Appropriate prudential framework for EEM

The Energy Efficient Mortgages Initiative (EEMI) aims at incentivising building owners to invest in energy efficiency of their property to reduce energy consumption and emissions. A central aspect of the initiative is that investments in energy efficiency entail risk mitigating factors that should be included in the prudential framework. This report contains our analysis of the treatment of EEM in the regulatory capital framework. The current report presents our results from this exercise and provides the foundation for a separate note on the regulatory implications that can be drawn from this. Our main conclusions are:

•  For an appropriate regulatory treatment of energy efficient mortgages (EEM), so-called risk mitigating factors should be accounted for. This is possible without a complete overhaul of the regulatory framework and hinges on the availability of technical solutions to provide the necessary data.
•  Transition risks, on average, seem manageable, but are very country- and portfolio-specific. Transition scenario analysis is therefore an important extension to the current framework.

This analysis departs from the second approach, analyzing whether energy efficient mortgages EEM entail risk mitigating factors that could gave consequences for capital requirements.