Science1 publisher2 min readPublished
European green finance experts expect climate risk to join energy ratings in mortgage decisions
Twenty-five green finance experts from European banks and advisory firms told Aalto researchers that poor energy ratings already make homes harder to finance. They expect flood, wildfire and other climate risks to be the next thing lenders weigh.
The Scientist · Science desk
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What happened
- EU energy performance certificates date from 2002 but became central to lending in 2020, when EU Taxonomy rules tied a building's green status largely to its rating.
- A property with a very poor energy rating may not qualify for a loan at all because banks may judge it too high-risk, doctoral researcher Maria Holopainen said.
- New buildings meet the EU Taxonomy's green criteria more easily because they can reach an A rating, and the system encourages banks to finance them over energy renovations.
- Lenders in southern Europe already give wildfires, heat waves and floods considerable weight, while severe flooding in Sweden has raised awareness in the Nordics.
- Banks name geopolitics and EU regulatory uncertainty, including the easing of sustainability reporting requirements, as obstacles to adapting their green-lending practice.
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Why it matters
- decision A buyer comparing homes in Europe has to treat the energy certificate as part of whether, and on what terms, the purchase can be financed at all.
- constraint Because green labels help banks raise their own funding, money for renovating existing homes stays harder to get than money for new builds, working against the EU's renovation goals.
- exposure If climate risk enters lending unevenly, households in fire- and flood-prone southern European neighbourhoods face worse credit access than nearby areas, the inequality Holopainen said lenders fear.
The study, published in the Journal of European Real Estate Research, is built on interviews [2][1]. That design shows how lenders describe their own criteria. It cannot count refused mortgages or measure the discount on a green loan. The closest the release comes to an effect size is doctoral researcher Maria Holopainen's description of green-loan terms as "somewhat more favorable financing terms than conventional loans" [6][22].
Banks have two reasons to care about the rating. A low rating makes it more likely that a property will need significant renovation spending and that its value will fall over time [4]. A high rating also helps the bank itself. "This gives banks an advantage when raising their own financing in the market," Holopainen said, referring to new buildings that can reach an A rating [10][9].
The second reason cuts against the EU's renovation targets. "Financing renovations, on the other hand, is riskier for banks, and reporting such properties as green is also technically more challenging," Holopainen said [11]. She called renovation essential to reaching carbon neutrality by 2050. "High-performing new buildings alone are not enough," she said [12]. In her view, closing the gap would take stronger guidance and more pressure from markets, investors and consumers [13].
Climate risk is, for now, a forecast. The experts expect floods, wildfires and other extreme weather to become the next major factor in financing homes and other properties [14]. How seriously a lender takes those risks depends heavily on where the asset sits and where the bank operates [15]. Holopainen's account of the Nordics shows how the two kinds of risk can diverge. "The building stock in the Nordics is comparatively energy-efficient and therefore less likely to be exposed to transition risks than that in other parts of Europe," she said. "However, physical climate risks may become more important in the near future." [18]
I think the energy-rating finding is well founded, because it follows from a rule that defines green buildings largely by their certificate [3]. The climate-risk forecast deserves more caution. It comes from a sector the study found to be responding to changing green-lending criteria reactively [19]. Seppo Junnila, a professor of real estate economics at Aalto, said a property's environmental performance "already affects banks' lending decisions and loan terms," and he expects more favorable financing to depend on a wider range of sustainability criteria in the longer term [7][21][22].
What to watch
- Loan-level data from any European lender showing approval rates or pricing by EPC band, which would put a size on the 'somewhat more favorable' terms the experts describe.
- Any change to the EU Taxonomy's building criteria that makes renovated properties easier to report as green.
- Whether Nordic banks add flood exposure to mortgage criteria in the wake of the Swedish flooding.