Risk-weight fiddling won't save planet
The pace of growth in green mortgage financing is improving, but it is still woefully inadequate, particularly with respect to covered bonds where there are no price advantages. Fiddling with mortgage risk weights while the world burns will not change behaviour quickly enough.
For the first time in the covered bond market’s history, two green transactions were launched within a few days of each other. This week Société Générale issued the first French green covered bond and Berlin Hyp issued its fourth green Pfandbrief.
This is something to be celebrated. But in the context of the landmark report published by the United Nations Intergovernmental Panel on Climate Change in October 2018, which said there we only had 12 years to prevent climate change catastrophe, green covered bond financing is nothing short of derisory.
Part of the problem is that the financial incentives to do green deals are non-existent. Both deals were priced at exactly the same spread as vanilla covered bonds. The industry hopes it can tilt the regulatory playing field by collecting enough of the right data set to empirically show that energy efficient mortgages are less risky and justify a lower capital charge, incentivising green mortgage origination and supply.
This might be helpful at the margin but, given the urgency of the problem and limited timescale for fundamental change, it will be too little, too late. The scale of action required means it is incumbent on policy makers to be honest and courageous.
Taxes and subsidies have a tremendous influence on price and, in an instant, economic costs can be aligned with ecological reality. All that needs to happen is for the European Commission to sing from the same hymn sheet as the European Central Bank governor and commit to “do whatever it takes”.