On 12 December 2017, Green Tagging emerged as the new strategy for Europe’s leading banks to scale up financing of energy efficient housing and real estate, concluded a new report from Climate Strategy and the UN Environment Inquiry into the Design of a Sustainable Financial System. The report was released in Paris alongside the One Planet Summit hosted by France’s President Emmanuel Macron.
"This report describes how 10 European banks – ABN AMRO, BBVA, Berlin Hyp, HSBC, ING, Lloyds, SEB, Suedtiroler Volksbank, Triodos and UniCredit – are beginning to identify, analyse and promote green finance for housing and real estate through the direct attribution of environmental characteristics in their lending and debt capital markets operations,” introduced Peter Sweatman, co-author of the report and chief executive of Climate Strategy & Partners.
Green Tagging refers to a systematic process where banks identify the environmental attributes of their loans and underlying asset collateral as a tool for scaling up sustainable finance. The Green Tagging of bank assets allows for easier access to green bond markets, better tracking of green loan performance and provides greater transparency of climate risks and portfolio resilience.
Green Tagging is applicable for all areas of banking and investment, but he pace of change is clearly accelerating around real estate and energy efficiency and is driven by a number of factors:
- Financial innovation: Banks are designing a new range of green finance products both in terms of lending, but also in debt capital markets and securitisation.
- Policy priority: Energy efficiency in buildings is the area where there is the greatest investment gap to deliver Europe’s climate goals
- Market disclosure: Initiatives such as the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) are prompting banks to become more focused on quantitative reporting on green finance.
- Financial regulation: The EC’s review of the European Supervisory Authorities concluded that the ESAs should now “promote sustainable finance, while ensuring financial stability”. Sustainability is part of the new securitisation framework and is being taken forward by national regulators in France, Italy, Netherlands, Sweden and the UK
Based on a survey of the 10 participating banks, the report identifies five key trends around green tagging:
- New green business opportunities are a stronger incentive for green tagging than improved risk management for banks at present and that this practice is often led by commercial real estate groups and wholesale finance in banks.
- While there is no clear definition of “green”, energy efficiency and greenhouse gas emissions are the green attributes seen as most material by banks and their stakeholders.
- The financial case for green is sufficiently compelling for banks to undertake green tagging without a perfect, multi-annual green performance data history.
- There is a strong case for connecting green tagging with the maturing agenda on the links between sustainability factors and prudential regulation as the inherent risks of non-green assets is not yet a leading driver for banks to implement green tagging.
- Financial institutions want to continue to investigate the correlations between financial performance in mortgage portfolios with energy performance.
The report concludes by recommending series of next steps for 2018:
- Assess the quantitative relationships between building performance and loan performance: Market players and policymakers still lack more robust analysis of how energy performance of buildings related to loan performance. This would provide the foundation for better loan pricing, stimulus for market development and feed-into regulatory alignment.
- Build a common EU database of EPCs and other building data: Tagging is currently held back by a variety of barriers that prevent easy matching of EPCs with loan data. Banks need more transparent availability of EPCs and buildings performance and energy usage data across Europe.
- Evaluate the links between building performance and regulatory capital: In the context of the review of the European Supervisory Authorities, green tagging needs to be considered as an important tool for banks to understand the environmental exposures in their balance sheets.
- Focus on real estate as a pilot for a common classification system: Efficient markets require shared protocols for defining financial attributes. Work is underway for a common EU classification system for sustainable assets. After renewable energy, real estate offers a financially sizeable and environmentally significant sector to focus on for convergence.
- Connect green tagging with the new EU securitisation rules: To help implement Article 10 3a, banks could begin to tag the energy performance of the underlying property as a voluntary data field.
For further information, please visit the relevant EMF-ECBC webpage at the link below.