Benjamin Guin
UK residential buildings account for about 15% of greenhouse gas emissions. To facilitate the transition to a low-carbon economy, the UK government aims to see many homes upgraded to an energy (EPC) rating of C or higher by 2035. Mortgage lenders are key in transitioning to more energy-efficient housing by financing purchases. This transition can be informed by a simple metric – like the portfolio share of mortgages for energy-efficient properties (with a rating of C or higher) relative to all outstanding mortgages, a variant of the Green Asset Ratio.
This post illustrates this energy-efficient mortgage ratio (EEMR). I calculate it for all UK mortgage lenders using the end-2017 stock of outstanding residential mortgages from the FCA’s Product Sales Database. The ratio varies between 20% and 40% across lenders. The majority of lenders hold mortgage portfolio shares for energy-efficient properties of around 30%. This metric shows no apparent differences between smaller versus larger lenders, suggesting that the majority of lenders had not started specializing in mortgages against energy-efficient buildings.
Recalculating the EEMR using more recent, end-2019 data shows a similar distribution. This is somewhat surprising: there is growing evidence that mortgages against energy-efficient buildings are less credit-risky. Thus, disclosing a metric like the EEMR could help markets gauge the riskiness of lenders’ portfolios, for instance by illustrating how lenders might be affected by mortgage underperformance due to rising energy costs. This may help lenders access cheaper funding and it might improve their valuations if investors reacted to it.
Chart 1: Energy-efficient mortgage ratio (EEMR) across UK mortgage lenders
Notes: Sample includes lenders with at least 1,000 outstanding residential mortgages. Large lender with at least 5,000 outstanding residential mortgages.
Benjamin Guin works in the Bank’s Strategy and Policy Approach Division.
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This is very interesting. It would be good if banks reported on the carbon footprint (or energy efficiency) of their lending portfolios as a matter of course, as that would shed some transparency on the potential impacts climate-related risks on them. However, it’s also important to look at the impacts of banks on the climate. For example, if they focus only on lending against energy efficient buildings, they might be encouraging the demolition and replacement of less efficient ones, which would potentially have a much higher carbon impact because of the emissions from construction.
Banks should be lending in order to support refurbishment of existing buildings to improve their energy efficiency. And indeed at least one is doing so – the Ecology Building Society, of which I am a director. This may mean that the energy efficiency of the overall mortgage book is lower than it otherwise would be, because of the properties that are undergoing refurbishment, but it contributes to the much needed shift towards lower energy consumption and lower carbon emissions.