European banks set to launch green mortgages to combat climate change

Banks with more than half of Europe’s outstanding mortgages are on the brink of creating a new ‘green’ asset class, which could influence the EU’s green taxonomy, influence capital requirements and trigger the issuance of dedicated covered bonds.

Forty banks, representing some 20% of European GDP, have been working with the European Mortgage Federation on establishing a definition of ‘energy efficiency’ mortgages, creating an IT tagging process and proving a correlation between energy intensity and default risk.

“The mortgage lending business has to change and we need to design a new structure for the entire mortgage market in order to cope with climate change,” explained Luca Bertalot, Secretary General of the European Mortgage Federation, European Covered Bond Council.

Speaking on a Responsible Investor webinar on integrating sustainability into corporate lending earlier this week, Bertalot added that the idea was to prove that energy efficient properties were at lower risk of default, and offered better collateral if default did occur. Therefore, they should be given favourable capital charges by regulators, which would enable banks to pass on better rates to homeowners with eligible properties, which could in turn encourage retrofitting and boost demand for low-carbon housing across the EU.

“We will help develop a new IT protocol to help banks manage energy efficiency data, relating to loan to value, probability of default, energy consumption and so on,” he told the audience. “This will create a quantitative basis to help the European Commission to set new standards in terms of capital charges for banks.”“The idea is simple: if you improve your house, your mortgage will be more efficient, so the bank will pay less in terms of capital charge and they can offer better-pricing for eligible mortgages. And we will improve the current collateral stock in the belly of all the European banks, improving financial stability for the whole financial sector.”

The initiative, whose banks include BNP Paribas, Axa Bank, ING Bank, Triodos and Nordea, among many others, launched two years ago but only entered its full pilot stage this summer. One of the key objectives has been to develop a shared definition of energy efficiency mortgages that will be the basis of new mortgage products starting next year.

“We hope to have this definition approved by the beginning of December,” said Bertalot. “And after this, the 40 banks will start to put in their production lines new mortgages which will allow homeowners to finance energy efficiency works.”

In addition, the group “would like to deliver a definition in order to help the [European Commission’s Technical Expert] Group capture properly the work of the initiative” when developing its green taxonomy. This taxonomy could form the basis of a ‘Green Supporting Factor’, offering capital charge relief to eligible green lending by banks.

The initiative is supported under the EU’s Horizon 2020 project.

To listen to the webinar in full, see here.