Sophie Sweatman

As we head through winter in Europe, when billions of Euros are spent helping people heat their homes, the EU’s Energy Performance of Buildings Directive outlines ways to reduce running costs, raise property value and increase jobs and financial security in the renovations sector. Ironically, the energy crisis has spurred some real progress.

Inefficiencies in both the residential and commercial sector form a vicious circle, as building owners claim a “lack of finance” while green mortgage and renovation loan lenders report they are “underwhelmed” by customers. The new directive looks to energy efficient lending institutions to engage with homeowners to renovate their homes with suitable financial products.

In Climate Strategy and Partner’s Report “Engaging Retail Lenders in Home Renovation”, Chief Executive Peter Sweatman and lead researcher Mauricio Yrivarren reveal: “Over a quarter of EU homes have a mortgage and this channel to discuss energy savings is underused. Lenders could offer and process the millions of energy renovation loans, or green mortgage top-ups, annually required to deliver the finance needed to upgrade and modernise the EU’s buildings.”  

The International Energy Agency (IEA) shows how policy action is turning into deployment and investment. The IEA says: ‘The energy crisis has unambiguously accelerated the energy transition, with energy efficiency policy action a central plank of government initiatives.”

Research shows 70% Europeans own their homes, 17% of these or 50 million homes are mortgaged and a larger percentage are debt free. Then European banks say 40 million current borrowers are not eligible for further mortgages. As insufficient public funding is available to renovate those homes, the new directive looks to private lenders to finance renovations.

With a total estimate for building renovations set at 2 trillion Euros, 1 trillion of that would be required to renovate homes not served by mortgage lenders, where renovations to the “low hanging fruit” of under-served inefficient homes could meet half the CO2 reductions laid out in the Paris Agreement for 2030. At COP28 in Dubai on the 6 December 2023, a pledge was made called “The Buildins Breakthrough: Global Push Near Zero Emission and Resilient Buildings by 2030“

Focus is on how ready retail lenders are, to finance the EU energy efficiency challenge in buildings. An in-depth report about engaging retail lenders with home renovation by Climate Strategy and Partners (CS&P) shows how introducing Mortgage Portfolio Standards into EU law, private finance can be unlocked to “green buildings”. Lenders would be required to improve the energy efficiency of the buildings they mortgage to meet the 2030 and 2050 energy targets.

While the CS&P’s report shows there are 7 trillion Euros in outstanding mortgages, making lenders the biggest stakeholders in Europe’s building stock, “experts assert that to meet its 2030 climate targets, Europe will need to invest upwards of €2.75 trillion to renovate 35 million buildings over the next decade” says Peter Sweatman.

Published this month, drafted over the course of 2023, Engaging Retail Lenders in Home Renovation outlines ways to engage retail lenders after receiving responses to a sustainable finance questionnaire from the 30 top banks in Europe. A renovation wave can be delivered through a variety of public and private blends of finance including the EU Renovation Loan, by improving the market’s understanding of different segments of homeowners.

The IEA believes that energy efficiency measures can deliver half the CO2 reductions target for 2030 set out in the Paris Agreement. To achieve EU buildings improvements over the next 7 years, 1.5 trillion Euros must come from the private sector and 500 million Euros from public funding.

While cars and white goods are sold through hire purchase and other innovative and competing sales packages, there is a lack of attractive “point of sale” finance options for buildings renovations. This is despite the returns on investment from increased financial security, energy savings and better health from reduced emissions, which are achieved ongoingly once the improvements are made.

Potential customers are left to navigate complicated admin and procurement procedures unassisted, although there is a historically high amount of public subsidy for buildings renovations via recovery and resilience funding. Most banks already with net-zero targets have seen the decrease in mortgage arrears and defaults when energy efficiency is improved.

Five key proposals made by Climate Strategy and Partners on the recast Energy Performance of Buildings Directive in their report are:

• Minimum Energy Performance Targets (MEPS) – renovations and energy efficiencies can be accelerated and emissions reduced by identifying the worst performing buildings and starting improvements on the “low hanging-fruit”.
• Fully funded government grants for renovations for the energy poor would make it easier for them to renovate their homes. Likewise, tackling inefficient housing stock reduces living costs and emissions. Permanent local renovation offices could provide application process, procedure, project management and technical assistance.
• Retail lenders to benefit from a new EU-level renovation loan and/or guarantee facility, particularly to promote home renovations to the elderly and low-income families, who may not be eligible for further mortgages. Banks say these 20% existing customers account for 40 million homes, estimated to cost 1 trillion Euros to renovate. The launch of an EU Renovation Loan, or the offer of a new EU-level guarantee, would increase the ability of lenders to cater for this substantial renovation segment.
• A Mortgage Portfolio Standard – over 10 of the top 30 European banks already have a voluntary MPS, while most of the others are coming to realise how an MPS is needed to deliver on their net-zero commitments. A Commission-led Delegated Act process can convene Europe’s leading lenders, experts and member states to build from the many existing best practices and help define technical standards and guidance to achieve these goals.
• Buildings energy performance data to be made available through the buildings renovation supply chain and to homeowners. Policy can ensure an increased amount of better-quality energy use and performance data. This will help residential and commercial buildings owners prioritise cost effective renovations, add value to their properties and reduce operating costs. Availability of this data means contractors, financiers and trusted project managers can work together to resolve the complexity of renovations. Fundamentally, building owners require reliable energy records, support and simplicity of process, while digital logbooks, building renovation passports, AI, proxies and improved and advanced EPCs can be utilised.

A comprehensive strategy for commercial and residential building owners, lenders, policymakers and renovation providers to use the tools provided under the EU’s Energy Performance of Buildings Directive can achieve net-zero commitments while bringing financial security and resilience, reduced living costs and better health from reduced emissions to millions of people and businesses both at home and at work.

The source of this information is an article by Peter Sweatman on the Euroactiv website dated 8 December 2023 entitled: Five hidden gems in the EU’s recast buildings directive. NB: The 5 proposals above appear in Climate Strategy and Partners report “Engaging Retail Lenders on Home Renovation” not the provisional agreement announced on 7th December to strengthen the strengthened Energy Performance of Buildings Directive (EPBD).