financier.
Administrative burden on councils: Upon expansion across Victoria, new onboarded councils also struggled with fulfilling complex administrative requirements, with many lacking staff capacity or resources, despite getting support from an administrative provider, Better Buildings Finance (BBF), that was affiliated with SMF but established through additional government funding. BBF was tasked with onboarding councils to scale up the uptake of EUF across the state; however, the councils had to uplift their administrative capabilities to meet ongoing demand. This limited scalability to more well-funded councils, who had additional resources at their disposal.
Vulnerability to economic shocks: The financing model made it highly sensitive to economic conditions. During the COVID-19 pandemic, demand for long-term credit declined considerably, whilst the high interest rates that followed the pandemic eroded SME confidence and the business case for taking on EUF. Because the lack of a mature competitive market had no resilience to absorb these shocks, the uptake of EUF gradually declined. These factors, along with the acquisition of Credit Suisse by UBS, resulted in a strategic realignment of legacy partnerships and a de-prioritisation of the relationship and the ending of the funds operation.
As such, a number of lessons can also be drawn from the EUF programme:
Context-driven origins: The emergence and uptake of EUF were strongly linked to local activism and pressure placed on councils to act on climate change. As such, these players were critical in supporting the programme as key enablers and participants.
Economic dependency: The programme witnessed strong uptake between the years of 2015 to 2020, when it expanded statewide, which is mostly attributable to low interest rates during this period. This enabled businesses to keep a positive cash flow and repay with the energy savings generated. In turn, this dependency caused difficulties once economic inflation conditions started taking hold post-pandemic.
Need for a competitive financing market: A single dominant financier left the EUF market vulnerable to economic shocks. A more sustainable financing model would involve creating a market with multiple providers. A useful example in the Australian context is the Clean Energy Finance Corporation (CEFC), a federal government agency that has been collaborating with private banks, engaging in co-investment schemes for green financing support.
Simplifying administration: The programme’s reliance on multiple actors and complex processes discouraged bank participation. Reducing administrative load and streamlining processes would be essential for wider adoption and scalability. It should also be noted that whilst the established council administration service provider, BBF, reduced some of these administrative burdens, there were concerns of a perceived conflict of interest due to the affiliation with the dominant financier in the market, which may have posed a barrier for other financiers to participate. Such a service should be established as an independent third-party and ideally funded by the government or by all participating financiers to ensure neutrality.
Several factors contributed to the initial success of the Environmental Upgrade Finance (EUF) programme:
Complementarity with other green finance products and services: EUF worked well alongside other forms of support promoted by SV, such as grant funding for energy audits. Audit results often highlighted opportunities for upgrades, which SMEs could then finance through EUF, generating synergies between the different programmes.
Favourable financing conditions: EUF offered long repayment terms and full project cost coverage, making building upgrades financially viable for SMEs. In many cases, energy savings exceeded repayment obligations, reducing operating costs and generating positive cash flows. Early in the programme, low interest rates further enhanced this advantage. Liability remaining with the building owner rather than the initial borrower, also offered flexibility and acted as a further incentive for SMEs to participate in the programme.
Effective use of channel partners: SMF brought service providers of building upgrade equipment and commercial solar PV on board, who promoted EUF as a financing option in the purchasing options of their equipment. This significantly increased awareness and largely contributed to the high uptake towards the start of the programme.
This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Member countries of the OECD.
This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
Photo credits: © Sakorn Sukkasemsakorn/Getty Images Plus.
© OECD 2025
Attribution 4.0 International (CC BY 4.0)
This work is made available under the Creative Commons Attribution 4.0 International licence. By using this work, you accept to be bound by the terms of this licence (https://creativecommons.org/licenses/by/4.0/).
Attribution – you must cite the work.
Translations – you must cite the original work, identify changes to the original and add the following text: In the event of any discrepancy between the original work and the translation, only the text of the original work should be considered valid.
Adaptations – you must cite the original work and add the following text: This is an adaptation of an original work by the OECD. The opinions expressed and arguments employed in this adaptation should not be reported as representing the official views of the OECD or of its Member countries.
Third-party material – the licence does not apply to third-party material in the work. If using such material, you are responsible for obtaining permission from the third party and for any claims of infringement.
You must not use the OECD logo, visual identity or cover image without express permission or suggest the OECD endorses your use of the work.
Any dispute arising under this licence shall be settled by arbitration in accordance with the Permanent Court of Arbitration (PCA) Arbitration Rules 2012. The seat of arbitration shall be Paris (France). The number of arbitrators shall be one
← 1. https://www.airah.org.au/Common/Uploaded%20files/Archive/Ecolibrium/2012/2012_11_F03.pdf
