Between crisis and opportunities, building a better future for our next generation

28 October 2020

As the Covid-19 pandemic has swept through Europe, it has filled us all with a deep awareness of and insight into the radical changes ahead of us. We all feel the winds of change blowing and we are preparing ourselves for a massive transformation of our society and with this also the economic and financial landscape. Never before in history have we seen a global pandemic which has simultaneously and dramatically impacted the supply and demand sides in all regions around the world, affecting the building blocks of our lives: how we work, how we study, how we interact with people, how we live. Underestimating the depth and the intensity of this change would be a mistake.

This crisis is highlighting and accelerating key drivers of change and dynamics which some have tried to overlook or hide. Today more than ever we see that in our society every change has an impact on the rest of the globe and every change in the rest of the globe has implications for our daily life: those who are hiding behind borders or walls must understand that no border or wall can shield from the magnitude of the wind of change. There are no walls that can shield from a pandemic, nor from new ideas, new economic models and financial crisis. Noth­ing can block the hope of looking for a better future, the promised land, which remains the only real driver of evolution for humankind. In fact, this is also a fundamental right to be guaranteed and a duty towards our future generations. Against this backdrop, for the majority there is a growing awareness that only global synergies and can preserve our civilisation and protect all of us from more dramatic scenarios.

The word crisis etymologically comes from the ancient Greek verb of “κρίνω” which means select, decide. In fact, in ancient times, “κρίσις” was the process after the wheat harvest of selecting the best seeds to be kept and used for planting, to prepare the fields for the next season. This selection allowed the community to survive, get through the winter and look forward to a better future with an abundant harvest.

This unprecedented crisis should help us to select the right seeds to allow our global community to plant the cultivation which will secure a fair and sustainable future.

The essence of this spirit is the basis for the action plan of the European Union called Next Generation EU. The coronavirus has shaken Europe and the world to its core, testing healthcare and welfare systems, our societies and economies and our way of living and working together. To protect lives and livelihoods, repair the Single Market, as well as to build a lasting and prosperous recovery, the European Commission is proposing to harness the full potential of the EU budget.

The real long term objective is fighting climate change and the plan proposed is intended to turn the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future: the European Green Deal and digitalisation will boost jobs and growth, the resilience of our societies and the health of our environment.

Those are the seeds identified to prepare the future for our upcoming generation. The Green Deal should be seen as an essential pillar of the Recovery Plan, going hand in hand with efforts to foster social mobility and the capacity of the most vulnerable part of the society to improve their future prospects.

This cultural attitude is the fundamental of the welfare systems in Europe and the mortgage systems in the Old Continent are an integral way of providing a social lift in the different countries. For example, looking at bench­marks, Denmark is not only the largest mortgage market and, with on average EUR 55,000 per adult, one of the most mortgage intense economies in Europe but it is also the country where the young generation has the earliest access to housing and where a low-income Danish family can raise their wage and social status to the country’s average in two generations, whereas in other regions in the globe it can take up to nine generations. Moreover, in terms of sustainability, Danish buildings now use half as much energy as they did 40 years ago.

Between 1990 and 2015 Denmark’s carbon emission dropped 36% while its GDP more than doubled. This shows that economic and green can go hand in hand. In 1990 renewables supplied 6% of Denmark’s energy, now they supply 33%. Denmark is the most prepared country for the energy transition and to meet the goals of the Paris Agreement being by 2050 carbon neutral.

Our democracies are based on their capacity to guarantee social mobility, and capital markets and mortgage markets are, for their, part essential components of the balance mechanisms to guarantee fair and sustainable societies. So, their smooth functioning is not only economically significant but politically relevant.

If we select the right seeds, this crisis can pave the way for a new, green ‘renaissance’. This will open up new perspectives at global level, in much the same way as the Black Plague was the trigger for a deep revolution of the society, labour market, financial and technological landscape at that time, setting the preconditions for the socio-cultural revolution called the Renaissance.

As for the Renaissance, private stakeholders can play a significant role and act as catalysts for a change in mentality. Like pioneers, we need to develop constructive spirits, build bridges, undertake collaborative actions and show leadership in tackling key building blocks. All this will result in adapting financial mechanisms and best practices to the new reality.

The private sector can certainly contribute significantly by channelling financial resources to support social mobil­ity and a transition economy towards low carbon standards. The challenge that we need to tackle is to convince the largest number of citizens to make the green Renaissance their hope for the future. We must be careful to highlight the green added value and not make the green wave an obstacle for their ambitions. From our per­spective it would be very counterproductive socially and economically to implement binary policy solutions, i.e. stick and carrot policies, which could ultimately hit the most vulnerable part of our society making their access to credit more difficult. Capital cost is the real priority for banks, a fine tuning of the prudential framework with a gradual privileged treatment for energy efficient mortgages would be the most appropriate approach, based on the evidence produced by the H2020 EeDaPP project. This risk sensitive approach would allow banks to align their risk profiles without shocking their capital structures, and in this way facilitate the implementation of sustainable financial products and boost private sustainable investments towards the real economy.

With these considerations in mind, the EMF-ECBC is setting out new strategies and putting forward concrete sets of market actions to support Next Generation EU.

With EUR 7 trillion of mortgages outstanding, the mortgage industry a key driver for social mobility and economic growth. Moreover, the Covered Bond industry, with EUR 2.7 trillion of outstanding bonds is the CMU gateway for long term investors and for lender access to long term funding. Moreover, from a financial stability perspective, the asset class represents a unique solid macroprudential instrument which has also proven its value as a crisis management tool.

In the context of Covid 19 and against the backdrop of financial vulnerability for at least a quarter of European families, the EMF-ECBC took early action and created a European task force to coordinate and promote policy and market actions in order to support consumers in financial difficulty and facilitate access to credit for busi­nesses. This immediate reaction during the lockdown period together with the introduction of measures such as moratoria across European markets prevented a worsening of the situation and relieved financial pressure on families. In parallel, the EMF-ECBC undertook efforts to increase market transparency by securing additional market disclosures through new COVID and ESG sections in the Covered Bond Label’s HTT.

In the context of the European Green Deal, the EMF-ECBC is reinforcing Industry capabilities to develop ESG funding and lending strategies.

For more than five years now, the EMF-ECBC has been leading on the Energy Efficient Mortgages Initiative (EEMI), which brings together the Horizon 2020 EU funded EeMAP, EeDaPP and EeMMIP projects. The EEMI has a threefold objective: First, to propose a private initiative promoting energy efficiency investments in buildings based on a common European definition of Energy Efficient Mortgages which helped to inform the work of the Technical Expert Group on the Taxonomy. Second, to create a standardised energy efficient mortgage (EEM) to facilitate the acquisition of energy efficient properties and the renovation of those not aligned with EE norms. Third, to evaluate the availability of EEM asset data across EU Member States and gather large scale datasets to investigate the link between building energy performance, market value, probability of default (PD) and loss-given-default (LGD). Indeed, the underlying assumption of the EEMI is that building energy efficiency reduces owners’ payment disruption risk, increases property value, and, as a result, reduces credit risk for banks and financial institutions.

The end of August 2020 marked the conclusion of the Horizon 2020 Energy Efficient Data Protocol & Portal (EeDaPP) Project which has delivered, after 30 months of intense work, data collection, market analysis and consultations, very important results for both the Industry and policymakers:

  1. The EeDaPP Master Template (& accompanying explanatory White Paper) (link to both), a protocol which provides a common Industry benchmark for the collection of data related to building energy performance and which will constitute the basis for the development of disclosure best practices in the Energy Efficient Mortgage Label;
  2. A comprehensive analysis into the correlation between energy efficiency and credit risk (link). The econometric analysis demonstrates a negative and significant correlation between building energy performance and the probability of mortgage default, potentially paving the way for new policy considera­tions in relation to EEM.

The econometric evaluation provided in the analysis focuses on the specific case of Italy. According to the associ­ated portfolio analysis, the percentage of more EEM has been increasing over the last decade, while less efficient properties are predominantly affected by default. Significantly and as indicated above, the econometric evalu­ations highlight a negative correlation between EE and the owners’ PD, thus confirming that energy efficiency investments tend to improve owners’/borrowers’ solvency. Additionally, the results indicate that the degree of energy efficiency also matters, i.e., more energy efficient buildings are associated with relatively lower risk of default. Once again, these findings highlight the role of energy efficiency in reducing the default probability of a borrower. All in all, this report shows that people with more energy efficient homes and lower energy bills, can better afford their mortgage payments, reducing financial risk for banks and investors.

The selection of the portfolio analysed with a data series of 10 years, was based on approximately 470,000 real estate valuations. After a data cleaning exercise of this real market dataset, the total number of mortgages analysed was 72,980.

These results are of great significance in relation to the current policy agenda given their relevance for key files including the EU Green Deal, the Renewed EU Action Plan on Sustainable Finance and the implementation of Basel III into EU legislation.

Indeed, the evidence produced by EeDaPP paves the way for a more risk sensitive approach in the regulatory treatment of EEM based on scientific confirmation that build energy performance has an impact on risk.

Against this background, the EMF-ECBC is leading efforts to establish an EEM Label which together with the Covered Bond Label will not only facilitate further data collection to substantiate this correlation on an ongoing basis, but which will also secure quality and transparency for market stakeholders in the gathering, processing and disclosure of EEM & ESG data, stimulating market development.


Boudewijn Dierick – ECBC Chairman

Luca Bertalot – EMF-ECBC Secretary General