Residential mortgage lenders: proposals to improve energy performance
In June 2019 the UK legislated for a target of net zero greenhouse gas emissions by 2050. The government’s target for zero carbon buildings seeks to implement this reduction in part by improving energy performance of all buildings.
The consultation builds on feedback received in relation to BEIS’s previous call for evidence issued in October 2017 and arising out of the government’s Clean Growth Strategy. That call for evidence identified lack of finance as a barrier to investment in energy efficiency improvements by owner-occupiers.
In July 2019 the government published a Green Finance Strategy and set out its intention to grow the market for green finance products to support home energy performance improvements. The consultation follows an announcement made by the government in October 2020, as part of its response to the 12th annual progress report of the Committee on Climate Change, that it would explore the merits of setting requirements for lenders as set out in the Green Finance Strategy.
The two main proposals from BEIS are:
- annual disclosure by lenders of portfolio-wide energy performance certificate (EPC) data and the gross value of loan facilities with the purpose of funding energy performance improvement works – the intention is that this will allow for comparison of data between lenders; and
- a target-based approach for lenders based on self-regulation and voluntary targets for improving the energy performance of their residential property portfolios. The government's preferred option is that lenders voluntarily agree to meet a portfolio average of EPC Band C by 2030, to align with the proposed increase of minimum energy standards in the private rented sector. The consultation also considers the introduction of mandatory targets (subject to further consultation and analysis) to ensure a “comparable effort across all lenders.”
BEIS has identified mortgage lenders as being “uniquely placed to influence mortgagors at critical trigger points, such as home purchase, renovation or re-mortgage” and believes that they could “play a vital role in driving the home energy performance improvements required to meet…Carbon Budgets and [the] net zero target.”
The consultation identifies a number of green factors in lending decisions, including improved energy performance being a predictor of lower mortgage payment arrears and resulting in lower credit risk (lower utility bills facilitating ability to make mortgage/ rental payments) and the risk of stranded assets if landlords fail to comply with regulations/legislation.
One of the suggestions is the introduction of annual reporting of average EPC ratings by mortgage lenders, with year-on-year comparisons, initially on a voluntary basis and eventually as a mandatory disclosure. This reporting requirement would cover all regulated mortgage lenders undertaking mortgage lending in England and Wales, regardless of the size of their portfolio, and would apply to privately-rented properties financed by buy-to-let mortgages.
It is standard for lenders to request that an EPC is delivered for properties they are financing, however, the proposal could also require lenders to collate energy performance scores by which to measure the potential for energy performance improvement within the portfolio. The proposals even go as far as providing a public “league table” of lenders.
It is noteworthy that approximately 90% of mortgages in the UK are held by just 19 lenders and therefore further consultation has been sought on reporting requirements for smaller lenders and we would encourage anyone with an interest in the market to have their say.
The government’s target-based approach aims to drive energy performance improvements, given the position of lenders in influencing a mortgagor’s approach to energy performance when purchasing property. Current proposals include a voluntary target portfolio average of EPC Band C, to be achieved by lenders by 2030, with a mandatory backstop date to follow.
This aligns with the recent private-rented sector consultation, in connection with tightening minimum energy requirements. This also sits alongside the Green Home Retrofit Finance Principles (GHRFPs) launched in September 2020, and prepared with input from the Loan Market Association, and which provide guidelines for financial institutions who are lending for improvement works to be carried out to improve the energy efficiency of domestic buildings.
The consultation acknowledges that there are potential challenges to the introduction of targets including consumer awareness of energy efficiency, the impact on owners in fuel poverty and limitations on tenants in leasehold properties.
This consultation is one element in Rishi Sunak’s efforts to “build out a green curve” in the UK economy. Financial reporting is a key element in which UK businesses will form part of the ‘green taxonomy’ – including the Financial Reporting Council’s publication of a report on the growing impact climate-related issues pose in regard to disclosure and corporate governance.
Mandatory climate disclosures have been proposed as part of the Taskforce on Climate Related Financial Disclosures (TCFD) – which published an interim report covering the future landscape of corporate disclosure across a broad variety of sectors.
More information on these reports and a detailed analysis of the changing regulatory environment surrounding environmentally sustainable growth can be found in separate recent update available here.
Additional reporting for this article was provided by trainee finance lawyer Sam Taylor.