How mortgage banks should manage transition risks from EPBD

Consequences of the transition to a carbon-neutral economy are predictable transition risks that banks should focus more on in the short and medium-term perspective.

Banks are swiftly recognizing the impact of climate-related risks on their operations, with this year marking a pivotal moment as these risks became integral to disclosure requirements (Pillar III). The European Banking Authority (EBA) is actively working to also incorporate climate-related risks into the capital requirements (Pillar I), linking it closer to the core operations of the banks.

Simultaneously, the Energy Performance of Buildings Directive (EPBD) is introducing comprehensive requirements for energy renovations in Europe's building stock. Trilogue negotiations are expected to end during the winter, revealing the directive in full detail.

The directive is likely to mandate achieving a national average of energy class D by 2033. According to Hemma's data, nearly 50% of detached houses in Sweden currently fall below energy class D and the data gap of houses without EPC is significant, posing a challenge to meet the target.

Banks should consider the cost of energy renovations in their valuations, as it may drive up loan to value ratio for some customers. According to the National Association of Villa Owners, renovations of SEK 550,000 are required to take a villa of 100 square meters from energy class G to D.

Banks are urged to prepare for potential impacts on property valuations and to adopt a risk-based approach to energy performance in their pricing, a practice not currently commonplace. A proactive approach from banks towards customers is needed to succeed in activating consumers to invest and renovate.

Here's a three-step guide for mortgage banks to effectively navigate and manage EPBD risks:

Step 1: Understand regulatory changes

Begin by thoroughly understanding the implications of the EPBD. Stay informed about the directive's requirements, timelines, and proposed changes to energy classes. This foundational understanding will lay the groundwork for strategic planning.

Step 2: Conduct a portfolio analysis and assess the impacts on valuation and affordability

Perform a comprehensive analysis of your mortgage portfolio for detached houses. Identify properties that may be particularly affected by the EPBD's energy renovation requirements. This analysis will help you gauge the potential impact on valuations and prioritize risk management efforts. Hemma’s portfolio analysis offers comparable energy performance data for all single-family homes through high-resolution bottom-up data and advanced AI models.

Step 3: Proactively support customers in the transition

Empower your customers in their journey towards energy efficiency. Offer products and services that align with the EPBD's objectives, providing financial support or incentives for energy-efficient renovations. By actively supporting your customers through the transition, you not only enhance customer satisfaction but also mitigate risk and ensure a sound mortgage portfolio.

Hemma can help you to get started

Successfully navigating the transition risks posed by the EPBD requires a strategic and proactive approach. Mortgage banks that succeed in navigating transition risks can position themselves as leaders in the evolving landscape of a carbon-neutral economy. This is not a quick-fix, it requires continuous focus over a long period of time. 

Hemma can help you in all three steps above, we are happy to be your sparring partner on how to interpret incoming regulatory requirements and prepare your organization for the upcoming requirements. Interested in learning more about our solutions and how it can power your green transition initiatives? Get in touch.

About Hemma

Hemma is the leading SaaS-platform in Sweden for collecting, processing and delivering high resolution, primary data for energy and climate transition of private-owned properties. We help mortgage banks operationalize and drive proactive actions in consumer dialogues and all related support processes.