EU building renovation for energy efficiency and the role of banks

The Russian invasion of Ukraine and rising fuel prices have forced EU countries to reevaluate their energy policies, bringing energy efficiency and building renovation into sharp focus

Energy has become the defining issue of this decade. But, across Europe, there currently seems little prospect of hitting the target of carrying out “deep building renovation” on 3% of buildings per year and cutting emissions from buildings by 60% by 2030.

In France, for instance, the government has earmarked €5.8 billion of EU pandemic recovery funding for building renovations. This would only be sufficient to cover 108,000 efficient home renovations – far short of its own target that would require renovating 700,000 homes every year, argues Stanislas Jourdan, Head of Policy at Positive Money Europe.

The size of the subsidies is reaching €28 billion per year

Other countries like Italy and Spain have also tried to address this with a range of subsidies. Those schemes, too, face serious financial limitations. The size of the subsidies required is huge, reaching €28 billion per year in France, according to the French Unlock campaign coalition. But even if the funds were available, governments find it hard to target them effectively. The results are the paltry renovation rates mentioned earlier.

It’s clear that we’re not doing a good enough job to help homeowners with better information and tangible support in identifying how to make their homes more energy efficient and finding the money to do it.

“It’s clear that we’re not doing a good enough job to help homeowners”

There is, however, a solution to overcome this bind: getting banks to play their part.

The Mortgage Portfolio Standard and banks

Well over 70% of households in Europe own their homes, and a third of those have mortgages. With the right combination between bank loans and public subsidies, these homeowners would definitely be happy to invest in making their home more energy efficient. But very few banks currently offer adequate lending products with low rates and long-term maturities, which are suitable to make renovation investments affordable and profitable from a household perspective.

Change can happen this month as the European Parliament will vote on the Energy Performance of Buildings Directive (EPBD). As things stand, the European Parliament is set to approve the Commission’s proposal for a Mortgage Portfolio Standard (MPS). Mortgage Portfolio Standards (MPS), would oblige banks to collect the energy performance certificate data for all the properties in their lending portfolios, and report them to financial supervisors so that member states can develop publicly available databases.

The MPS would also require Member States to establish binding targets for banks to increase the energy performance of the buildings in their portfolios, with a priority on making loans available to homeowners with the worst-performing buildings, for full green renovation instead of partial measures.

This measure is strongly supported by the pan-European Unlock campaign, which brings together a diverse coalition of civil society organisations, campaigning groups and renovation experts, including Positive Money Europe, WWF, Reclaim Finance, Renovate Europe, Agir pour le Climat, Asufin, Association négaWatt, Institut Veblen, Dorémi, Fondation Abbé Pierre, the Shift Project, and le CLER.

EU-wide, strong and well-regulated MPS

The European Central Bank has published an opinion that emphasises the importance of an EU-wide, strong and well-regulated MPS with minimum requirements that become more stringent over time, while the Institutional Investors Group on Climate Change (IIGCC) also came out in support of the idea in a letter published in December last year.

If banks provide loans for renovation to the scale needed, governments could then make their spending programmes more cost-effective by squarely targeting them at the most vulnerable households, and ensuring the necessary upskilling of the renovation workforce and tackling other supply-side barriers.

If the EU, Member States and banks at large are serious about their commitment to meeting net zero by 2050, implementing a mandatory MPS should be a natural step.

If the EU are serious about its commitment to meeting net zero by 2050, implementing mandatory MPS should be a natural step

Sadly, certain banks are intensively pressuring EU policymakers against Mortgage Portfolio Standard. They argue such a scheme should be voluntary for banks. However, most banks seem unwilling or slow to proactively act on their mortgage portfolios (with the exception of a few banks such as ING and ABN AMRO). Making MPS a mandatory framework for all banks will ensure that inaction is not an option anymore.

Additional supportive measures are also needed on energy efficiency

For instance, to mitigate the additional requirements that the MPS will place on banks, the European Commission can oversee the creation of EU and national guarantee funds for energy efficiency loans to cover the risk of default by the most vulnerable households. This would have the added bonus that by bringing down energy bills, the financial outlook of these households would improve, minimising that risk further.

Central Banks should also offer a discount rate for energy-efficient building renovations through targeted longer-term refinancing operations to further incentivise lending and reduce borrowing costs for banks and households.

This level of coordinated action would create a win-win situation for policymakers, financial institutions, citizens and the planet alike and give the EU the best chance of meeting its net zero targets.

This piece was written by Stanislas Jourdan, Head of Policy at Positive Money Europe.