Underwriting the Renovation Wave with Mortgage Portfolio Standards for Energy Efficiency

  • Underwriting the Renovation Wave with Mortgage Portfolio Standards for Energy Efficiency

    Peter Sweatman, Author

    Introduction of Mortgage Portfolio Standards (MPS) in EU law can unlock private finance to green European buildings.

    Experts assert that to meet its 2030 climate targets, Europe will need to invest upwards of €2.75 trillion to renovate 35 million buildings over the next decade. Considering limited public financing available, bank lending could play a key role in making European buildings warmer, healthier, and more sustainable for millions of people. Almost all 50 million mortgaged European homes will need energy efficiency renovation works between now and 2050. Hence, as there are €7 trillion of mortgages outstanding in Europe, retails banks are the largest financial stakeholders in European buildings.

    To unlock the potential of banks and mortgage lenders in accelerating the EU’s Renovation Wave, this report by Climate Strategy & Partners calls for the introduction in EU legislation of the innovative mortgage portfolio standards (MPS). Mirroring fleet-wide emission standards for cars, a mortgage portfolio standard would require retails banks to improve the overall energy performance of the properties within their loan portfolios over time in line with the 2030 and 2050 climate targets.

As the EU reviews its buildings and financial regulations to deliver a 55% greenhouse gas emission reduction by 2030, this report proposes the inclusion of mortgage portfolio standards in the Energy Performance of Buildings Directive (EPBD) currently under review and their alignment with EU financial regulations.

Mortgage portfolio standards a can help Europe achieve its climate objectives, through:

  1. Helping align retail bank actions and mortgage portfolios with the EU’s Renovation Wave and climate goals;
  2. Increasing the energy performance of the buildings which back banks’ mortgages, and establish a trajectory aligned with the Paris Agreement objectives for their average portfolio standard;
  3. Incentivising and encourage lenders to support the energy efficiency and renovation needs of over 50 million existing mortgage banking customers;
  4. Increasing access to necessary renovation finance for millions of European households that needs to borrow money to upgrade their homes;
  5. Levering EU recovery funds for renovation in a concerted push with banks also using MPS to better manage climate transition risks in their portfolios.

Peter Sweatman, CEO of Climate Strategy and author of the report said:“In developing Mortgage Portfolio Standards, we took proven regulatory tools that have decarbonised electricity in the USA and vehicles in Europe, and applied them to buildings. When MPS are applied by banks to tens of millions of mortgages, the resulting transparency and new renovation funding offers will provide a competitive advantage for those green leaders who are using them.”

Ciarán Cuffe, Member of the European Parliament – Group of the Greens/European Free Alliance:“In order to promote deep renovations we need integrated solutions that are encouraged by green financing instruments such as on-bill financing, energy efficient mortgages, renovation grants and mechanisms that incentivise the upgrade of existing inefficient buildings at the portfolio level.”

EU policies to support the uptake of Mortgage Portfolio Standards

To deliver the Renovation Wave, a combination of levers will be required to come to bear on buildings owners and funders. Firstly, data quality and transparency must improve and stronger obligations for updated Energy Performance Certificates (via the revision of the EPBD) based upon real performance will enable retail banks to assess the quality of their mortgage portfolio. The introduction of mandatory minimum energy performance standards (MEPS) for existing buildings can boost the rate and increase the depth of renovations. Finally, banks’ balance sheets must become climate resilient and fit for our climate future. This provides a role for the uptake of mortgage portfolio standards to boost energy efficient and smart building renovations, to benefit customers’ bottom-lines and help deliver Europe’s broader climate goals.

Published by: