Financiers tell EU to get radical on financing green projects

A high-level group on sustainable finance has advised European regulators to incentivise a more favourable treatment for energy saving loans and mortgages, which could unlock billions in lending for green building renovation programs and other green projects.

Note: This article first appeared on The Fifth Estate on 19 February.

The group’s final report says that almost three-quarters of the EU’s 2030 clean energy investment gap – estimated at around €130 billion a year (AU$204b) – is accounted for by energy efficiency in buildings, most of which is concentrated in central and east European countries where the leakiest buildings are found.

It calls on policymakers to support efforts to “exploit potential links between energy efficiency savings and mortgage loan performance”.

Some banks are already looking at ways of providing better approaches to financing energy saving programs, such as building renovation loans to homeowners. For instance, the European Mortgage Federation is developing a standardised “energy efficient mortgage”, which links efficiency improvements with a lower probability of default of borrowers.

Europe already has an energy efficient mortgages action plan.

The high-level group believes that directing investment into long-term, sustainable projects will also improve the stability of the financial system as a whole. It proposes:

• a classification system, or “taxonomy”, to provide market clarity on what is “sustainable”
• clarifying the duties of investors’ when it comes to achieving a more sustainable financial system
• improving disclosure by financial institutions and companies on how sustainability is factored into their decision-making
• an EU-wide label for green investment funds
• making sustainability part of the mandates of the European Supervisory Authorities
• a European standard for green bonds, with the establishment of a new Green Bonds Technical Committee in 2018, to develop a long-term governance structure for the EU Green Bond Standard

It also recommends:

• supporting the growth of social enterprises and the financing of social-related projects
• revaluing natural and environmental capital in economic and financial decisions
• re-orienting agriculture to a way that is more sustainable for the economy, the environment and public health

Radical advice

It’s quite radical for a bunch of high-level financiers.

The EU executive is to follow up on the report’s recommendations during the first half of March with a comprehensive action plan on green finance that will include more steps to encourage investments in energy efficiency. This will include a “harmonised taxonomy” for banks to classify different types of financial products according to their environmental performance and to prevent “greenwashing”.

Christian Thimann, head of sustainability at French insurer AXA, who chaired the group, said: “There is no claim that everything green is necessarily less risky. But the group does make the claim that taking account of environmental and climate risk and long-term sustainability may have – and in some cases must have – a positive impact on your risk analysis.”

Energy efficiency investments affect the value of a building or industrial facility “by more than just the present value of the expected energy savings”, the authors note, saying banks should be able to better identify these multiple benefits. Measuring those “would help de-risk energy efficiency investments”.

EU can easily miss its 2020 energy efficiency target

The report is timely because the EU is in sore danger of missing its target of a 20 per cent reduction of energy consumption by the year 2020 compared to baseline projections, according to the latest figures.

EU28 primary energy consumption: progress towards the energy efficiency target between 1990 and 2016

Meeting the target would mean achieving a primary energy consumption of no more than ,483 million tonnes of oil-equivalent (Mtoe) and a final energy consumption of no more than 1086 Mtoe in 2020.

But, in fact, primary energy consumption, while going lower in the interim, has decreased between 1990 and 2016 by just 1.7 per cent.

Consumption of solid fossil fuels (coal and coal products) decreased by 47 per cent and oil (including petroleum products) decreased by 12 per cent. Renewable energy use increased by 200 per cent, natural gas and manufactured gases by 31 per cent and nuclear by six per cent.

Overall energy efficiency gains in European countries since 2000

Final energy consumption in 2015 was approximately the same as in 1990, but in 2016 it had risen to 2.1 per cent above that level.

The actual final energy consumption in year 2014 was lower than the 2020 energy efficiency target level of 1086 Mtoe, but it’s gone up since then. This temporary dip was most likely due to the economic recession.

Overall energy efficiency gains in European households since 2000

Figures also show that 8.7 per cent of Europe’s 28 countries’ population on average is in fuel poverty, down from a 10.8 per cent peak in 2012, but this varies wildly by nation, with Greece being amongst the worst performers, and Norway and Switzerland amongst the best.

As a result, the high-level financiers’ report recommends that the new Sustainable Infrastructure Europe body should have a particular focus on the Central and Eastern Europe area, and have Eastern European offices.

David Thorpe’s two new books are Passive Solar Architecture Pocket Reference and Solar Energy Pocket Reference. He’s also the author of Energy Management in Building and Sustainable Home Refurbishment.