Europe’s ageing building stock needs large-scale energy efficiency renovation if the EU is to meet its climate and energy targets. Increased private investment would create jobs and help citizens save money, writes Luca Bertalot.
Luca Bertalot is the secretary-general of EMF-ECBC, the European Mortgage Federation-European Covered Bond Council.
Countries in the European Union have agreed to an energy efficiency target of 20% by 2020, and at least 27% by 2030. These goals are particularly relevant for the EU’s building stock, which is responsible for 40% of the bloc’s total energy consumption and 36% of its CO2 emissions.
Today, about 35% of buildings in the EU are over 50 years old, and a large majority of the current European building stock will still exist in 2050. So making buildings – particularly existing ones – more energy efficient would result in clear reductions in energy consumption and CO2 emissions. Improvements in this area would also reduce the EU’s reliance on energy imports. 61% of gas imports are destined for buildings, of which 75% for residential buildings.
These figures clearly demonstrate the need to further stimulate energy efficiency improvements in buildings in Europe. In fact, the International Energy Agency has called investments in energy efficiency – and particularly in buildings – a priority for all countries.
But EU member states are currently behind in the implementation of their overall energy efficiency targets for 2020. This year, the European Commission is revising both the Energy Performance of Buildings Directive and the Energy Efficiency Directive, and other related initiatives are in the political pipeline. Creating an ambitious legal framework is an important prerequisite, but the implementation of these targets set by legislators requires mobilising both public and private stakeholders and financing.
Clear business case for the mortgage industry
Global, institutional and investor interest in energy efficiency finance has increased in magnitude in recent years. Both the Paris Agreement adopted at the UN Climate Change Conference in December and the United Nations’ Sustainable Development Goals agreed in 2015 to include targets to improve energy efficiency as part of a wider global climate and energy agenda. Both frameworks also underline the importance of attracting private financing and the creation of new business models to support these goals.
This is why the European Mortgage Federation and the European Covered Bond Council, in cooperation with important stakeholders, have launched a European initiative to develop an energy efficient mortgage. The idea is to mobilise banks’ mortgage financing to incentivise citizens to move their property out of the “brown zone” – energy rating G-D – and into the “green zone” – energy rating A-C.
Based on a set of energy efficiency indicators, lenders would offer a discount in the interest rate after a certain period of time according to the improvement in the energy rating of the property, or additional funds at the time of origination of the mortgage. Energy efficiency improvements would free up borrowers’ disposable income due to reduced energy bills as well as help them maintain the value of their property.
For banks and investors, the tangible benefits, which the EMF-ECBC will be looking to substantiate in the coming months, would lie in borrowers’ reduced probability of default and in the increase in value of the property and therefore the decrease of the loss given default (LGD), leading to a more favourable capital treatment of energy efficient loans on banks’ balance sheets. Another key advantage linked to the property value would be the subsequent opportunity to protect banks’ and investors’ portfolios against a “brown discount” from a risk management point of view.
The mortgage industry can play a leading role in developing a pan-European private financing initiative for the energy efficient improvement of residential buildings, which is entirely independent from, but complementary to, public funds or tax incentives. Furthermore, increased investments in long-term energy efficiency would trigger a flow of capital to and jobs in companies that carry out the retrofitting works, thus supporting the wider economy and EU’s growth agenda.
Considering that the European building stock constitutes the largest single energy consumer in the EU, and that the value of the European mortgage market is equal to 53% of the EU’s GDP, there is huge potential for unlocking the benefits of mortgage financing to support energy efficiency for the benefit of all.