EeMAP Market Consultation: Over 500 Stakeholders Show Strong Support for Pilot Proposals

Image result for stephen richardson world gbc

By Stephen Richardson, World Green Building Council

Between February and April of this year, the EeMAP consortium undertook a mammoth, market consultation exercise to gather detailed feedback on our draft proposals for the pilot scheme.

Spearheading this process, national Green Building Council’s (GBCs) from the Europe Regional Network (ERN) of World Green Building Council hosted eight workshops in Croatia, Finland, France, Ireland, Italy, Poland, Spain and the UK. The workshops brought together national experts from the energy efficiency, finance and valuation communities to discuss national implementation of the EeMAP pilot guidelines.

Using tools and materials provided by the ERN and engaging both national and international speakers, the GBC workshops attracted almost 500 stakeholders. In several instances, the workshops were co-hosted by national banks such as UniCredit in Italy and Triodos in Spain and have led to the formation of national hubs of actors from across the value chain who will take forward the implementation of the EeMAP pilot at national level. Alongside these workshops, the EMF-ECBC coordinated an online public consultation process which received more than 50 responses from a range of sectors.

The experts consulted in both the national workshops and the online consultation gave strong signals of support for the proposed approach to the EeMAP pilot. All respondents to the online consultation agreed that the draft guidelines were appropriate for the pilot scheme. There were no respondents who selected ‘disagree’ or ‘strongly disagree’.

In the workshops, a traffic-light system of red, amber and green responses was used to gather participants’ feedback on the proposed building performance criteria for energy efficient mortgages. Across all eight countries, the responses were either green, indicating the criteria can be implemented without any adaptation, or amber, indicating that only small adaptations would be needed. The map below shows a summary of the workshop responses.

Based on these outcomes, the EeMAP consortium have updated the guidelines for the pilot, making only small adjustments, and adding greater flexibility to ensure that they can be adapted to account for specific market conditions.

The large number of banks and supporting organisations [link to pilot launch press release] which have committed to the pilot is another endorsement that this framework has struck the right balance between ambition and rigour on the one hand and pragmatism and flexibility on the other.

Picture 1: Stephen Richardson of WorldGBC presents EeMAP to national experts at a workshop hosted be UKGBC in London
Picture 2: Hundreds of experts provided feedback on the EeMAP proposals during national workshops facilitated by Europe’s GBCs

Energy Efficient Mortgages Initiative: The Dawn of a New Asset Class?

By Luca Bertalot, Secretary General EMF-ECBC, Coordinator EeMAP&EeDaPP

Introduction:

Interest in energy efficiency finance has increased in recent years, driven largely by the successful conclusion of COP21 and the ambitious efforts being undertaken at EU level as a result.

For its part, the EU has set itself an overall 20% energy savings target by 2020 and a 30% target by 2030. It is widely anticipated that around €180 billion of additional investments a year is needed to reach the EU’s 2030 energy efficiency saving targets agreed during COP21. Considering that the EU’s building stock is responsible for 40% of the EU’s total energy use, and that the value of the European mortgage market is equal to 53 % of EU’s GDP, there is huge potential to unlock the benefits of mortgage financing to support energy efficiency. Bridging these two worlds, which until recently have been operating in a largely disconnected manner, has the potential to deliver an effective way to tackle the challenges arising from climate change.

With this in mind, for approximately three years, the European Mortgage Federation – European Covered Bond Council (EMF-ECBC) has been working on the development of an “energy efficient mortgage” according to which building owners are incentivised to improve the energy efficiency of their buildings or acquire an already energy efficient property by way of favourable financing 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 efficiency features. The Energy Efficient Mortgages Initiative, as the project is known, consists of two parallel projects, the “Energy efficient Mortgages Action Plan” (EeMAP) and the “Energy Efficient Data Portal & Protocol” (EeDaPP), and is funded via the European Commission’s Horizon 2020 Programme.

Significantly, the Energy Efficient Mortgages Initiative represents the first time a group of major banks and mortgage lenders, as well as data providers, companies and organisations from the building and energy industries and the valuation profession have proactively come together to discuss private financing of energy efficiency.

Energy Efficient Mortgages Initiative – The Concept:

The Energy Efficient Mortgages Initiative was born from the realisation that: (i) banks, in financing the purchase of property, can play a game-changing role in supporting the EU’s energy savings targets, by bringing energy efficiency  into the conversation between banks and consumers by means of a standardised approach to the financing of energy efficient buildings/renovation, and (ii) by way of the Initiative, it would be possible to respond to increasing demand for ‘green’ on the funding side of the mortgage business, by delivering a new asset class, an energy efficient mortgage, which could be used for the purposes of green bond and green covered bond issuance.

The ultimate success of the Project rests on the key assumption that energy efficiency has a risk mitigation effect for banks, by positively impacting borrowers’ ability to service their loan thereby lowering the Probability-of-Default (PD) of the borrower (because there is more disposable income available) and that improved energy efficiency increases the value of the property, thereby lowering the loss for the bank in the case of default, i.e. the Loss-Given-Default (LGD).

Establishing a correlation between energy efficiency and PD and LGD 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 a positive effect in respect to the correlation can be established using large-scale empirical evidence – as envisioned by the Project – the EMF-ECBC believes that the lower risk of energy efficient mortgages should be recognised in the regulatory framework in the form of a realignment of the capital requirements for these exposures. In turn, this would represent a strong incentive for banks and investors to play an active role in the energy efficiency financing agenda

This alignment is also supported at EU level with numerous initiatives being pursued to bring into line the financial sector with the EU’s commitments on climate change. As part of these efforts, the European Commission published an Action Plan on Financing Sustainable Growth in March 2018, which sets out the necessary steps for the financial system to contribute to the delivering the EU’s new sustainable finance strategy, by introducing legislative proposals on how to integrate sustainability considerations into new and existing policy frameworks, with the first initiatives planned for the end of Q2 2018.

Encouragingly, in its recently published Action Plan on Sustainable Finance, the European Commission specifically refers to the Energy Efficient Mortgage Initiative on page 9 (footnote 30) as a market initiative aimed at “demonstrating a correlation between energy efficiency in buildings and mortgage performance” and commits to considering the potential for a realignment of capital requirements for green assets. In this respect, the European Commission states that it “will consider all the available evidence on the link between energy efficiency savings and mortgage loan performance”.

Data collection and analysis with a view to establishing this correlation will begin in the form of an Energy Efficient Mortgages Pilot Scheme, which will be launched on the occasion of a large Energy Efficient Mortgages Stakeholder Event to be held on 14 June in Windsor, UK. The Pilot Scheme will be supported by an Energy Efficient Mortgage Product Framework (draft available here), which will be launched the same day, and which sets out high-level guidelines for mortgage lending, building performance assessment and property valuation. At the time of writing, more than 20 pioneering banks from across the EU have signed up to participate in the Pilot Scheme.

Significantly, the Project in general and the Pilot Scheme in particular will be supported by the design and delivery of a market-led protocol, which will enable the large-scale recording of data relating to energy efficient mortgage assets, via a standardised reporting template. The data will be accessed by way of a common, centralised portal, allowing for continuous tracking of the performance of the energy efficient mortgage assets, thereby also facilitating the tagging of such assets for the purposes of energy efficient bond issuance.

As indicated, the datasets gathered as part of the Project are intended to allow for the linking between energy efficient features of a building, its value, and the loan performance, thereby creating a better understanding of the impact of energy efficiency on banks risk parameters as described above.

Looking at the Project from a broader perspective, the underlying risk assumptions also drive an incentive chain which provides an economic advantage to all stakeholders involved: borrowers, lenders and investors. 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. small and medium sized enterprises (SMEs), engaged in renovation whilst encouraging innovation and stimulating start-ups in the field of energy efficiency.

Mortgage and Covered Bond Funding – Value Chain:

As suggested above, the Project aims to consider and deliver additional synergies in the mortgage lending and funding value chain by delivering a new asset class, an “Energy Efficient Mortgage” which could be used for the purposes of green/energy efficient covered bonds issuance, creating a virtuous circle. While over the past few years, green and sustainable bonds have been a fast-growing capital market segment, the market for green and sustainable (covered) bonds is still in its infancy. There is nonetheless reason to believe that the market has significant potential going forward, with a strong investor base for green/ sustainable debt products having been observed, e.g. green covered bonds being heavily oversubscribed. There is therefore reason to believe that the Energy Efficient Mortgage Initiative will stimulate the growth of the green and sustainable covered bond market.  In view of this, the ECBC has introduced a Sustainable Covered Bond Label on the ECBC Covered Bond Label website, which facilitates the identification of green/sustainable covered bonds for market participating.

Project Partners & Deliverables:

The Energy Efficient Mortgages Initiative will concretely deliver the following results by way of EeMAP and EeDaPP during the life of each Project (each 24 months, from May 2017 and March 2018 respectively):

The EeMAP Initiative – led by the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), Ca’Foscari University of Venice, RICS, the Europe Regional Network of the World Green Building Council, E.ON and SAFE Goethe University Frankfurt – 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.

The EeDaPP Initiative – led by European Mortgage Federation-European Covered Bond Council (EMF-ECBC), Ca’Foscari University of Venice, CRIF, European DataWarehouse, Hypoport, SAFE Goethe University Frankfurt and TXS  – 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 and common centralised portal; (4) data and substantiation correlation analysis; and (5) roadmap for system integration.

For more information about the Energy Efficient Mortgages Initiative, please visit: https://eemap.energyefficientmortgages.eu

Press release – The light turns green: Energy Efficient Mortgages Pilot Scheme goes live!

PRESS RELEASE   –   PRESS RELEASE   –   PRESS RELEASE

Brussels, 14 June 2018 – For immediate release

The light turns green: Energy Efficient Mortgages Pilot Scheme goes live!

Today marks an important milestone for the Energy Efficient Mortgages Initiative, with the official launch of the Energy Efficient Mortgages Pilot Scheme, on the occasion of the Energy Efficient Mortgages Events in Windsor, UK. The Energy Efficient Mortgages Initiative is aimed at delivering a standardised European framework and data collection process for energy efficient mortgages, with favourable financing conditions for energy efficient buildings and energy saving renovations.

For the purposes of the Pilot Scheme, 37 European banks (see list below) have committed to test the implementation of the final energy efficient mortgages framework, also being launched today, into existing product lines and processes, prior to an anticipated roll-out of an energy efficient mortgage product in the future. These banks will be joined in the Pilot Scheme by 23 other supporting organisations (also listed below).

The energy efficient mortgages framework is the result of extensive consultation of major stakeholders and includes valuable feedback gathered during a series of national roundtable events with banks, building energy performance experts, property valuers and utilities.

In addition, during the Pilot Scheme, lenders will be encouraged to report data relating to energy efficient mortgages for the purposes of analysing the impact of energy efficiency on credit risk. In this way, the Pilot Scheme will respond to the recently published Action Plan on Sustainable Finance in which the European Commission has committed to investigate the feasibility of incorporating sustainability considerations in the prudential framework, also taking account of market evidence. This data collection and analysis exercise will be supported by a robust data infrastructure, the design and deployment of which also falls under the Energy Efficient Mortgages Initiative umbrella.

The Pilot Scheme is expected to last at least two years. Lessons learned during the course of the Pilot Scheme will feed back into the framework, with a view to optimising its relevance and therefore implementation, and ultimately supporting the origination of an energy efficient mortgage product.

Welcoming the launch, Luca Bertalot, Energy Efficient Mortgages Initiative Coordinator, commented:

This initiative is intended as a clear response to the call for concrete market action to support the Capital Markets Union, growth, financial stability and energy efficiency agendas. The large number of organisations participating in the pilot scheme currently represent 45% of the European outstanding mortgages which amounts to 21% of European GDP. More importantly, the significant critical mass that these pioneers constitute underlines the willingness of the market to take action and to play a pivotal, potentially game changing role, in supporting the European Commission Action Plan on Sustainable Finance, by designing common, multi-stakeholder market best practices. After many months of preparation and extensive consultation of relevant actors, the pilot scheme will provide real business responses to the challenges of designing a market framework for energy efficiency financing and supporting the EU’s transition to a more sustainable future. Much effort has been dedicated to this initiative by and across a number of sectors, and we are therefore excited that the major European lenders from a wide range of jurisdictions have recognised the importance of the Initiative and have committed to road-testing it”.

List of Pilot Scheme Banks & Other Organisations:

Pilot Banks

1. ABN AMRO (NL) 2. Argenta Bank (BE) 3. AXA Bank (BE)
4. Banca Monte dei Paschi di Siena, BMPS (IT) 5. Banco BPM (IT) 6. Belfius Bank & Verzekeringen (BE)
7. Berlin Hyp AG (DE) 8. BNP Paribas Fortis (BE) 9. BNP Paribas (UK)
10. Groupe BPCE (FR) 11. BPER Banca (IT)  12. Caisse des Dépôts Group (FR)
13. Caixa Geral de Depósitos, CGD (PT) 14. Caja Rural de Navarra (ES) 15. Compagnie de Financement Foncier (FR)
16. Crédit Agricole (IT) 17. Crelan (BE) 18. Friulovest Banca (IT)
19. Garanti Bank (RO) 20. ING Belgium (BE) 21. KBC Bank (BE)
22. Mortgage Society of Finland, Hypo (FI) 23. Münchener Hypothekenbank eG (DE) 24. Norddeutsche Landesbank, NORD/LB (DE)
25. Nordea Bank (SE) 26. Nordea Eiendomskreditt (NO) 27. Nordea Kredit (DK)
28. Nordea Mortgage Bank (FI) 29. OP Mortgage Bank (FI) 30. Rabobank (NL)
31. Raiffeisen Bank (RO) 32. Société Générale (FR) 33. Société Générale (IT)
34. Triodos Bank (BE) 35. Triodos Bank (ES)
36. Unión de Créditos Inmobiliarios, UCI (ES) 37. Volksbank Alto Adige (IT)

Members of the Advisory Council

1. European Commission 2. European Investment Bank, EIB 3. European Bank for Reconstruction and Development, EBRD
4. The World Bank 5. UNEP Finance Initiative 6. International Finance Corporation, IFC

Other Supporting Organisations

1. Alliance HQE –GBC France (FR) 2. AmTrust International 3. Cohispania (ES)
4. Croatia Green Building Council, CGBC (HR) 5. Dutch Green Building Council (NL) 6. European Builders Confederation, EBC
7. Finance Denmark, FIDA (DK) 8. Flemish Construction Confederation, VCB (BE) 9. German Sustainable Building Council, DGNB (DE)
10. Green Building Council España, GBCe (ES) 11. Green Building Council Finland, FIGBC (FI) 12. Green Building Council Italia, GBC (IT)
13. Irish Green Building Council, IGBC (IE) 14. Madrid City Council (ES)  15. Polish Green Building Council, PLGBC (PL)
16. Romania Green Building Council, RoGBC (RO) 17. Romanian Association of Banks, ARB (RO) 18. S&P Global Ratings
19. Tinsa Group (ES) 20. UK Green Building Council, UKGBC (UK) 21. UK Regulated Covered Bond Council, UK RCBC (UK)
22. Union Professionnelle du Crédit/Febelfin (BE) 23. Verband deutscher Pfandbriefbanken, vdp (DE)

 


Notes to Editors

The Energy Efficient Mortgages (EEM) Initiative consists of:

The Energy Efficient Mortgages Action Plan (EeMAP) Initiative – led by the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), Ca’Foscari University of Venice, RICS, the Europe Regional Network of the World Green Building Council, E.ON and SAFE Goethe University Frankfurt–  aims to create an energy efficient mortgage through which homebuyers are incentivised to improve the energy efficiency of their building or acquire an already energy efficient property by way of favourable conditions linked to the mortgage. The cornerstone of the initiative is the assumption that energy efficiency has a risk mitigation effect for banks as a result of the impact on a borrower’s ability to service his/her loan and on the value of the property, a correlation which the EeMAP Initiative will seek to substantiate.

The Energy Efficiency Data Portal & Protocol (EeDaPP) Initiative – led by European Mortgage Federation-European Covered Bond Council (EMF-ECBC), Ca’Foscari University of Venice, CRIF, European DataWarehouse, Hypoport, SAFE Goethe University Frankfurt and TXS  – aims to design and deliver a market-led protocol, which will enable the large-scale recording of data relating to energy efficient mortgage assets (loan-by-loan), via a standardised reporting template. The data will be accessed by way of a common, centralised portal, allowing for continuous tracking of the performance of the energy efficient mortgage assets, thereby also facilitating the earmarking of such assets for the purposes of energy efficient bond issuance.

For additional information on the pilot scheme, please visit: https://eemap.energyefficientmortgages.eu/

SUSTAINABLE BOND ISSUANCE AND ENERGY EFFICIENT BUILDINGS

The case of Caja Rural de Navarra: A practical experience for the retail banking sector

by Miguel Garcia de Eulate Martin, Caja Rural de Navarra

Caja Rural de Navarra (CRN) updated in 2017 its Sustainable Bond Framework in order to include Energy efficient buildings within its eligible use of proceeds. This was a relevant step for us, allowing for a sizeable part[1] of our loan book (residential mortgages) to show its contribution to green finance.

This update also marked the beginning of a challenge: that of tagging our mortgage book accordingly, which involves an important change in IT and lending procedures.

With approximately EUR 12bn of total assets, and even though CRN –as a traditional retail bank- is a mainly deposit-financed institution, we regularly issue bonds under our Covered Bond (“Cédulas Hipotecarias”) programme since 2013, when the inaugural Covered Bond was printed. Currently (as of May 2018) CRN has five outstanding Covered Bonds and one Senior Unsecured. Two of these Covered Bonds and also one Senior bond are included in CRN’s Sustainable bond programme.

CRN has a Sustainability framework with a Second Party Opinion (SPO) by Sustainalytics. These are the main milestones in the development or our Sustainable bond programme:

  1. In 2016, after finalising its Sustainability framework for its lending activities, CRN became the first issuer of a Sustainable (including both social and environmental lines) Covered Bond.
  2. In 2017, CRN has updated its Sustainability framework[2] and Sustainalytics has updated CRN’s Second Party Opinion[3] in order to:
    1. Include Energy efficient buildings as a specific environmental line, following CRN’s involvement in the EMF-ECBC EeMAP initiative[4].
    2. Improve the transparency and alignment of our taxonomy by mapping our 9 sustainability lines (5 environmental and 4 social) into the United Nations Sustainable Development Goals (SGD) categories[5].
  3. Since 2016, CRN reports on an annual basis on the social and environmental impact of its lending activity.[6][7]
  4. In 2017, CRN extended the reach of its Sustainable bond framework to Senior unsecured debt, by issuing a Senior private placement.


  5. In 2018, CRN issued its second Sustainable Covered Bond (Cédula Hipotecaria), advancing the United Nations Sustainable Development Goals.
  6. Having in 2018 issued its second benchmark-sized Sustainable Covered bond and one Senior bond private placement, it is currently, according to public information, the third European bank in terms of outstanding sustainable bonds, that is, bonds whose use of proceeds includes both social and environmental activities. Additionally, CRN has been warranted the EMF-ECBC-developed “Sustainable covered bond label” which identifies with a green leaf symbol those issuers with Sustainable (social and/or green) outstanding covered bonds.[8][9]

Energy efficient buildings

Following the inclusion of Energy efficient buildings on the Energy Efficiency use of proceeds, CRN developed a specific framework in order to identify eligible loans under this category.

In our view, one of the greatest environmental impacts that we can offer as a retail and cooperative bank is represented by the physical collateral which underlies our mortgage origination business. Due to the fact that most of this collateral is of residential nature, CRN thinks that the commitment of retail banks in order to identify, tag and promote greener residential mortgages is key in order to reduce CO2 emissions in Europe. 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 Energy Efficiency (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.

The engagement of CRN in the EeMAP initiative by EMF-ECBC can be a relevant case for other retail banks in Europe in order to make a significant contribution from the retail financial sector to a greener and more sustainable economy and also increase the awareness and alignment of the European citizen to the EU sustainable and energy efficiency agenda.

Taking into consideration European and Spanish Energy Efficiency regulation (which considers different climate regions and EPCs categories), Caja Rural de Navarra (CRN) will use Energy Performance Certificates (EPCs) as established in applicable legislation (Directive 2010/31/UE and Spanish Royal Decree 235/2013 which required the requirement for EPCs from 1st June 2013 on), in order to evaluate the degree of energy efficiency. The main objective of the internal framework of CRN will be to focus on its lending activities in either financing new buildings that must be among the best performing in terms of energy efficiency, or financing an appropriate upgrade in the efficiency of the existing stock of buildings.

To this end, CRN’s “Energy efficient buildings” sub-category only includes loans financing:

  1. Residential units (buildings/apartments/houses) whose date of completion and first delivery took place after 1st June 2013, that represent the top performing in terms of energy efficiency. CRN has decided to include only those units within the “A” and “B” categories, which are well below the 15% best performing threshold of the total stock.
  2. Residential units whose date of completion and first delivery took place before 1st June 2013, that either are included in the “A” or “B” categories or after retrofitting have achieved at least a 30% improvement in energy performance, leading to an EPC of “C” or superior. CRN will also include those loans granted to owner’s communities of residential blocks (“Comunidades de Vecinos) to implement new complementary isolation and/or change in centralized heating leading to an EPC “C” or superior for the whole building.

CRN will include units which -after retrofitting- attain the “A”, “B” and “C” categories, as any upgrade from “G”, “F”, “E” or “D” to the “C” category involves an improvement of at least 30% in energy efficiency (this also represents an improvement of 30% compared to the region’s housing stock average, see appendix 2)

Which are the main challenges in including residential buildings’ energy efficiency?

  • Granularity of retail exposures

The granularity of smaller loans in general, and residential mortgages in particular (compared to project finance or commercial mortgages) pose a difficult challenge for which retail banks are best positioned to provide ideas to overcome such hurdles due to their direct and close knowledge of their client base and their loan book detailed composition.

  • Data collection

With EPC data either not publicly available in many countries or not included in banks’ systems, most issuers have used other building certification data or building regulations as a proxy for energy efficiency, whether issuing green or sustainable covered bonds or senior debt. Some European banks, for example, issued green covered bonds in 2018 with residential mortgages as underlying assets, but using the year of construction of the property as a “short-cut” given a lack of available EPC data.

CRN’s process of sourcing EPC data directly involves three work streams:

  • mortgages of individual properties where CRN financed the real estate development, as it may therefore already have the relevant data;
  • existing mortgages not included in the above-mentioned group;
  • and new origination.

EU EPC legislation was implemented in Spain in 2013 and some EUR150m of lending for which CRN has EPCs have already been identified in the first work stream. CRN intends to follow this work by asking regional governments for existing EPCs data and designing new processes in order to capture EPCs in new mortgage origination.

The second work stream (existing mortgages but not having been financed directly by CRN on a real estate development loan since 2013) requires innovative IT tools to be deployed as existing databases on EPCs cannot be easily matched to the mortgage book of the bank as they rely on alphanumeric fields previously included manually into IT platforms and that is why CRN is exploring advanced algorithms able to find reliable solutions.

CRN’s eligibility criteria, checked by second party opinion provider Sustainalytics, mean that the underlying buildings are comfortably within the top 15% most energy efficient – this having become a market standard for energy efficiency – or lending is financing an upgrade of the building that improves energy efficiency by 30%.

Some EUR3bn of CRN’s lending is eligible under its sustainable bond framework as of end-2017, while this eligible portfolio was around EUR2.5bn at end-2016. Overall loan book growth together with the beginning of the tagging process of Energy efficient buildings are responsible for this increase.

  • Harmonisation and common taxonomy

CRN’s has designed its Energy efficient buildings’ financing framework with a view on market practices and data reliability. The Second Party Opinion by Sustainalytics concludes that Caja Rural de Navarra’s “Buildings Energy Efficiency” criterion is aligned with market best practices including loans for buildings among the 15% most energy efficient in the regions Basque Country, Navarre and La Rioja and renovation that improves the Energy efficient buildings by 30%.”

Moreover, Sustainalytics states that Given this local context, Caja Rural de Navarra’s addition of energy efficient housing to the eligible projects is well aligned with EU’s and Spain’s priorities on GHG reduction and initiatives to improve energy efficiency in the housing sector” and that Based on the above points, Sustainalytics considers Caja Rural de Navarra’s sustainability bond to be robust, credible and transparent”.

Sustainalytics has also mapped CRN’s nine project categories against the UN Sustainable Development Goals (SDGs), finding that they are all aligned with SDG 12, responsible consumption and production, 7, affordable and clean energy, or 11, sustainable cities and communities.

This recognised taxonomy is very important for investors and more and more are asking issuers to do this. Investors want to have all the social, sustainable and green bonds they invest in mapped to the SDGs so they can explain this to their final investors and that is why CRN decided to map its own 9 lines into UN SDGs.

Why does it make sense for bond issuers to adapt their framework to include residential buildings’ energy efficiency?

The Investor’s perspective:

In our view, investors benefit from accessing financial instruments with a ‘use of proceeds’ commitment which is aligned with their investment policy. In this sense, transparency, harmonization and allocation & impact reporting are key elements to leverage sustainable finance from the investor’s perspective. The recent EU High Level Expert Group’s final report and the expected European legislative initiative to impulse sustainable finance will also be in CRN’s point of view a clear game-changer in the short run.

Moreover, there is in many investors’ view a clear link between a Sustainable bonds’ framework and the overall ESG strategy of the bank. That is why many investors believe that banks who are first-movers as sustainable bond issuers have a more resilient Governance structure and a long-term strategic perspective which, in turn, can lead to better management, healthier credit metrics and therefore to a lower volatility and better performance of their bonds.

The issuer’s perspective:

We are convinced that its Sustainable issues have benefited from a broader investor base. Taking as example its last Sustainable Covered Bond issued in April 2018, it achieved the highest oversubscription ratio (more than 3x) of any euro benchmark covered bond until that month and got a highly granular and diversified investor base, whith one of the highest allocation to Green and Sustainable investors (65%).

This is a clear proof of the importance that ESG factors are gaining in the success of bond transactions, both from the point of view of investors (with a clear focus on asset managers, pension funds and central banks and sovereign funds) and issuers.

The financial sector / public authorities / society’s perspective:

CRN is attached to its home regions and believes that its ESG strategy is an essential element of its proximity banking model.

From a broader perspective, banks play a key role in the European financial sector. Even in the context of the Capital Markets Union (CMU) project, European banks will retain a great relevance as key players in changing the economy towards a more sustainable environment and a more inclusive society.

Within this background, retail banks are uniquely placed to originate eligible (from a sustainability perspective) assets. These assets could be bonds and/or loans, and different ways to channel financing to them could be envisaged. However, all of these ways will have in common the need for a common taxonomy, a regulatory level-playing field and the right incentives to help this change happen.

That is why CRN believes that the involvement of smaller banks with a local and retail focus is key in order to reach all regions, citizens and SMEs of the EU. If a reasonable, not too burdensome legal framework is put in place and proportionality is taken into account, smaller, and particularly cooperative banks are best placed to channel finance to the real economy with a focus on sustainable social and environmental projects in which Energy efficient buildings will play a key role.

[1] CRN’s updated Sustainability framework: https://www.cajaruraldenavarra.com/cms/estatico/rvia/navarra/ruralvia/es/particulares/informacion_institucional/galeria_descargas/2017-Sustainability-Bond-Framework-CRN.pdf
[2] Sustainalytics updated SPO on CRN: https://www.cajaruraldenavarra.com/cms/estatico/rvia/navarra/ruralvia/es/particulares/informacion_institucional/galeria_descargas/Sustainalytics-CRN-Second-Opinion.pdf
[3] EMF-ECBC Energy Mortgages Initiative (EeMAP): https://hypo.org/ecbc/market-initiative/emf-ecbc-energy-mortgages-initiative/
[4] United Nations Sustainable Development Goals: https://www.un.org/sustainabledevelopment/sustainable-development-goals/
[5] CRN 2016 Impact Report: https://www.cajaruraldenavarra.com/cms/estatico/rvia/navarra/ruralvia/en/portal/pdf/2016-Sustainability-impact-report.pdf
[6] CRN 2017 provisional allocation report following UN SDGs: https://www.cajaruraldenavarra.com/cms/estatico/rvia/navarra/ruralvia/es/particulares/informacion_institucional/galeria_descargas/Preliminary-2017-impact-report.pdf
[7] CRN 2017 provisional allocation report following UN SDGs: https://www.cajaruraldenavarra.com/cms/estatico/rvia/navarra/ruralvia/es/particulares/informacion_institucional/galeria_descargas/Preliminary-2017-impact-report.pdf
[8] Press release on CRN joining the EMF-ECBC’s Sustainable Covered Bond label: https://hypo.org/ecbc/press-release/covered-bond-label-enhances-transparency-sustainable-finance-caja-rural-de-navarra-receives-110th-label/
[9]EMF-ECBC Sustainable Covered Bond list: https://www.coveredbondlabel.com/issuers/Index/?countryId=&fullSearch=&initialIssuanceDate=&initialIssuanceDateTo=&maturityDate=&maturityDateTo=&poolType=&couponType=&currencyId=&green=1