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FIGCovered Bonds

Revised Taxonomy will hinder green bonds


The European Commission’s draft Taxonomy for Sustainable Activities will stymie green bond issuance as it’s based on an unfair system that excludes mortgages on many countries’ most energy efficient buildings.

Last November, the Commission said it would only consider mortgages with an Energy Performance Certificate rating of ‘A’ as being eligible for its Taxonomy.

This was met with howls of derision from the covered bond market, as it would have reduced the amount of energy efficient mortgage collateral that was compliant with the Taxonomy, severely hitting green senior unsecured, covered bonds and RMBS issuance. At the time market participants said it would kill the FIG green bond market.

This is because to date green issuance has been based on standards set by the International Capital Markets Association and the Climate Bonds Initiative that rely on financing the top 15% most energy-efficient buildings in any single country.

Indeed, the Commission’s own Technical Expert Group recommended following this approach because it is simple, transparent and ensures that all building stock in any country will improve over time as member states introduce new and higher building standards.

But instead of accepting the TEG’s advice, the EC’s latest revised draft, which was announced two weeks ago, counts building stock with EPC ratings of ‘A’ and ‘B’ as eligible for the Taxonomy.

There are eight countries in the EU with a high stock of buildings with EPC grades of ‘A’ or ‘B’. That means they can continue to issue green bonds secured on energy-efficient mortgages.

However, there are many other member states where the numbers of such buildings are too small to allow for this, such as Bulgaria, Italy or Spain, meaning lenders could no longer finance greening existing building stock with green bonds.

Another quirk of the revised Taxonomy is that a property with no EPC label can be eligible for it, if a study shows it is on of the top 15% of energy efficient buildings within a country. Therefore, sometimes it will be better not to obtain an EPC certificate to qualify for the Taxonomy — surely not the intention of the rules.

The biggest net reductions in energy use and carbon emissions come from improving the most energy inefficient buildings. That is to say, if the Taxonomy is to have any real impact, it needs to permit financing renovating buildings that lack the top EPC ratings, or ensure that new buildings are built to the highest standards rather standing outside of the system.

The Taxonomy’s continued reliance on EPC ratings also penalises countries that set the highest energy performance standards as EPC ratings apply different standards to different countries. For example, based on energy consumption, an EPC rating of ‘A’ in Austria or Norway equates to an EPC rating of ‘D’ in Portugal and ‘B’ in Germany.

Aiming for an EPC ‘A’ label would be a fine goal, if the standards were harmonised. But equally important is getting more existing buildings up to that standard.

To do this the Commission needs to address the whole green mortgage market as it is, and not exclude large parts of it at the stroke of a pen.

It must take its own Technical Expert Group’s advice and make all of the top 15% of energy efficient properties across the EU eligible for the Taxonomy — with no exclusions.

Banks across the EU will then be able to issue the green deals that finance energy efficient mortgages which investors are clamouring for.