Governance, risk & compliance $7.32trn
EU household debt reached in October 2021.
CEIC
in EEMs. It relies on access to relevant, timely and transparent information on banks’ loan portfolios through the Harmonised Disclosure Template (HDT) – the worldwide, standardised, Excel-based form lending institutions – once they have been granted the EEM Label.
“When you buy a house in Europe, you don’t have to tell banks what level your EPC is, so banks are completely blind,” says Bertalot. “So, we are helping banks to clean their balance sheets. All the elements are there for the virtuous circle – banks can reduce credit risk, while consumers can cut energy bills and improve the value of their house.”
Beyond banks As part of a bank’s broader sustainability strategy, mortgages inevitably play a vital role too. “Banks are increasingly focused on reducing their carbon footprint, which includes not only the emissions of their own operations, but also from the activities financed by the bank,” Calder explains. “This will include a bank’s mortgage portfolio. From a sustainability point of view, it aligns with the ambition of achieving net zero.”
Even so, banks are not the only ones getting in on the act. Hemma, a Swedish sustainable finance fintech founded by Therese Ruth in 2018, is not only offering more affordable mortgages with financial incentives for households to invest in energy efficiency and renewables. It is also providing key data collection and analysis services for banks wanting to develop their own EEM programmes.
“Disclosure regulations for banks mean they have to be transparent about Scope 3 emissions in their loan books and how they work proactively to transition the properties they have as collateral, and there is a branding question that cannot be disregarded,” says Ruth. “There is more and more debate about greenwashing and banks want to show they have data, procedures and actual products for customers.
“There is also the risk of stranded assets and banks need to work with customers today not to have a portfolio of lower-quality assets,” she adds. “We focus more on the transition and improvement of assets, and we work with incumbent banks that provide loans.”
Hemma has developed a technical product for data collection that is proving popular with banks in Sweden, where sustainability is a high priority in customers’ minds and, though many mortgages are available for homes that are already green, there are fewer options for upgrading less efficient or sustainable homes. “We enable a ‘one-stop-shop’ process so customers can obtain digital advice and share data about the improvements they have made, so banks can tag these loans,” continues Ruth. “Thereby, we create
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a data-trail for the loan to show it has been used for energy efficiency. It is important to show the benefit of such an investment and we have to enable analytical tools for consumers. To define how long the payback period is and what the terms are, you need a data infrastructure.”
Calling out to customers
If the products and the data infrastructure are in place, the next challenge is to build interest among customers. “As with everything that is new, it takes time for people to understand how a new product works,” observes Calder. “There are several lenders in the UK offering green mortgages now, and we hope to see many more. Alongside this, each lender may have different eligibility criteria, so customers and mortgage brokers need to learn what the different criteria are in order to choose the most suitable product for them.”
In 2017, Barclays became the first UK bank to launch a green bond to fund domestic residential mortgage assets, which led it to consider how to pass on the benefits of funding directly to customers purchasing energy-efficient properties. That led to the development of the green home mortgage, which was initially available on properties purchased from a specific group of house-builders. In 2021, Barclays expanded the eligibility criteria to include energy-efficient homes built by any house-builder. “A customer wouldn’t necessarily choose a green home mortgage because it’s green,” Calder says. “As part of the mortgage advice process, an adviser will assess what the best product is and advise on the best option. The uptake depends on a series of factors, such as market and competitor environment, as well as product availability. We have, however, seen a significant increase in demand since we expanded the eligibility criteria. In fact, we’ve recently reached £1bn of green mortgages since launch.”
A key message for customers, at any rate, is that energy costs are rising sharply – so there is no better time to consider the advantages of an EEM. “When well-designed, the product sells itself,” says Ruth. “We just finalised a trial with a Tier 1 Swedish bank and the number of customers who engaged and converted was far higher than expected. Property uses 40% of energy, so the EU’s Energy Efficiency Directive and the renovation of properties is a key initiative. Even here in Sweden energy prices have soared, so the cost of heating your home has gone up dramatically.” “Make it accessible, affordable and easy to understand and customers will go for it,” adds Bertalot. “Europe can do a lot, but it only has 7% of the global population. However, it can build financial standards for the world.” ●
Future Banking /
www.nsbanking.com
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