European Mortgage Federation, ECB, EBA and European Commission to create green mortgage label in 2020

Label could form first building block of controversial ‘Green Supporting Factor’ plan

The EU has moved another step closer to creating a dedicated asset class for green mortgages, with an official label slated for next year.

The European Mortgage Federation created a definition of an energy efficient mortgage last year, in collaboration with banks, and has this year been working with its 50 members, including ABN Amro, Barclays, Berlin Hyp, BNP Paribas, Credit Agricole, ING, Societe Generale, UniCredit and Volksbank Banco Popolare, to tag compliant assets in their existing lending books.

It’s now taking feedback from those banks until January, and will give itself three months to make improvements to the model before kick-starting the formal creation of an Energy Efficient Mortgage label for Europe to help grow the market and “provide a credible, recognisable label to consumers”.

Luca Bertalot, Secretary General of the European Mortgage Federation – European Covered Bond Council, who heads up the Energy Efficiency Mortgage Action Plan (EeMAP), told RI the label will be developed by a committee comprising representatives from the ten largest mortgage markets in the European economic area, alongside ratings agencies, investors, the construction and valuation industries and the Green Building Council.

In addition, there will be an advisory council “to help the committee get this right, and make sure there is a macro-prudential element to the label”. 

Mirroring the existing process for covered bonds, the energy efficient mortgage label will rely on self-certification against an official definition.  

The Council is expected to include representatives from the European Commission’s energy and finance units, the European Central Bank, the European Banking Authority and national central banks. 

Bertalot says all institutions are already engaging with the process, but the structure will be formalised in the second quarter of 2020.

“We will do as much as possible to get the label up and running next year,” he told RI. “And then the label will be agreed every year by the committee, to allow the industry to raise the bar gradually.”

Mirroring the existing process for covered bonds, the energy efficient mortgage label will rely on self-certification against an official definition.  

Bertalot said there are currently around 30 compliant mortgage products available in Europe, but that he expects the majority of the initiative’s 50 members to come to market with new lines over the course of 2020.

Luca Bertalot, Secretary General of the European Mortgage FederationTwo pilots will be launched to test the label: one in Scotland, and one in Südtirol/Alto Adige in Italy. 

“The Scottish pilot will be the biggest in scale. We’re working with the Scottish government to create the necessary synergies that will bring together public-sector subsidies for homeowners renovating their properties, with market participants who can offer the right mortgages, and others – utilities, for example – who might offer other relevant discounts.”

Belgium, Spain and Germany will “hopefully” be the next countries to participate in pilots, Bertalot added. 

“Ultimately, in Europe we need to upgrade 220 million houses to meet our climate goals, so we need to work together to make that an economically interesting prospect for people.”  

He noted that the G20 was also engaging in the discussions, too. The G20’s Sustainable Finance Study Group has been focusing on ways to create a securitisation market for sustainable finance – something that could be made much easier by the creation of a green mortgage asset class.

But the potential for the label is perhaps most interesting in the context of the Green Support Factor – a controversial measure being floated that would provide capital relief to banks financing assets that support the EU’s climate commitments. 

First posited three years ago by the French Banking Federation, the concept quickly became one of the Commission’s top climate priorities, despite warnings from advisors, regulators, politicians and civil society that there is no clear correlation between greenness and credit risk.

“any capital relief for green assets must be based on clear evidence that they are less risky than non-green assets” – Andrea Enria

Following the criticism, Commission Vice President Valdis Dombrovskis appeared to go quiet on the topic, but it has been creeping back into his rhetoric lately: earlier this month, he told one conference audience that the Commission’s “next step will be to explore standards and labels for green mortgages and green loans to help owners upgrade their houses”, and another that “the EBA is already assessing the possibility of introducing a more risk-sensitive capital treatment of green assets, as a ‘green supporting factor'”.

Last week, Andrea Enria, the Chair of the Supervisory Board for the European Central Bank – which is contributing to the EBA’s assessment – warned against “jump[ing] to policy conclusions” when it came to a Green Supporting Factor in a speech last week. 

He acknowledged that “climate change certainly poses risks to banks” but said “any capital relief for green assets must be based on clear evidence that they are less risky than non-green assets”.

 The current efforts by the European Mortgage Federation to coordinate the ‘tagging’ of green mortgages are in part an attempt to build such evidence.

 “We’d like to be able to demonstrate that the riskiness of these assets is less than a ‘normal’ mortgage, because energy efficient houses provide better collateral, and lower energy bills mean homeowners will have more disposable income to make repayments,” said Bertalot, adding that ‘spot analysis’ among the initiative’s members “strongly hints at a correlation between energy performance and credit risk profiles”. 

However, he concluded: “For this kind of issue, you need 15 years of reliable data, and we have started from scratch.”