Explain the savings, deliver the change

Article originally published in The Intermediary January 2024 – page 14

At the inaugural Green Mortgage Summit in Manchester in July this year, Richard Rothwell, commercial development director at Leeds Building Society said, “There’s far more data available to us now. That EPC never used to mean anything to us or a purchaser of a home. It absolutely means everything now. We have all these new data points that we’re factoring into decisioning and our pricing for mortgages.”

His point is an interesting one because it recognises the fact that no matter how quickly the housing and mortgage industry tackle climate issues, the public mood has turned. The cost-of-living crisis and inexorable rise in the cost of domestic energy has meant people want better energy performance from their properties.

There are tell-tale signs in every market. The recent uptick in Equity Release market has prompted some to speculate whether some older home-owners in older less energy efficient homes are taking the product to cope or make repairs that are overdue. Fuel poverty affects the old and the young alike.

The event in Manchester was born out of the GFI’s local partnership with the Greater Manchester Combined Authority and brought together over 60 key industry stakeholders to explore what the green mortgage market needs to scale and how the market can collaborate to enable the decarbonisation of more homes.

Richard’s point about data underpins the entire thing; without data, there is no starting point and no yardstick to measure progress. That event was held six months ago and in the intervening months, more lenders are moving into the process of quantifying their exposure to emissions not directly under their control.

The National Grid defines scope 3 emissions as those not produced by the company itself and are not the result of activities from assets owned or controlled by them, but by those that it is indirectly responsible for up and down its value chain. Analysis by Nationwide suggests that the 29 million residential homes in the UK account for around a fifth of the country’s greenhouse gas emissions.

If we are to meet the government’s commitment to net zero emissions by 2050, the mortgage industry must undertake an enormous task. New build minimum efficiency standards will help, but they cannot come near to solving the problem. Retrofitting existing housing stock must make up the bulk of strategy to decarbonise the sector. This puts the onus squarely on lenders.

By far their biggest footprint is their mortgage lending – the climate risk sitting in their back books.

Until now, the focus has been on developing green mortgage products designed to facilitate homeowners who want financial support to retrofit their properties. Between 2019 and today, the number of green mortgage products has risen from four to more than 60, according to GFI. That said, take-up has been much slower than hoped, hampered by the cost of living crisis along with a lack of awareness among homeowners who simply do not know where to start.

More meaningful scale is needed and in November the Green Finance Institute published a report looking at the potential for a Property Linked Finance (PLF) scheme to help deliver it. Given that the UK has some of the oldest and least energy efficient homes in Europe, with buildings responsible for around 23 per cent of the UK’s annual greenhouse gas emissions, they estimated that £360billion of investment will be required to upgrade the UK’s inefficient buildings by 2050.

PLF is not currently available in the UK but is based on the US Property Assessed Clean Energy (PACE) model, which has unlocked investment of over $13billion to make homes and commercial buildings greener and more resilient, according to US trade body PACENation.

The report states: “Developing and introducing PLF to the UK market in collaboration with the finance and retrofit industries, has the potential to enable between £52 billion and £70 billion of private capital into upgrading 2.1 million EPC D rated and below owner-occupied homes.”

PLF allows property owners to fund up to 100 per cent of energy efficiency upgrades upfront. The finance is linked to the property rather than the property owner. This means the payment obligation transfers to the new owner when it is sold.

Property owners only pay for energy efficiency measures until they sell their property, while new buyers benefit from a more energy efficient, potentially more valuable property, in return for continuing to make regular payments towards the upgrades.

There is no doubt that people are increasingly interested in improving the energy efficiency of their homes.

With energy bills set to go up again in January, according to Cornwall Insights, cutting energy waste in homes with poor insulation has the potential to save families hundreds of pounds a year.

To motivate that behaviour change however, the industry must show customers how they benefit in a meaningful way and that means putting a figure on the possible savings. It also means accurate data and more of it.