Are Energy Efficient Borrowers Less Risky?

The EEFIG Working Group on Risk Assessment is focusing on the quantitative relationship between energy efficiency improvements and lower probability of default of associated loans and the increased value of the underlying assets. The Working Group has identified leading research groups and banks offering to provide access to their loan books, to merge these with relevant environmental data points and undertake careful analysis of the relationships that may exist.

Establishing a quantitative relationship, a correlation or ideally a causation between energy efficiency and lower credit risk can help to provide a business case for lenders to focus on asset energy performance. This could lead to more origination of energy efficiency loans and mortgages, given the fact that on average credit risk constitutes by far the most significant risk type for banks and plays a fundamental role in the derivation of banks’ capital requirements.

The underlying causal relationship between energy efficiency improvements, credit risk and asset value is complex. The central argument is that property with higher energy efficiency performance (and hence lower expenses and higher comfort) should have a lower credit risk. This should in turn produce fewer non-performing loans, arrears and losses in case of default due to more advantageous cash flow patterns both on a monthly basis but also over their full lifetime.

Preliminary conclusions of the EEFIG analysis

The EEFIG working group has identified and reviewed data produced by a range of its member banks covering over a million properties spread all over Europe. It has taken years to clean, assess, review and re-assess statistical studies undertaken by these banks and their advisors and to benchmark them against those academic studies and those published by regulators. One example is the Bank of England. Causality is especially hard to screen for, and yet several of the confidential studies have now been able to manage this. EU Member States which do not make Energy Performance Certificates (EPCs) available to banks operating in their countries harm banks’ abilities to undertake this analysis. In these cases, EEFIG’s working group members have come up with a sophisticated proxy mechanism, notably in Germany and Finland. The working group has 68 members and observers.