It’s time to refocus on Net Zero

Article originally published in The Intermediary Sept 2024 – page 46

If you ever needed reminding about the breadth of work facing the UK’s homeowners and everyone in that value chain to meet our commitments to net zero in 2050 then the recent announcements from government underline its commitment to the goal.

Following Labour’s landslide election result the new Prime Minister and Chancellor of the Exchequer have been quick to get their early policies out of the door.

One, heralded as “new rules” by many commentators, has been the reintroduction of energy efficiency rules requiring landlords to improve let properties’ energy performance certificate ratings to a minimum band C. The revised deadline has been set for 2030 – a more lenient timeframe than under previous Conservative policy, which had initially proposed these improvements be made mandatory by 2028, before ministers ditched the plan altogether. The new government’s decision to put these rules back in place is welcome, and a move widely anticipated by private landlords, most of whom had already begun investing in improved energy efficiency.

It’s an important signal to the property industry more broadly that there is a renewed commitment to the UK’s net zero targets, and it builds on legislation introduced earlier this year for the new build market that stipulates that developers factor in an element of biodiversity net gain when planning projects.

The intention is to make sure that habitats for wildlife are left in a measurably better state than they were before the development. In England, a biodiversity net gain of 10 per cent minimum has been mandatory since 12 February. Guidance on the government website advises developers to consult an ecologist to measure the biodiversity value of a plot’s existing habitat and advise on suitable habitat creation or enhancement for the land. There is a statutory biodiversity metric which takes different factors into account, including the habitat’s size, condition, strategic significance and type.

It has so far not been easy to assess its implementation. according to the rules, there are three ways a developer can achieve a biodiversity net gain of 10 per cent. They can create biodiversity on-site within the red line boundary of a development site. If developers cannot achieve all of their biodiversity net gain on-site, they can deliver through a mixture of on-site and off-site. Developers can either make off-site biodiversity gains on their own land outside the development site, or buy off-site biodiversity units on the market. If developers cannot achieve on-site or off-site biodiversity net gain, they must buy statutory biodiversity credits from the government. This should be a last resort. The government will use the revenue to invest in habitat creation in England. At the moment, figuring this out is a consideration that lies firmly in the lap of developers.

But it won’t be long before lenders will have to get their heads around it. Lending against new build homes that must pass this legislative benchmark will require a new level of due diligence – specifically at balance sheet level. Lenders’ own net zero targets require a much more granular understanding of carbon emissions contained within the business, both directly and indirectly.

National Grid definitions Scope 3 emissions rules encompass emissions that are 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’s indirectly responsible for up and down its value chain.

An example of this is when we buy, use and dispose of products from suppliers. Scope 3 emissions include all sources not within the scope 1 and 2 boundaries.

The implications of biodiversity net gain legislation will have an increasingly material impact on lending decisions as new developments complete and buyers apply for mortgage finance. But while the government may have considered the metrics by which a net gain can be recorded by the developer, there is virtually no understanding of how this legislation should be measured when it comes to lenders’ financial exposure. When added into the energy efficiency exposure melting pot for lenders, things get even trickier.

Lenders are already grappling with how to assess and quantify carbon emissions exposure when it comes to assets already on their balance sheets. Much of the data available to them to inform that assessment lies in energy performance certificate bandings. Given homes need only undertake an EPC assessment at point of sale and certification is valid for the following 10 years, data is often inaccurate and outdated.

Renewed momentum for greener solutions under the Future Homes Standards is widely viewed as positive in the housing industry, but there are big challenges still to overcome when it comes to measuring deliverability.  Central to that is including the real volume of housing. Existing stock cannot be ignored.

It’s tempting to think the workload as it stands for lenders is slightly overwhelming but the solutions and the data partners are here to help with all these elements. It’s time to refocus on Net Zero.