Green ‘tagging’ key to jumpstarting climate finance, says European banking group

European banks are calling for more work to be done around effective ‘tagging’ of green assets on the sector’s balance sheet, to help identify investment risks and unlock the supply of green products.

HSBC, ING, Lloyds, ABN Amro, BBVA, Unicredit, Triodos, SEB, Berlin Hyp and Suedtiroler Volksbank have formed a working group, in collaboration with UN Environment, the European Mortgage Federation, the European Covered Bond Council and the European Climate Foundation.

They have produced a report, written by Nick Robins, the Co-Director of UN Environment’s Inquiry and Peter Sweatman, the Chief Executive of Climate Strategy & Partners.

The findings are based on 15 responses to a 20-question survey, completed by various departments of the banks, including credit research, sustainability, commercial real estate, debt capital markets and treasury.

It concluded that “over one third of the banks surveyed are well-advanced and have a functioning approach to green tagging,” focused on mortgages. Only 40% have launched green products, it claims.

Tagging would enable banks to issue more green bonds, as it would make it easier to identify enough green assets for dedicated securitisations.

“If banks tagged their real estate and mortgage loans to existing energy and environmental standards, there would be a leap in market transparency on the flows of finance to energy efficient assets and products,” the report says. It adds that the focus on climate finance is often on renewable energy, but energy efficiency requires even more capital to help meet global goals.

The European Commission’s High Level Expert Group on Sustainable Finance has already noted that there is a lack of transparency around the sustainability of bank lending. The IFC already has an initiative to support the development of green ‘tagging’ practices.

According to the report, the European Mortgage Federation and the European Covered Bond Council are exploring an ‘energy efficient mortgage’ with their members, and are already encouraging banks to offer cheaper interest rates to borrowers buying energy efficient homes or committing to making energy savings.The EU has recently introduced securitisation rules that require issuers to disclose the energy characteristics – such as the energy rating – of real estate and vehicles. It is hoped the rules will enable investors to more easily create green portfolios.

Relevant mechanisms and products already being employed by the 10 banks include:

– Triodos uses a sustainable real estate screen to assess energy efficiency and limited social aspects of its investments. It claims to have launched Europe’s first sustainable listed property fund, focused on office buildings.

– SEB is very active underwriting green bonds, has a green bond fund, and has issued its own green bond to finance green loans in Europe. It has also created a green tagging process throughout the bank, which it calls a ‘virtual green balance sheet’.

– Lloyds has a green loan initiative, offering cheaper debt to clients wanting to improve the energy efficiency of property. This currently stands at £270m.

– ING has developed an app around energy efficient real estate for borrowers and offer free certifications to some clients. From next year, it will only offer finance for offices in the Netherlands that meet independent green standards, and plans to have only ‘green’ buildings in its portfolios within six years.

– BBVA has stepped up on its green bond underwriting and provision of green loans.

– BerlinHyp issued the first green covered bond. It has a €2.6bn green finance portfolio and looks at sustainability and energy efficiency in its commercial real estate lending. It set up an internal Green Building Commission and has green finance as a corporate goal, mandated by the board of directors.

– ABN Amro has an initiative to maximise energy efficiency in its real estate portfolio by 2030. It offers a range of online tools to help with this strategy. It is also an issuer of green bonds, and has an initiative for the efficiency of its own offices.

HSBC, Unicredit and Suedtiroler Volksbank did not provide case studies explaining their commitment to energy efficiency or tagging for the report.