4 QUESTIONS FOR…

Louise O’Mahony, Head of Sustainable Banking at Banking & Payments Federation Ireland, on the EPBD

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Louise O’Mahony, Head of Sustainable Banking at Banking & Payments Federation Ireland, guides us through the transformative changes brought about by the in the European Union. Published by the European Commission in 2021 and currently undergoing final negotiations, the EPBD targets a radical reduction in building emissions, addressing the significant role buildings play in the EU’s energy consumption and emissions. The legislation, a key component of the “Fit for 55” package, aims to shift towards a climate-neutral built environment aligned with the EU’s climate goals. With Louise, we explore the major shifts, including increased renovation rates, enhanced energy performance information, and the imperative for climate-neutral buildings by 2050. Our focus extends to the impact on banks, their preparations, and the opportunities arising for supporting transition finance in this dynamic regulatory landscape.

1. What major changes can we expect from the EPBD and when will they take effect?

The review of the Energy Performance Buildings Directive (EPBD) was published in 2021 by the European Commission and is currently under final negotiation. The legislation seeks the radical and rapid reduction of building emissions within the EU, a critical objective, given the built environment is responsible for 40% of the EU’s energy consumption and 36% of its energy-related emissions.

Delivery of this legislation by the end of the year will put in place a key aspect of the European Union’s “Fit for 55” package, the legal obligation to reduce EU emissions by at least 55% by 2030 and to be climate neutral by 2050. The revised EPBD will complement other legislation introduced as part of the EU’s Renovation Wave, including the Effort Sharing Regulation (ESR), the Energy Efficiency Directive (EED) and the Renewable Energy Directive (RED).

The proposed legislation places significant new obligations on Member States, who must include progress in delivering on new National Building Renovation Plans (NBRP) in their annual National Energy and Climate Plans.  Some of the most impactful changes include a re-scaling of Energy Performance Certification (EPCs); new Minimum Energy Performance Standards (MEPS) requiring the renovation of the worst performing buildings and stricter Global Warming Potential (GWP) measures to inform on the “whole life” cycle emissions of new buildings. Requirements on Member States to put measures in place to remove non-economic barriers include enhanced digitalisation, mechanisms to facilitate data exchange, Building Renovation Passports and One-Stop Shops, as well as raise awareness and inform building owners and tenants of the new regime.

The directive directly deals with social sustainability, the “S” of ESG.  The NBRPs devised for each Member State’s building stock will provide an overview of national policies and measures to empower and protect “vulnerable households”, alleviate energy poverty, and ensure housing affordability.  This prioritises the lowest energy performing classes of buildings, those with the highest potential for decarbonisation.

From 2028, all new buildings should be zero emissions and buildings occupied, operated or owned by public authorities must be zero emissions by 2025. For existing buildings that require retrofitting, the deadline is 2050. EPBD defines zero-emissions buildings as: “a building with a very high energy performance […] where the very low amount of energy still required is fully covered by energy from renewable sources generated on-site, from a renewable energy community […] or from a district heating and cooling system”.

2. What will the EPBD mean for banks and how should they prepare?

The EPBD, while not constituting financial services legislation, will directly affect banks, for example, introducing voluntary Mortgage Portfolio Standards for credit institutions, which must be considered in conjunction with the existing mortgage regulatory regime.

By providing mandatory requirements for Member States and building owners, and incentives and information for buildings owners and tenants, EPBD legislation provides policy certainty for lenders as they develop green products and services that support their customers to enhance the energy performance of their buildings.

Banks, responding to European supervisory requirements, aim to manage climate-related risk in their portfolios, by improving the energy performance of the mortgaged properties on their books, a large part of which includes mortgage lending to households and businesses.

The impetus EPBD provides to clients to improve their buildings will help protect banks’ long-term assets, as over time, the proportion of their lending portfolios that can be considered sustainable will increase significantly. This will both address the risks arising from climate change events and increase compliance with the evolving regulatory regime put in place to mitigate and adapt to climate change.

Considering the ESG Pillar 3 requirements, the inclusion of wording to allow financial institutions to access information on energy performance certification is welcome. Green Asset Ratio (GAR) measures a bank’s “green assets” as a share of its total assets, with the categorization of both eligible and aligned green assets defined by the EU Taxonomy, which classifies how financial institutions disclose their financing sustainable activities. The EBA specifies banks’ reliance on EPC information required for the reporting of the GAR to prove that they are taxonomy aligned.

In January 2023, the ECB endorsed the directive, supporting efforts to enhance financial institutions’ access to EPCs, recognizing that increased access to more granular information would allow financial institutions to evaluate their climate-related transition risk and to improve the climate-related transition risk assessments of their real estate assets.

The new legislation requires Member States to streamline processes for enhancing properties’ energy performance. Banks, therefore, should identify in advance simple and clear procedures for providing related financing options to their clients in a timely manner, including preparing their staff for these changes and collaborating closely with national authorities. Many banks have already identified the opportunity of supporting clients to access affordable finance to retrofit their buildings or purchase a Zero Energy Building (ZEB). They have been training their frontline staff and relationship managers to support customers through the process and to inform them of the availability of grants already in place and facilities such as One Stop Shops.

Banks might offer green hubs, which provide practical information on sustainability and links to relevant third-party websites, case studies and details of green products and services, and any trusted partnership services.

Banks must understand the implications of  enhanced digitalization, changes to EPCs information, and to EPC Databases in each Member State, which will hopefully improve the availability, quality and comparability of EPCs across the EU.  Also, implications of the revised standards for buildings in a bank’s portfolio and how, for example, to calculate which buildings meet the zero-emission building standards.

The impact of the introduction of MEPS will be closely monitored in terms of the implications for the collateral held by financial institutions.

3. What would that mean for households and bank clients?

The EPBD along with other Renovation Wave legislation, has the potential to improve living and working conditions for many, bringing better health and wellbeing, but also new jobs, improved living conditions, and the reduction of energy consumption and energy costs. While the focus is on decarbonizing buildings to reach the EU’s climate targets, it also addresses issues like indoor air quality, insufficient lighting, dampness, and noise pollution.

Crucially, Member States are now required to raise awareness of methods for enhancing energy performance, and particularly to provide tailor-made information to vulnerable households, with the Commission providing up to €150 billion available to implement the MEPS, between now and 2030, and an additional €72.2 billion from the proposed  Social Climate Fund, 2025 – 2032.  Member States are expected to match these funds and to develop initiatives that efficiently combine public and private financing.

New Member State requirements will also improve the client’s “retrofitting journey”, for example, introducing independent control systems for energy performance certificates and renovation passports, smart readiness indicators and reports on the inspection of heating and air-conditioning systems.

In providing individual buildings owners with better opportunities to reduce the energy emissions of their buildings, an uptick in construction and renovation is anticipated, depending on the economic situation of these owners. Of course, many will require financing to pay for energy performance improvements to their property (In the euro area, about 70% of people are homeowners, with nearly 39% having no mortgage, and 27% of households are paying rent, according to the ECB).

Improvements in the energy performance of residential buildings and subsequent reduction in energy costs will give households more income at their disposal; studies have shown people in better energy performing homes are less likely to go into arrears (BoE Study). For those households seeking loans, EPBD’s push for public-private financing initiatives is also advantageous.

As well as a more robust process, the support put in place by the EPBD may help resolve the challenge of affordability. Despite many countries providing an impressive array of grants, an affordability gap remains in building upgrades. In Ireland, retrofit costs are reported to range from €25,000 to €75,000+.

For the upscaling required, banks with attractive green financing propositions are aware of the importance of pricing for clients, so state support, combined with lender discounted rate will be important.

4. What are the opportunities stemming from the EPBD that could enable transition finance?

Prompted by the major new sustainable finance legislative regime under the EU’s Sustainable Finance Framework and national decarbonising rules and initiatives, banks have developed individual NetZero transition plans, aligned with EU and Member States’ decarbonising policies such as those for a decarbonised built environment.

The EPBD will prompt demand for finance, enabling banks to better support their customers and showcasing their critical role in supporting clients to take economic actions that support the climate transition. This development is particularly positive for banks offering financial products and services tailored to clients seeking finance for energy-efficient building projects.

Under regulatory requirements discussed earlier, there is a need for improved data on the energy efficiency of buildings to be included in banks’ risk assessments and due diligence processes. Banks engaged in transition finance need to integrate comprehensive assessments of the energy performance of buildings into their risk analysis and due diligence procedures. This could involve evaluating the energy efficiency of properties when considering loans or investments in real estate.

Effective transition planning requires increased engagement with clients, which entails the need to upskill staff so they can explain new opportunities to their clients, both households and businesses.

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For more information:

Alexia Femia, Financing Sustainable Growth Adviser, a.femia@ebf.eu

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