At the time this article is written, EeDaPP is at a turning point. By March 2019, the project will enter its second year, while its twin project, the Energy Efficiency Action Plan will successfully come to an end. At the same time, the Energy Efficient Mortgages Initiative Pilot scheme, the operational experimental phase involving more than 40 European banks and 50 institutions is entering a new determining cycle.
The interactions and synergies that took place between the two projects and the pilot scheme were determinant in achieving the first milestones of the EeDaPP project. In its first year, the EeDaPP partners, with the help of market stakeholders and pilot banks managed to fulfil their main objectives:
- Identify and list best practices in data storage, management and structuration, existing templates and protocol to build upon;
- Define a minimum set of energy efficiency reporting criteria to fulfil the reporting requirements for the Energy Efficient Mortgages Asset Class;
- Start defining and designing a standardised data protocol, collecting feedbacks from pilot banks.
Energy Efficiency minimum pan-European reporting criteria
The energy efficiency mortgage value chain is complex and fragmented, which is fully reflected in how data is being collected, managed, shared and reported. EEMI brings together a wide range and diverse set of individual stakeholders including lending institutions, borrowers, energy assessors, valuers and data warehouses, operating at different stages of the property life cycle who often have very different interests and priorities and typically tend to think and act in silos. Mainstreaming energy efficiency mortgages and linking it to sustainable finance requires to increase data accessibility, comparability and disclosure. Yet, in order to do so, the final reporting requirements must build as much as possible on the already wide range of information that banks need to report on for regulatory purposes. The extra mile that banks will have to provide to link the additional information on the energy performance of assets, a valuation method that include such “green” inputs and the traditional information reported on financial characteristics and performance at loan level must be facilitated and rationalise in order to reach a practical and effective implementation in the short-medium term.
With this operational constraint in mind, the EeDaPP consortium extracted a minimum core list of energy performance and efficiency criteria that can reflect, at European Level a fair assessment of the energy performance of the whole building stock (new and existing building, residential or commercial properties, individual or collective housing).
The following figure is displaying the data reporting structure, or “data tree” developed for EEM. It is made of three pillars; identifiers, financial and banking data and energy efficiency data. The additions to existing regulatory reporting requirements (from the European Central Bank, the European Banking Authority and the European Securities & Markets Authorities) are restricted to three core indicators: the Energy Performance Certificate, the “upgraded” property valuation assessment (taking into account energy performance criteria) and the link to existing public energy efficiency scheme (of European, National, or local level). Among those, the EPC is identified as the most important information for banks to collect, a small step in the reporting protocol and a huge step in linking the sustainable finance objectives to the real economy.
The publication of the White Paper in February 1st, detailing the reporting criteria list, its rationale and main principles is intended first and foremost to start a consultation with lending institutions, data providers, built environment professionals and other relevant market stakeholders to assess the relevance of the proposed data points, both mandatory and voluntary, their respective categorisations as such, and the feasibility of gathering, processing and disclosing them. In this sense, the protocol should be considered as a “living” list to be adapted and refined according to market feedback.
EeDaPP – Energy efficiency Data Protocol and Portal – is an initiative by the European Mortgage Federation – European Covered Bond Council (EMF-ECBC), Ca’ Foscari University of Venice, CRIF S.p.A., European DataWarehouse GmbH, Hypoport BV, TXS GmbH and SAFE Goethe University Frankfurt. This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 784979.
By Daniele Vergari, Gianluca Natalini, Stella Fumarola, CRIF
One of the key objectives within the EeDaPP project is to investigate the correlation between energy efficiency and credit risk, measuring how this affects obligor’s credit risk and thus a “green” mortgage portfolio performance.
To this end, CRIF, closely working with University of Venice “Ca’ Foscari” and the other EeDaPP consortium partners, will be preparing the ground for the quantitative analyses. These will focus on the two main components of credit risk and its cost trying to consolidate our previous research evidence:
- Probability of default: energy efficient borrowers have a better payment behavior and therefore a lower credit risk;
- Recovery rate: energy efficient properties are more valuable and show greater resilience to economic cycle.
Energy Efficient Mortgage Pilot Scheme
In order to make the study as sound and robust as possible, different market players and stakeholders are involved firstly in the creation of the analysis data pool:
- Financial institutions provide information about mortgage loan applications (i.e. customer and contract data) and corresponding performance (i.e. the customer failed to pay its obligations);
- Institutional players, like ENEA or other institutions, where needed, may integrate the banks’ own internal data and evidence with EPC information that may prove to be scarcely available for most financial institutions in the manner it is required by the analysis (e.g. historical time series);
- Consortium member CRIF is able to further integrate the above data (i.e. estimated property value, property value time series, etc.).
Once the pool data is available, a rigorous process of data normalization (needed to make data coming from different sources and / or institutions comparable and coherent) takes place followed then by the quantitative (econometric) analyses. The overall process is summarized in the following five steps:
- Data organization – going from data specifications preparation and data gathering through to data normalization and enrichment, data quality analysis. This ultimately leads to the data pool consisting of both energy efficient and non-energy efficient loans and mortgages so as to allow for comparative analyses of risk and its impacts;
- Model design – the fundamental pillars of the quantitative analysis are defined. They include the risk analysis (i.e. risk definition, choice of the appropriate time horizon, sample selection, segmentation, etc.) and the impact analysis (e.g. assessment of credit risk of energy efficient vs non-energy efficient portfolios, impacts on portfolio expected credit losses, regulatory capital absorption, etc.);
- Correlation analysis – based on the model design, the econometric analyses defined above are carried out to assess how energy efficiency affects credit risk and recovery rates (from property sales). At this stage, the a priory hypotheses are verified and preliminary evidence also further investigated;
- Impact analysis – quantification of the impact of such correlation evidence on the portfolio performance (i.e. risk, cost of risk);
- Reporting – final document reporting assumptions and findings.
Impact of Energy Class on Credit Risk
Crif has already carried out a preliminary assessment of the impact on credit risk of energy class using a sample of about 18.000 mortgage loans for which all customer level (e.g. age, marital status, residential status, etc.) and contract level information (e.g. property EPC, loan amount, property value, downpayment amount, term, etc.) was available. Credit performance was also available allowing to observe credit risk differences between energy efficient and non-energy efficient obligors. In order to take in due account potential customer profile differences, the portfolio was clustered into segments homogeneous in terms of property value and loan-to-value rate.
The analyses showed that, within the identified clusters, that energy classes A and B report a much lover one-year default rate compared to the other classes (that are twice as risky and classes A and B).
The sample size is not large enough to generate robust evidence. Further analyses and larger and more representative samples are necessary in order to confirm and possibly fine-tune the above evidence.
Impact of Energy Class on Property Value
Another aspect that must be taken into consideration is the value of “green” properties and how real estate markets value them. These two elements may have a potential impact the collateral value (represented by the property) and therefore on the recovery rate realized from the property sale. The underlying assumption is that energy efficient properties have greater value than non-energy efficient ones (all the other features being the same) and that this value is less affected by the economic cycle (property resilience).
Contrarily to the probability of default, gaining robust evidence on recovery rates may prove rather difficult considering the average duration of the recovery processes in some European countries (e.g. Italy). Most financial institutions do not have EPC information at all, some others have started to collect it although only recently and then lacking it for most of the cases with complete workout processes for which recovery evidence is more robust.
The WP5 team is also facing this potential issue; completion of the data pool creation will tell how relevant this may be. Automatic Valuations Models (AVM) come into the game to help cope with such data limitations. The Automatic Valuation Model used by Crif, compliant with the the definition adopted by the European AVM Alliance®, is a system that provides an estimate of value of a specified property at a specified date (also in the past), using mathematical modelling techniques in an automated manner. The model does not necessarily require any previous values of the property to be provided as input, but it only requires that a property be specified and therefore they can function merely based on property address (or cadastral reference or other forms of unique property identification) and a few basic property characteristics. By analyzing these property attributes, (using the market comparison approach), it provides property valuation in different points in time allowing to observe how such value varies throughout time (possibly considering also impact of a full economic cycle).
A study has been carried out using a sample of 40.000 mortgage loans for which the ECP information was available. The property value corresponding to such loans was estimated for the years 2011-2018, separately for energy efficient and non-energy efficient properties. The preliminary evidence shows that
Conclusions & Next Steps
We are at the very early steps of WP5’s correlation analysis study. However, some preliminary analyses have provided some promising hints into how energy efficiency can affect credit risk and the ability to recover from property sale. The above studies were conducted on limited data samples and the gained evidence may be affected by the used data. The ground for the WP5 study has been prepared. The data gathering phase, the most crucial one, has already started with the aim of building a pool large enough to be representative of the market and to allow for robust analyses. Data availability and quality are crucial. WP5 team has then prepared a plan for data remediation and enrichment so as to effectively cope with potential data issues.
Further evidence will be made available as the study progresses.
By Marco Marijewycz, E.ON
Around 19 million UK households – equal to around 71% of the UK’s 27 million homes – currently fall below an Energy Performance Certificate (EPC) Band C rating, which means they are missing out on energy savings of up to £380 a year by not having basic measures in place.
Tackling energy efficiency levels of existing housing stock is one of the biggest infrastructure challenges of this generation and is part of the Government’s Clean Growth Strategy which aims by 2035 to bring as many homes as possible up to EPC Band C level where practical, cost-effective and affordable.
Under the umbrella of the Energy Efficient Mortgage Initiative, E.ON is working with BNP Paribas Personal Finance to develop and pilot an innovative Energy Efficient Mortgage product, which will allow movers, first time buyers, and re-mortgagers to use their mortgage to borrow further via a linked ‘energy efficiency home improvement loan’ to improve the energy efficiency of their homes. Under this model BNP Paribas Personal Finance would provide the improvement loan financing and E.ON would provide a managed service to install appropriate energy efficiency solutions. This service would help the customer to identify what measures would deliver the greatest savings potential, E.ON would then install the measures and offer a range of in-life energy services.
The improvements funded through the scheme loan could also result in a discounted mortgage rate once the energy efficiency measures have been verified via an updated EPC.
Michael Lewis, Chief Executive, E.ON UK, said: “We need to find ways to radically increase interest and action on energy efficiency in homes, but property owners often face a significant financing barrier when wishing to do so. In the UK, attempts have been made in the past to tackle this barrier through schemes like the Green Deal, but they have not been successful, in part because they weren’t designed with the customer front and centre.
Energy efficient mortgages have the potential to be a game changer in the delivery of affordable finance and we are ready to meet the challenge for home-owners motivated to take the step into energy efficient living. Our agreement with BNP Paribas Personal Finance is a further step along this journey and brings together two well-known international companies with expertise in financing and delivering energy saving solutions across Europe.”
Easier access to affordable financing via an energy efficient mortgage should provide an added incentive for customers to better insulate buildings, replace old heating systems or increase their energy independence through solar panels, batteries or virtual storage. It can also ease the purchase of existing energy-efficient houses or commercial buildings through preferential financing in conjunction with a mortgage.
The ambition of this Energy Efficient Mortgage pilot is to provide a competitively priced home improvement loan provided by BNP Paribas Personal Finance linked to a mortgage to fund a range of personalised energy efficiency solution bundles delivered by E.ON. These could include measures such as insulation, energy efficient boilers and smart meters and smart thermostats. For customers wishing to prepare their home for tomorrow’s energy world, smart energy technologies such as electric vehicle charging points, solar panels and battery storage could also be funded as part of the Energy Efficient Mortgage pilot, as well as heat pumps. All of which E.ON intends to steer by its innovative Home Energy Management System Dashboard.
E.ON and BNP Paribas Personal Finance are working towards further collaborations with building societies and High Street finance providers to pilot and develop this innovative new financing solution to customers, initially for the UK market, in the first half of 2019. This collaboration aligns closely to the recommendations of the UK Government’s Green Finance Task Force.
The partnership follows consumer research undertaken by E.ON as part of the EeMAP project in several European countries in February 2018 to understand if customers would take advantage of an energy efficient mortgage where E.ON found a positive consumer appeal towards the concept, particularly in Great Britain. The research conducted by E.ON in several European countries looked into the question of whether customers would even take advantage of a standardized “energy efficient mortgage”. The result is consistently positive with the overall high level of appeal towards the concept particularly high in Italy and Great Britain. In Germany and Sweden, respondents welcomed the fact that, in addition to existing funding instruments, there was an alternative or more extensive offer.
By Ursula Hartenberger, RICS Global Head of Sustainability
The recently published EeMAP definition for energy efficient mortgages presents a breakthrough in the project and provides the basis for establishing protocols to ensure appropriate lending secured against properties which are likely to both lower credit risk and support the climate change mitigation agenda. The definition explicitly mentions the value aspect of the energy efficiency measures of the property for which an Energy Efficient Mortgage (EEM) is being sought and as such clearly refers to the EeMAP valuation and energy efficiency checklist, developed by RICS to aid transparency to the valuation process.
What is the checklist and how does it sit with the traditional canon of mortgage lending valuation instructions?
The EeMAP valuation checklist is the result of an in-depth consultation with valuers and mortgage lending banks from across Europe and is designed to complement existing instructions given to valuers. Currently there is no standard reporting template for valuers asking them for their assessment of the relationship between value and the energy efficiency aspects of the property although much of this information may already be collected and used implicitly to inform the valuer’s opinion of market value. The checklist provides a list of property characteristics which may affect the energy demands of the building – such as heating, insulation, structure and orientation to name but a few and requires the valuer to report on each explicitly using a tick box and comment facility. Many of the indicators on the list will look familiar to valuers and banks as they are already part of existing valuation instructions – the difference is that they will be assessed specifically from an energy efficiency perspective.
Therefore, if the instruction allows, valuers are advised to consider and make specific reference to those indicators and observed subsequent energy efficiency characteristics and implications which potentially could impact the value of the property and, indeed, consider this relationship in their final estimate of the subject properties market and mortgage lending value.
What implications does the EeMAP checklist have for lending institutions?
Depending on the lending context and/or the property-specific information already available or recorded, lending institutions may wish to complement their existing valuation instructions with selected indicators from the checklist, or indeed use it in its entirety.
In addition, banks are advised to capture important information on the indicators contained in the checklist as this is essential for measuring the financial performance of energy efficient mortgages and for benchmarking them in relation to key risk indicators such as Probability of Default (PD) or Loss Given Default (LGD). Additionally, by collecting and recording this data, it will better inform the valuers of the energy/value relationship. This could be important for EU policy moving forward.
What is the scope of the new EeMAP checklist?
The checklist is intended to serve different lending scenarios, including:
– the origination of a new or extension of an existing mortgage for a property undergoing renovation,
– the origination of a new mortgage for an already energy efficient property, and
The checklist has been created with user-friendliness in mind. It comprises three assessment categories:
- the core indicators, such as the EPC rating, energy consumption, physical building characteristics, condition of systems, availability of building related information/documentation, etc.,
- commentary regarding additional energy-performance related risk considerations, including building orientation, presence of renewables, lighting, etc., and finally,
- an assessment summary that also benchmarks the property in question against overall market expectations with regard to energy efficiency.
Valuers are asked to rank each indicator according to a RAG (Red, Amber, Green) rating with a supplementary comment column in which they should provide a brief rationale for their respective ‘RAG’ judgement where this is not obvious.
Red: Below market ‘norm’ – value actually/potentially at risk over period of proposed loan
Amber: On or near market expectations – may be at risk in medium term
Green: Above market expectations and therefore likely to present a lower value risk moving forward.
Grey: No data available
Are valuers in Europe ready for the new EeMAP energy efficiency valuation checklist?
The EeMAP consortium is fully aware that widespread market uptake of the EeMAP valuation checklist will depend on valuers feeling comfortable with making a professional judgement on the potential value impact of energy efficiency characteristics of a property. The consortium is also conscious of the fact that not all valuers in Europe undertaking valuations for mortgage lending purposes may currently have the necessary knowledge to assess some of the technologies that impact on energy efficiency and performance in order to appropriately complete and rate all indicators and assess their potential to impact value.
Therefore, the EeMAP consortium is now working on additional reporting guidelines to support the practical application of the checklist by providing explanatory notes on each of the checklist’s core indicators as well as the items under the commentary section and the overall assessment summary.
On the basis of these explanatory guiding notes, a tailor-made set of EeMAP energy efficient mortgage valuation training slides will be developed and integrated into existing valuation and energy efficiency training material, developed as part of the Intelligent Energy Europe funded project RenoValue. The combined training package will cover the following: the rationale and business case for integrating a building’s energy efficiency features as part of the valuation process, an introduction to energy efficiency in buildings, sources of information on energy performance, the integration of energy efficiency considerations into valuation methodology and valuing energy performance as part of valuations for mortgage lending purposes.
The joint EeMAP / RenoValue training material will be free and can be used either inhouse by lenders or in those cases where valuations are outsourced by firms contracted to carry out valuations on behalf of the bank.
By Max Riedel, Research Fellow at Ca’ Foscari
Do borrowers become more creditworthy if they take out a mortgage on an energy efficient (EE) building? Or, to start with a more prudent question: does there exist any empirical relationship between EE and the probability of mortgage default (PD) at all? The first question is concerned with the identification of a causal link between EE and PD, while the second questions the very existence of a link between the two. The current data environment is challenging for answering either of the two questions.
To study the link between EE and PD, the necessary pre-condition is a clean, granular dataset that accurately distinguishes between loans on EE and non-EE buildings. Unfortunately, this information is seldom readily available as banks either store energy performance data in physical form, which is retrospectively costly to digitalize, or data is not being stored at all due to lack of an IT solution. Furthermore, the link has to be identified by taking into account borrower and building characteristics that might confound the empirical findings if not included. For instance, borrower’s age, building age, or location might have a confounding effect on the identification of a clear relationship between EE and PD. Fortunately, banks already collect the most relevant information in order to feed their credit risk models. Therefore, the main challenge in this respect lies in the collection of EE data and its merge with the remaining mortgage information.
When it comes to identifying causality, the requirements on the analysis become much more demanding. In order to establish a causal link, we have to understand and take into account the borrower’s consumption behaviour. Suppose a borrower buys a highly energy efficient house. One might argue that she will save money on heating and, thus, is more likely to repay her debt, which, in turn, should be reflected in an improvement of her credit rating. However, this would only hold true if she did not change her consumption behaviour. And this is where the currently unobservable risk lies: the unexpected deviation from the former consumption pattern after mortgage origination. For instance, the borrower could decide to change her heating habit and might use up the EE savings on more intense or careless heating. In the literature, this scenario is referred to as the rebound effect. The rebound effect generally refers to an increase in the request of energy services due to the decrease in the effective price paid by the consumer. However, she might also spend her EE savings on some other consumption products, such as a new car or kitchen. In addition to the shift in consumption, the borrower might also self-select herself into the data sample. In this case, not EE per se but a different factor would affect the credit risk. For instance, environmentally conscious borrowers are more likely to buy an energy efficient building and their attitude towards debt repayment might differ from other borrowers. In order to identify the causal link one has to account for such subtle factors. This is a challenging task as the bank typically does not collect soft information. However, there are solutions to overcome this issue. Regarding the consumption pattern, the bank typically possesses the borrower’s financial transaction history and can track its development over time. Additionally, utility companies collect energy consumption data, which allows to measure the rebound effect. To account for the other soft borrower characteristics, customer surveys would be helpful in order to estimate their general attitude towards the environment.
As of date, it is a challenging task to meet all data requirements for a causality analysis. The reasons being lack of data and privacy concerns. Thus, we focus our analysis on the correlation between EE and PD, and leave the causality question for a future study. In the following, we present our findings from the Dutch mortgage market.
Using loan-level data from the Dutch mortgage market, we investigate the relation between a building’s energy efficiency and the probability of mortgage default. By focusing on residential buildings exclusively, our sample consists of mortgages issued on more than 120,000 dwellings. We supplement the dataset with provisional energy efficiency ratings that are assigned by the Netherlands Enterprise Agency (Rijksdienst voor Ondernemend Nederland, RVO) to all Dutch buildings that are not yet supplied with the actual energy performance certificate (EPC) rating. RVO provides rating categories for 60 pairs of different building type and construction period combinations in the Netherlands. This allows us to match the loan data with EE ratings according to building type and construction year. Additionally, we exploit the fact that the ratings change asynchronously across the different building types in order to disentangle the energy efficiency-component from building type- and building age-specific effects that are typically associated with borrower’s risk of default. We employ two empirical methodologies – the Logistic regression and the extended Cox model – and find that energy efficiency is negatively correlated with a borrower’s likelihood of default on mortgage payments. The results hold if we account for borrower, mortgage, and market control variables. The findings also survive a battery of robustness checks. As an additional exercise, we investigate to what extent the degree of energy efficiency plays a role on borrower’s credit risk. Our findings suggest that mortgages on more efficient buildings are less prone to default. However, the findings on the degree of energy efficiency are less significant than the baseline results.
To date, only few studies attempted to investigate the correlation between EE and PD. To our knowledge all these studies were focusing on the US market. Our empirical exercise is among the first ones to establish a link between EE and PD with European mortgage data. We are optimistic that this field of research will grow as more European countries and banks commit themselves to collect and share their data.
Brussels, 3 December 2018 – For immediate release
The Energy Efficient Mortgages (EEM) Initiative is, today, unveiling its definition of an energy efficient mortgage which is the result of extensive cross-sectoral, market consultation of the lending institutions piloting the energy efficient mortgage framework and of the EEM Advisory Council.
Today’s announcement coincides with the start of the United Nations Climate Change Conference – COP24 – taking place in Katowice, Poland until 14 December.
The definition is intended as a concrete response to the efforts of the European Commission to construct a capital markets union, to facilitate the clean energy transition in line with the Paris Agreements, and in this context, to build a financial system that supports sustainable growth. It will provide a market benchmark to operationalise the integration of energy efficient mortgages into the business lines of the forty-one pilot lending institutions. At the end of 2017, these lending institutions represented 55% of mortgages outstanding in the European Union, equal to 25% of EU GDP, constituting significant critical mass in the market.
The EEM Initiative is a market-led initiative, funded via the European Commission’s Horizon 2020 Programme, which aims to deliver a standardised European framework and data collection architecture for energy efficient mortgages, with favourable financing conditions for energy efficient buildings, energy saving renovations and anti-seismic measures.
The EEM Pilot Scheme was launched in June 2018, further to the engagement of market actors in a consultation process by way of national and European roundtable events. The pilot scheme lending institutions are supported by the EEM Advisory Council, which includes representatives from the European Commission, the European Investment Bank, the European Bank for Reconstruction and Development, the International Finance Corporation, The World Bank, UNEP Finance Initiative, the Scottish Government and Climate Bond Initiative.
- To consult the definition, please click here.
Gerassimos Thomas, European Commission, Deputy Director-General for Energy, stated:
“I believe the EEM Initiative will bring a positive change in the market, providing more accessible financing for energy efficiency in buildings. It will facilitate the implementation of energy efficiency investments where they are most needed, in the buildings sector. Having agreed on a definition is an important step, opening the way for a quick roll-out of energy efficiency mortgages. The definition agreed upon is operational and easy to use, and can be strengthened in time, to match the high level of ambition of the EEM Initiative, and to make better use of the tools provided by the European legislative framework.”
Luca Bertalot, Energy Efficient Mortgages Initiative Coordinator, stated:
“Now is the time to take action, a market roadmap is the most effective way of delivering mortgage financing solutions to support European citizens in making their homes more energy efficient, comfortable, secure and therefore, ultimately, future-proof. The definition announced today provides a strong, operational market benchmark for lending institutions and a clear blueprint for the European Commission’s Sustainable Finance agenda, by facilitating cross-sectoral and institutional coordination and delivering market innovation and synergies.”
- To consult the Lending Institutions, please click here
- To consult the Advisory Council, please click here
- To consult the Supporting Organisations, please click here
Luca Bertalot, Energy Efficient Mortgages Initiative Coordinator
Tel: +32 2 285 40 35
EeMAP Initiative Coordinator
LATEST NEWS AND EVENTS
- The Energy Efficient Mortgages Initiative embraces the Polish market: PKO Bank Polski and PKO Bank Hipoteczny join the Pilot SchemeApril 12, 2019 - 8:28 am
- The Ministry of Finance of the Republic of Lithuania joins the Advisory Council of the Energy Efficient Mortgages Pilot SchemeApril 3, 2019 - 7:16 am