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Renovation revolution spurs green covereds

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By Bill Thornhill
04 Aug 2020

The refurbishment of existing housing stock promises to deliver big strides in cutting global carbon emissions and will provide issuers with a large new stream of green collateral to issue green covered bonds.

“The renovation of existing housing stock could be at the centre of a growth strategy leveraging financial markets such as covered bonds and RMBS, but also green consumer loans and even green deposit accounts,” said Luca Bertalot, general secretary of the European Covered Bond Council (ECBC), on Tuesday.

The majority of green covered bonds have funded green commercial and residential building developments, particularly new ones. New buildings typically conform to higher building standards and tend to be the most energy efficient. They are also easy to identify within a mortgage portfolio.

However, most people typically live in older buildings, and it is within this kind of housing where some of the biggest gains are expected to be made in reducing the global carbon footprint and providing new green mortgage collateral.

The ECBC has been instrumental in helping to promote refurbishment instead of new building as a dimension to the green mortgage market. 

It has helped finance improvements in three historically important buildings across Europe.

“We are working on three very interesting refurbishment projects of three symbolic buildings,” said Bertalot. 

These are Ca’ Foscari, which is owned by the University of Venice, and Florence Charterhouse in Italy, and the headquarters of the British Colonial Police in Nicosia, Cyprus.

“We are trying to demonstrate with these projects that we can really be instrumental in helping improve the energy performance of historic buildings, and not just residential and commercial ones,” he said.

The three projects aim to set a new standard or benchmark that empirically demonstrates and promotes the concept that there are big gains to be made from renovating existing building stock.

Green building, healthy mortgage

At the same time, the ECBC is close to finalising a correlation analysis report under its Energy Efficiency Data Protocol and Portal which should be ready for publication by the end of August.

The report is expected to provide a concrete data set demonstrating there is a correlation between energy performance and mortgage payment disruption risk.

The report will be submitted to the European Commission and could pave the way for a lower risk weighting for energy efficient mortgage loans. The lower capital charge could then be passed on to customers by way of cheaper mortgage financing for prospective green renovation projects.

The report has been compiled with the help of several systems providers, such as credit solutions agency CRIF, TXS, European Data Warehouse and Hypoport. The correlation analysis is being conducted by Venice University, Trinity College in Dublin and Goethe University Frankfurt.

The ECBC has also involved large utility companies, such as E.ON, which is active in most European countries, serving over 50m customers. But ultimately the project hinges on the ability to provide appropriate financing which has put banks and green covered bonds at its core.

Intesa Sanpaolo, Nordea and Nationwide Building Society have all recently made efforts to provide new green mortgage financing that is specifically designed to fund home improvements to enhance the energy efficiency of buildings and reduce their carbon footprints.


Efficient label

Provided a sufficient improvement in the energy performance of a home can be demonstrated with an upgraded energy performance certification, these loans could become eligible for inclusion in green cover pools that could enhance the scope of green covered bond issuance.

For this to happen it will be important for issuers to demonstrate that they have met green mortgage collateral standards for refurbished buildings, which is more complicated than meeting standards for new buildings. 

The energy efficient mortgage label is a transparency initiative that dovetails with the ECBC’s harmonised transparency template and will be unveiled in November. 

The ECBC’s energy efficient mortgage initiative can “create fertile soil for our pilot banks when implementing the energy efficient mortgage label”, said Bertalot.

The label is expected to be revealed just as further plans for the capital markets union are scheduled to be announced. “We are really trying to be at the front and centre of the green renaissance,” said Bertalot.


New financing on the way

The ECBC has already made extensive use of the European Union’s Horizon 2020 programme that is designed to improve Europe’s competitiveness and, according to Bertalot, September will be the last opportunity to apply for more Horizon 2020 project funding.

The ECBC has already won funding of €4.5m for its members to support and promote energy efficient mortgage funding by setting out action and implementation plans, as well as a data collection portal. 

“We now preparing eight new projects which could bring additional €15m to support. The prospective funding projects that the ECBC is seeking funding for are based in Denmark, Italy, Turkey, Hungary, Ireland, Germany and the Netherlands.

The funding will support 50 member banks that are taking part in a pilot phase to create national hubs, in order to further promote lending for building improvements that will boost their energy efficiency.

The ECBC has also been working closely with the team supporting European Commissioner, Valdis Dombrovski, who is responsible for financial stability, financial services and capital markets union, and Kadri Simson, the European Commissioner responsible for energy.

By Bill Thornhill
04 Aug 2020