UK banks: Facilitating energy transition, the £100bn opportunity

By Benjamin Toms
Published February 7, 2022 | 2 min read

The UK Government is taking aim at residential Co2 emissions, and this represents an opportunity for the country’s banks, argues RBC. RBC’s ElementsTM team has extracted data from all the EPC certificates available on the UK Governments website and combined it with UK banks postcode lending data to create, for each bank in our coverage, a unique EPC footprint. This has given powerful insights into UK bank mortgage portfolios and highlighted the potential £100bn benefit to lenders of all consumers if they bring their properties up to a EPC rating of C.

The magic letter C

Under UK law, all domestic and commercial buildings in the UK, available to buy or rent, must have an Energy Performance Certificate (EPC). The EPC offers a rating depending on two factors: the amount of energy used per m2 and the level of CO2 emissions in tonnes per year. These ratings are about to become important because the difference between a C & D rating could mean: +5% increase in property value; 10bps better mortgage rate with looser credit standards; and >£250 savings in annual energy costs.


The 326m tonne problem

In 2020, the UK produced 326m tonnes of CO2 emissions. After transport, residential emissions are the second largest emitter and are becoming increasingly more significant: in 1990 Residential made up 13% of total CO2 emissions, vs. 21% today. To reduce this figure, under the UK Government’s Clean Growth Strategy, most owner-occupied properties in the UK will need to have a C rating by 2035 and all BTL properties will need to have a C rating by 2028. Currently, 60% of the UK's housing stock (c.28m domestic properties) is graded below a level C.


Banks as an instrument of change

Although there is currently not a legal/regulatory requirement or timeline for banks to disclose these exposures, this could change due to the Task Force on Climate Related Financial Disclosures' (TCFD) recommendations, Net-Zero Banking Alliance's (NZBA) commitments and Government consultations. RBC sees this as an opportunity for UK banks, which could be used as an instrument of change, as they will be required to increase the average EPC ratings of their mortgage portfolios. Mortgage lenders, in turn, are likely to start to attach green improvement stipulations to mortgages. House buyers will struggle to pay for energy efficiency improvements upfront and therefore mortgage principals will need to increase to fund upgrades.


c.£100bn required to raise UK properties to EPC C

RBC estimates the aggregated consumer cost to raise all UK property EPC ratings to a minimum C at £101bn. Whilst it is true that the government will likely provide some funding around the edges for these property upgrades, RBC believes that the expectation is that the bulk of the costs will fall on the shoulders of homeowners funded by banks. This represents a potential uplift of 5.8% to UK bank loan books, and an annual boost to owner occupied and BTL volumes of 3% & 8% respectively. Banks could therefore facilitate residential CO2 reductions of 23% (12mTn), equivalent to 4% of all UK CO2 emissions.

Benjamin Toms

Benjamin Toms
ACA, Equity Analyst, Europe

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