How Banks Will Help Us Transition To a Low-Carbon Society

(Original post on LinkedIn)

With pictures of climate disasters bombarding our news feeds, the need for change is more apparent now than it was before.

In a 2018 report, The Intergovernmental Panel on Climate Change (IPCC) informed the world that “to keep the global temperature rise under 1.5°C, 45% of CO2 emissions would have to be cut by 2030”.

Just take a look at our depleting CO2 Budget.

Doesn’t look promising, does it? Experts warn that the groundwork to make this happen must be laid in the following months, making the planning deadline 2020 and the overall deadline in just 11 years.

Something must be done now.

Prompted by the Paris agreement, policies are being revised and put into place, but making the leap to a low-carbon society so suddenly requires the reallocation of a large amount of capital.

Although private investors will be called in for support, most of the burden of climate change policy will lay on the government.

Governments aren’t the only entities that are stirring. Corporations are publishing their carbon footprint and transitioning to low-carbon solutions, especially after the Carbon Majors Report released by the CDP, an NGO running a global disclosure system to manage environmental impacts, in 2017.

The report showed how between 1988 and 2015, just 100 companies were responsible for 71% of global industrial greenhouse gas (GHG) emissions. The need for transparency was clear, as the approach relied on “company-reported activity data”.

From Green Finance to Green Banking

As previously mentioned, addressing the threat of climate change requires a major shift in how financial resources are allocated.

It’s widely thought that the financial sector must be on the front lines in the fight against climate change because they’re responsible for incorporating sustainability into their own portfolio.

There’s been a surge in green labelled-issuances, e.g. Green bonds, but there is a lack of transparency (that thing we said we need) in regards to what the money is used for and, therefore, the bonds aren’t necessarily always green or don’t always provide additional green value. 

Green bonds also lack standardisation, which makes it difficult to determine if the bonds are effectively green or not. To solve this, the EU and the International Organization for Standardization are both preparing a Green Bond Standard based on existing principles.

So, institutional investors, as well as central banks, have the power to influence which project or company will prosper in the future. Financial institutions, like banks, on the other hand, have the responsibility to channel those funds into the real economy to support the transition.

But how can banks support the transition?

Let's zoom in on the most important aspect of the community: the individual, without whom there wouldn’t even be a community.

It’s the bank’s responsibility to direct the individual towards Energy Efficient (EE) solutions for their home while educating the client on the positive socio-economic impacts. 

So, whether they’re planning on renovating to improve the environmental performance of their building, or looking to buy a new EE building with an existing sustainability rating, Energy Efficient Mortgages should be put on the table. 

So, what’s so good about these "green" mortgages?

It starts, as always, with the borrower of the mortgage.

Apart from contributing less to the quasi-apocalyptic climate crisis, EEM borrowers enjoy discounted rates and successfully lower their energy bills.

This decreases the probability of default as the borrower has more money to direct towards repayment of the loan.

A Bank Of England working paper has found that "mortgages against energy-efficient properties are less frequently in payment arrears" and, while there may be variables we don't know of, energy efficiency should be a factor when calculating the probability of default.

So, the lender/loan originator gets access to cheaper funding as a result of the lower probability of default.

Investors will have the chance to use their money to contribute to causes that are important to them without compromising their possible returns.

In fact, they will also be fully aware of how the projects they invest in are planning to deal with climate change risk. Not to mention being put in a good light and diversifying their portfolio.

The first and most important factor for Governments will be the decrease in emissions from residential buildings. Then, access to a qualitative and quantitative database on green-labelled financial products, which will aid in monitoring the impacts.

The benefits for Society as a whole include reduced energy consumption, increased wealth conservation, and the decrease in carbon emissions.

SMEs and the Real Economy will be active in the retrofitting of buildings to become more energy-efficient. Moreover, this all fits in perfectly with the Juncker Plan, a European investment plan that aims to increase the levels of investment that have been declining since the 2008 financial crisis.

The European Fund for Strategic Investments (EFSI), one of the central pillars of this plan, aims for “40% of its infrastructure and innovation projects to contribute to climate action in line with the Paris Agreement”.

It sounds too good to be true, but I'm not making it up!

Green mortgages exist and there’s an initiative in place that will give us the opportunity to access them.

Introducing: The Energy Efficient Mortgages Initiative - a European effort against Climate Change.

It consists of two parallel projects, the “Energy Efficient Mortgages Action Plan” (EeMAP) and the “Energy Efficient Data Protocol and Portal” (EeDaPP), and is funded via the European Commission’s Horizon 2020 Programme.

The EeMAP is a market-led initiative that is determined to design and deliver a standard "green mortgage".

The EeDaPP aims to "design and deliver a market-led protocol to enable the recording of data relating to energy efficient mortgage assets and which will be made accessible via the design of a common data portal".

After three years of engagement and consultation with banks, borrowers, real estate advisory services providers, and environment professionals, the Initiative was created.

Until now, 47 lending institutions, which account for 55% of outstanding mortgages in the European Union, have signed up to the Energy Efficient Mortgages Pilot Scheme.

The Pilot Scheme is currently determining the feasibility of such an implementation.

The lending institutions involved in the scheme are supported by 32 Supporting Organisations and by an Advisory Council.

Here you can find the lending institutions, supporting organizations, and advisory council that are a part of the pilot scheme. 

The supporting organisations include energy providers, green building councils, technology companies and more.

Here you can discover the latest brainchild of Tesobe, a tech company in Berlin.

I'll give you a clue: You can build green sandcastles in it!

#ClimateChange #EnergyEfficiency #GoingGreen