Governance, risk & compliance
generation of electricity, steam, heating and cooling. ‘Scope 3’, for its part, considers indirect emissions from sources that are not owned and not directly controlled by the reporting company. That includes suppliers, distributors and, crucially, bank lending exposure.
Scope 3 is the real kicker for banks and has prompted them to create a new breed of products – energy-efficient mortgages (EEMs) – to make their loan books greener. Furthermore, the EU has implemented an energy-efficient mortgage action plan (EeMAP), with which a host of banks are involved, among them ABN Amro, BNP Paribas and ING.
“The two key drivers were to reward customers for purchasing an energy-efficient home, and to help promote the construction of energy-efficient homes,” says Craig Calder, director of mortgages at Barclays, which has launched its own green home mortgages and, more recently, green buy-to-let mortgages. “Our Green Home Mortgage rewards homebuyers purchasing a new-build energy-efficient home with a discount on their interest rate. “We’re creating an extra incentive for builders to ensure that the properties they’re building achieve the top EPC ratings of A or B, and we’re also adding an extra incentive for someone to buy an energy- efficient home,” Calder adds. “It helps reinforce the message that by purchasing that home they are doing something for the environment.”
The EEM ecosystem
As well as encouraging the construction of new energy-efficient housing, EEMs are particularly popular with existing homeowners keen to upgrade their properties. Banks are offering easy application processes and generous repayment options on loans for home improvement. Currently, mortgage loans in Europe are equivalent to around 46% of the EU’s GDP, making the sector a crucial focus for the region’s broader sustainability agenda. Facilitating the transition to green mortgages is crucial towards securing a climate-neutral economy. Since its inception in 2015, the Energy Efficient Mortgages Initiative (EEMI), funded by EU Horizon 2020, has been the catalyst for the growth of the new, integrated, multi- stakeholder EEM ecosystem. “With the financial crisis of 2008, we saw mortgages could be a driver to support the real economy, acting as a cog between real life and the financial markets,” says EEMI coordinator Luca Bertalot. “Covered bonds backed with mortgages are the largest financial asset with more than $3trn in the market. We understood we were looking at a market revolution rather than an evolution.” “The mortgage market is transforming, and we thought it was important to help banks comply with
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new European rules,” Bertalot continues. “We provide a common platform where 40 banks now display their products, and people can see what is available for green renovation in their local region. So, there is consumer pressure on banks to build more appealing products.”
Regulation is certainly a key motivation for banks – but there is more to their involvement in the EEM market than merely ticking a compliance box. For instance, EEMI conducted an in-depth data collection and analysis exercise in Belgium, the Netherlands and Italy, with the results strongly implying that the more energy-efficient a building, the lower the credit risk for the bank. Its latest extended analysis of the Dutch market confirmed a mitigating effect on mortgage default from energy- efficient properties, with lower-income households benefiting the most.
“It is about banks providing the right instruments to help families improve their houses,” explains Bertalot. “We are all spending more time in our houses now, so we all need a better space to live and maybe work. There is an opportunity cost for banks and consumers from not having a systemic approach to reducing climate change risks in banks’ portfolios and in society.
“Every European family – including in the UK, which is the largest European market – has to think of investing up to €30,000 to make a house resistant to climate shock, so the banking sector must make it easy for families to get access to this money,” Bertalot continues. “Our target is middle-class or lower middle-class families needing to renovate a house, so there is an opportunity for banks to highlight the long-term benefit of what can be achieved.” EEMI’s data suggests that around 70% of families cannot manage a financial shock. Cutting their energy bills, possibly by as much as 70%, could make a huge difference. As energy prices rise sharply, there is, moreover, an opportunity for banks to show customers that they are wasting money by not making homes more energy efficient.
Craig Calder, director of mortgages, Barclays.
Luca Bertalot, EEMI coordinator.
Therese Ruth, CEO of Hemma.
“Our target is middle-class or lower middle- class families needing to renovate a house, so there is an opportunity for banks to highlight the long-term benefit of what can be achieved.”
Luca Bertalot
A key element of the long-term success of the EEM product and ecosystem is clear data from reliable sources – but this remains a challenge in Europe. The EEM Label, provided by the Energy Efficient Mortgage Label Foundation (EEMLF), is a quality benchmark that supports confidence
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Barclays; EEMI; Hemma
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