Banks as Key Players in the Energy Renovation Wave: Navigating Challenges and Opportunities in the EPBD Recast

Banks on the first line of action

Changes stemming from the EPBD review will affect both society and financial institutions as these will have to play a major role in financing renovation.

The EPBD recast states that financial institutions should be mobilised to incentivise building renovation. Furthermore, MS should encourage banks to promote targeted financial products, grants, and subsidies to improve the energy performance of vulnerable households and owners of the worst-performing building stock. Finally, the Commission is expected to publish a voluntary framework to help financial institutions target and increase lending volumes in energy renovations.

The housing market differs a lot between Member States. Hence, the impact of the EPBD recast will also vary depending on the country. It’s important to consider national specificities when addressing the potential effect of the Directive. Before looking into potential effects on banks, six important variables must be considered to estimate the impact of the Directive, these six variables are discussed in more detailed in our previous piece that you can find here. 

Firstly, the availability of sufficient and qualitative data on buildings’ energy efficiency varies significantly between jurisdictions. Consequently, investments to generate and update these data points will also fluctuate.

Secondly, the current quality of the building stock is also greatly varying, as mentioned previously. This adds to structural differences in building types. 

Thirdly, some countries already see the presence of an energy premium on their housing and real estate market. For example, in Belgium, ERA, the country’s largest real estate agent, showed that Flemish homes with an EPC score of A or B became 1.5% more expensive in 2023. In contrast, homes with a lower score (E or F) see a price decline of 1.6% over the same period. Our economists expect these energy efficiency premiums to widen in the coming years. Read more on this here. The generalisation and growing importance of EPCs will, therefore, have an impact on the overall market price.

House prices have slightly decreased since 2022 due to the high interest rate environment

Index Jan 2011 = 100

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Also, as shown in the previous section, renovation costs vary greatly between MS, which ultimately impacts renovation feasibility. This is accentuated by the national ownership profile. Indeed, a higher share of low-income homeowners will also hinder energy renovation, especially in countries with higher refurbishing costs.

This brings us to the last point: liquidity access. The feasibility of the EU renovation wave will depend on homeowner’s access to sufficient liquidity to fund the necessary refurbishing. Ultimately, this last variable pushes banks to the first line to enact this transition. Nonetheless, this is not without consequences for the financial sector.

Overall, the changes presented in the transitional agreement could negatively affect the banking sector through two channels. The first one is the enforcement of the Minimum Energy Performance of buildings. Setting a minimum required energy performance or EPC could reduce the value of the least efficient part of the bank’s portfolio. Indeed, as presented before, some countries like Belgium have already highlighted an energy premium on high EPC houses and discounts on the worst-performing stock.

However, as the provisional agreement applies MEPS only to non-residential buildings and focuses on an average efficiency approach for residential ones, we expect this effect to be less important than projected previously.

 

The provisional agreement did, however, keep the option for MS to exclude certain types of buildings from energy efficiency requirements. While this makes sense to protect the integrity of historical buildings, it may provoke a large devaluation of some buildings with the presence of energy efficiency premiums on the market. Hence, depending on a bank's portfolio composition, it could imply higher stranded asset risk for institutions with a large share of EPBD-excluded buildings on their book.

The EPBD recast is also expected to impact banks as they will have to create and develop an EPC database for their portfolio. The cost of retrieving sufficient and qualitative data on building efficiency remains one of the main challenges for the sector. Without qualitative information on the state of credit institution’s building stock, it also hinders the enforcement of adequate measures and financial incentives for renovation.

On the bright side, this Directive recast will open and help develop a new market for renovation loans by setting a clearer direction for the sustainable transition. As the regulation outline becomes clearer, financial institutions can estimate and prepare for the upcoming renovation wave.

With the renovation wave also comes the opportunity for financial institutions to develop products allowing all homeowners to access the necessary financial means and take a concrete role in making this transition a just one.

Even if the Directive review doesn’t state direct penalties for infringements, not respecting or playing an active role in the enforcement of the new requirements can have a serious reputational effect as well as increasing litigation risks for banks.

 

The provisional agreement reached at the end of 2023 brings the Energy Performance of Buildings Directive a step closer to the finish line. The most important change concerns residential buildings' renovation goals. Indeed, as the proposals all included a minimum energy performance approach, the agreed text changes this to rather look at improving national averages while keeping the MEPs for non-residential buildings.

The clause ensuring that 55% of the energy reduction stems from the worst energy-performing buildings is the main addition to the existing proposals. The EPC scale harmonisation will ensure more comparability between countries building stock, however this harmonisation will be delayed to the end of 2029 for some countries. The agreement underscores stricter regulation on fossil fuels, including their gradual phasing out, but also more lenient rules on the establishment of solar energy for buildings.

All in all, changes stemming from the EPBD recast will affect both society and financial institutions, as these will have to play a major role in financing renovations.