Energy efficiency and credit risk correlation – evolution of the basel regulation framework and its potential impact on EEM

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In the last ten years, energy efficiency (EE) has gained in importance as a key way of mitigating climate change and its dramatic effects and reducing energy consumption and therefore dependence on fossil fuels. EE has therefore been in the EU 2030 goals, which define specific targets for EE, among others. Continued efforts are however needed in order to meet these goals, especially against a background where 75% of the EU’s building stock is considered as energy inefficient (ECBC, 2020) and buildings have been responsible for almost 40% of the EU final energy consumption (BPIE, 2015).The Energy Efficient Mortgage Initiative (EEMI), and the present Project as part of the EEMI, is, seeking to respond to the need for huge investment to meet the targets by designing an energy efficient mortgage ‘ecosystem’ to support the financing of the improvement of the EU’s building stock. 

The underlying assumption of the Initiative is that EE has a positive impact on credit risk reduction, increasing the attractiveness of the investment for EU banks and mortgage lenders and delivering spill- over benefits for homeowners. To this end, the EEMI’s EeMAP and EeDaPP projects conducted literature reviews and empirical analyses which demonstrate a significant positive correlation between building EE and credit risk reduction, supporting the development of EE mortgages. The present report aims to expand the EE and credit risk correlation discussion, through an overview of the prudential regulation relative to credit risk. The document proposes an overview of the Basel accords (I, II and III), their evolution and an evaluation of their potential impacts on EE mortgages. The report also considers covered bonds and their potential as a driver for EE mortgages. The report concludes that even though the revised Basel III accords and the pandemic and post- pandemic adjustments, as well as the current Ukrainian conflict, present potentially important challenges to the global economy and the development of EE mortgages, potential opportunities are also available.