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: http://eemap.energyefficientmortgages.eu

 

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

Webinar: Piloting Energy Efficient Mortgages in Europe, 19 June, 10:00 AM BST

EeMAP: Piloting Energy Efficient Mortgages in Europe
Join us for a webinar on Jun 19, 2018 at 10:00 AM BST.
Register now!

In June the EU funded EeMAP project is launching a ground-breaking pilot of a European ‘energy efficiency mortgage’ with a number of major financial institutions. Join this webinar to find out which banks are taking part and in which countries. You will also hear from different businesses about how they are positioning themselves as leaders in Europe’s growing market for green mortgages and green bonds.

The session will be chaired by Dr Stephen Richardson, Technical Lead for EeMAP at the World Green Building Council’s Europe network.

Confirmed speakers include:

  • Jennifer Johnson, Head of Legal & Economic Affairs at EMF-ECBC (EeMAP Coordinator). Jennifer will give an update on the pilot, which banks are involved and what support is being offered by European institutions.
  • Barry Lynham, Global Director of Strategy and Communication at Knauf Insulation. Barry will discuss how mortgages can solve major barriers to energy efficiency investment and increase renovation rates.
  • Rob Cartwright, Director of Energy Solutions at eTech Solutions Limited. Rob will explain how eTech’s innovative software platform could help streamline the property assessments for energy efficient mortgages.

This is likely to be a very popular event and places may be limited – Register early to avoid disappointment!
After registering, you will receive a confirmation email containing information about joining the webinar.

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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: http://eemap.energyefficientmortgages.eu/