Prudential treatment of green mortgages: summary and recommendations 

The transition to a carbon-neutral economy entails massive investments in construction, technology and new infrastructure. The European Commission estimates that investments of around EUR 180 bn per year are required during the coming decade. This can only be realised with a strong involvement of financial institutions. Concretely, Copenhagen Economics (CE) estimates that around 50% of all the investment needed the next decade could be credit-financed (based on numbers from Denmark1). This corresponds to EUR 90 bn per year in Europe. Thus, over the coming decades, a massive amount of credit is likely to flow into investments which – one way or the other – support the green transition. These loans are typically dubbed ‘green assets’. This poses the question of how these green assets should be regulated from a prudential perspective. The response to this question has often been: Exactly like any other asset – based on the financial risks: The purpose of prudential regulation is to guard against expected credit losses and unforeseen events – no matter the colour of the asset. Nevertheless, it is important that we treat green assets correctly, incorporating any risk mitigating factors that green assets entail, thus not disincentivising green investments. Within the Energy Efficient Mortgages Initiative (EEMI), Copenhagen Economics has been tasked to analyse this question in relation to energy efficient mortgages (EEM), i.e. mortgage credit to energy efficient building and energy renovations. Our hope is that these results and recommendations will not only guide the debate on green mortgages but can provide general guidance on the prudential regulation of green assets.