A senior Bank of England (BoE) economist has called for banks and other lenders to disclose the green mortgages they hold as a percentage of their total portfolios.
Writing for Bank Underground, the BoE staff blog, Benjamin Guin said that mortgage lenders are key in transitioning to more energy-efficient housing, but have yet to recognise the credit benefits of doing so.
Guin has calculated a simple energy-efficient mortgage ratio (EEMR), which he defines as “the portfolio share of energy-efficient mortgages relative to all outstanding mortgages”.
Outstanding residential mortgages in the UK were cross-referenced with residential energy performance ratings for 2017 and 2019. Guin found that the ratio of mortgages of energy-efficient properties to the total portfolio varied between 20% and 40% across UK lenders, with no apparent differences between smaller versus larger lenders and no change during the two years studied. This suggests that most lenders have not started specialising in mortgages for energy-efficient buildings, he says.
Pointing to growing evidence that energy-efficient mortgages are less credit-risky, Guin suggests that EEMR disclosure would make this risk differential more visible. This offers the potential for cheaper funding and higher valuations for market participants focusing on the security of energy-efficiency in their portfolios.
By illustrating how lenders might be affected by mortgage underperformance due to rising energy costs, the EEMR can also help investors and financial regulators to assess the exposure of banks to energy price shocks, and to the transition risks involved in the increasingly urgent move to a sustainable economy.
As Russia’s invasion of Ukraine focuses minds on the price instability and deep insecurity associated with fossil fuels, the EEMR also offers central banks a potential tool to target lending in support of energy security as well as climate change mitigation.
Leading UK civil society groups have called on the BoE to lower borrowing costs for green activities in its targeted lending schemes, especially for energy efficiency measures taken by SMEs and households. European groups have called for similar measures from the European Central Bank, offering proposals on how small changes in its Targeted Longer-term Refinancing Operations (TLTRO) programme could help pay for energy efficiency retrofits across Europe.
Benjamin Guin is a senior economist in the BoE’s prudential policy directorate, currently researching climate risk and its implications for policy and regulation.
This page was last updated March 22, 2022
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