Market initiatives

EMF-ECBC INITIATIVE ON ENERGY EFFICIENT MORTGAGES

EeMAP & EeDaPP website available HERE: www.energyefficientmortgages.eu !

For almost three years, the EMF-ECBC has been working on the development of a standardised, pan-European mortgage financing mechanism, according to which EU citizens are incentivised to improve the energy efficiency (EE) of their buildings or acquire an already energy efficient property by way of preferential financial conditions linked to the mortgage. This mortgage financing mechanism is intended to be supported by a data protocol and portal to collect and access large-scale empirical evidence relating to energy efficient mortgage assets allowing a comprehensive analysis of de-risking energy efficient features.

The Energy Efficient Mortgages Initiative consists of two parallel projects, the Energy efficient Mortgages Action Plan (EeMAP) and the Energy efficiency Data Portal & Protocol (EeDaPP). Both projects are funded via the European Commission’s Horizon 2020 Programme and further details is available on the EeMAP & EeDaPP website on www.energyefficientmortgages.eu

Background

In the EU, buildings are responsible for 40% of the energy consumption & 36% of the CO2 emissions. 75-90% of the building stock in the EU is predicted to still be standing in 2050 making EE refurbishment and energy efficient mortgage financing a top priority for Europe. By improving the EE of buildings, total EU energy consumption could be reduced by 5%-6% and CO2 emissions by 5%. The EU has set very ambitious energy savings targets for 2020 and 2030 with the scale of the investment needed to meet these targets being estimated at around €100 billion per year. In addition, it is considered necessary beyond that to invest €100 billion per year until 2050 in the EU building stock in order to deliver on Europe’s commitments on climate change. While the EU has increased the amount of public funds available for EE, the European Commission suggests there is a need to boost private EE investment to deliver on the 2020 and 2030 energy targets and policy objectives.

This is where the EMF-ECBC comes in. Considering that the European building stock constitutes the largest single energy consumer in the EU, and that the value of the European mortgage market is equal to more than half of the EU’s GDP, there is huge potential to build a bridge between the domains of finance and EE and unlock the benefits of mortgage financing to support EE to the benefit of all.

Until now, there has been a lack of coordination between these two crucial domains for a broader energy debate and bridging this gap is of the essence of the EMF-ECBC Initiative. Importantly, mortgages as an existing financial product are familiar to consumers in Europe, and are offered at an important moment in the building lifecycle in terms of the opportunity to renovate; point of sale/purchase of a home. This instrument is therefore well suited to increasing the current rate of EE building renovation.

Concept

With these considerations in mind, the Energy Efficient Mortgages Initiative,  under which umbrella the EeMAP and EeDaPP initiatives runs in parallel, is based on the realisation that: (i) banks, in financing the purchase of homes, can play a game-changing role in supporting the EU’s energy savings targets, by bringing EE into the conversation between banks and consumers by means of a standardised approach to the financing of EE buildings/renovation, and (ii) it is essential to gather and access large-scale data relating to energy efficient mortgage assets (loan-by-loan) for the purpose of risk analysis by way of an accompanying data protocol and portal.

The idea is to incentivise and channel private capital into EE investments by way of preferential conditions linked to the mortgage financing mechanism, which is entirely independent from, but complementary to, public funds, tax incentives and utility rebates. The data protocol and portal will enable large-recording of data relating to energy efficient mortgage assets, allowing for continuous tracking of the performance.

The ultimate success of the Initiative rests on two assumptions, which have already been recognised across a series of market and academic studies, and which will be further substantiated via the EeMAP and EeDaPP Initiatives. The first assumption is that improving the EE of a property has a positive impact on property value, reducing a bank’s asset risk. The second assumption is that EE borrowers have a lower probability-of-default as a result of more disposable income in the household due to lower energy bills, reducing a bank’s credit risk:

These risk mitigation effects for banks means that energy efficient mortgages have the potential to represent a lower risk on the balance sheet of banks. Establishing a correlation between EE, probability-of-default and loss-given-default provides a central business case for lenders to originate energy efficient mortgages, given the fundamental role of these risk parameters in the calculation of banks’ capital requirements. If the lower risk can be established using large-scale empirical evidence – as envisioned by the EeMAP & EeDaPP Initiatives – this should be recognised in the regulatory framework in the form of a realignment of capital requirements according to the lower risk for this type of exposure. In turn, this would represent a strong incentive for banks and investors to play an active role in the EE financing agenda.

Data collection and analysis with a view to establishing this correlation will begin in 2018 in the form of an Energy Efficient Mortgages Pilot Scheme, which will also be used to ensure a workable end energy efficient mortgage design. The data collected will, over time, be made available to the market by way of a common, centralised portal, facilitating the earmarking of such assets for the purposes of also energy efficient bond issuance.

To this end, the ECBC has also  begun work on a Green Covered Bond Label which will allow the identification of green/sustainable covered bonds on the ECBC Covered Bond Label website.

Broader Perspective

From a broader perspective, the underlying risk assumptions also drive an incentive chain which provides an economic advantage to all stakeholders involved: borrowers, lenders, investors and small and medium sized enterprises (SMEs). In addition, the private investments foreseen will provide a flow of capital into the real economy and in doing so support privately held companies, e.g. SMEs, engaged in renovation meanwhile encouraging innovation and stimulating start-ups in the field of EE.

Project Partners and Deliverables

EeMAP – Energy efficient Mortgages Action Plan –  is led by EMF-ECBC alongside the following Consortium Partners:  Ca’Foscari University of Venice, RICS, European Regional Network of Green Building Councils, E.ON, and SAFE Goethe University Frankfurt.

Concretely, the EeMAP will deliver the following five deliverables: (1) Identification and summary of market best practices, (2) Definition of an energy performance indicators and a Building Energy Passport, (3) Identification of pre-requisites for the assessment of “green value”, (4) Substantiation of correlation between EE & probability of default – portfolio analysis and (5) Definition and design of energy efficient mortgage, based on preferential financial conditions.

EeDaPP – Energy efficiency Data Protocol & Portal – is led by EMF-ECBC alongside the following Consortium Partners: Ca’Foscari University of Venice; CRIF; European DataWarehouse; Hypoport;  SAFE Goethe University Frankfurt and TXS .

Concretely, the EeDaPP will deliver the following five deliverables: (1) identification and summary of market best practices within data systems; (2) definition of energy efficiency reporting criteria; (3) design and delivery of standardised data protocol & design of common, centralised portal; (4) data and substantiation correlation analysis; and (5) roadmap for system integration.