Green Mortgages, EU Taxonomy and Environment Risk Weighted Assets: A Key Link for the Transition
1. Introduction: The EU and the Transition
2. Literature Review
3. The Energy Challenge in the Housing Sector, Green Mortgages and the Taxonomy
3.1. The Role of Green Mortgages
3.2. The Criteria for Green Mortgages in the EU Taxonomy
4. Materials and Methods
4.1. The Data Set
- Last EPCs available (EPC collected in January–May 2021);
- EPCs related to private properties of buildings with a residential use (public properties and public use of private properties have been excluded);
- EPCs belonging to the same climatic zone “E” that is the prevailing in Lombardy (this criterion is due to the fact that the energy consumption index used for EPC classification is related to climatic zones); Italy is classified into six climatic zones related with the winter heating needs (degrees-day) and Lombardy territory has only the two most intense degrees-day zones ;
- exclusion of homes serviced by district heating;
- as for winter heating technologies based on combustion technology, the prevailing one (natural gas boilers) has been considered, excluding heating technologies marginally used in Lombardy that in our sample (year 2021 EPCs) account only for 4.5%.
4.2. The Energy Consumptions of Energy Efficiency Classes
4.3. Methodology and Results for LCA Air Emissions’ External Cost Estimation
4.4. A Method of External Cost Evaluation Based on Value Transfer
5. Discussion: How to Develop the ERWAs in the Building Sector
- The simplest case is the purchase of an existing building (Taxonomy Section 7.7.1), given that the Taxonomy only requires the EPC’s energy efficiency class (at least class A1). Classes from B to G are not compliant (with the Taxonomy); hence we propose to assign the neutral value of ERWA (1.0) to the B class, in order to provide a premium to the Taxonomy compliant classes (A4-A1) and a penalty to the less energy efficient classes (C-G). ERWA values for all other energy efficiency classes are calculated using the buildings’ life-cycle external costs indicator. As seen for Lombardy, this indicator can be calculated for given administrative areas and climatic zones, starting from the average primary energy consumptions of the EPC we obtain the vector of the external costs related to the average energy consumption of each energy efficiency class, in every area.
- In case of renovation of existing building (Taxonomy Section 7.2), ERWAs comes from the Taxonomy requirement of at least a 30% reduction in terms of primary energy use (excluding nonrenewable energy sources). The matrix of the primary energy savings related to each energy efficiency class change, achieved with the renovation intervention, is the starting point for the calculation of the environmental risk reduction of the asset (the building’s external costs savings). The neutral ERWA is assigned to energy saving renovations not achieving the Taxonomy criteria (including those not allowing any energy class change), reserving an ERWA premium to Taxonomy compliant renovations according to the reduction of environmental risk obtained compared with the reduction potential for the same class. On the contrary, a penalty is provided for renovations that increase the building’s primary energy use.
- In the last two cases (Section 7.1 construction of new buildings and Section 7.7.2 purchase of buildings built after 2020), the technical screening criteria of the Taxonomy are the same: the primary energy demand (excluding renewable sources) is at least 10% lower than the threshold set for ZEBs in national measures implementing Directive 2010/31/EU. Indeed, a single threshold for nZEBs is not guaranteed in each climatic zone of the EU: in their national transposition of the EPBD, Member States introduced many different requirements for nZEBs, related to the building structure to the energy efficiency of the plants supplying the residential building’s energy services and to the percentage of energy consumptions covered with renewable sources . Lacking an EU-wide homogenous approach for nZEBs, these requirements can be translated “ex post” into a single value of the primary energy demand indicator by using statistical analysis of the primary energy consumption values certified by the EPC in a specific area and climatic zone (for example, Lombardy region and climatic zone E in our sample). In this case we suggest assigning (i) the neutral ERWA (1) to the buildings compliant with the country-based rules on nZEBs and (ii) ERWA values < 1 to buildings compliant with the Taxonomy criteria (at least a 10% reduction of the nZEB-equivalent primary energy demand), with ERWA values proportional to the external costs of the new building.
5.1. ERWAs Values for Credits Related to the Purchase of Existing Buildings (Taxonomy Section 7.7.1)
- The neutral value of ERWA (1.0) is assigned to the B class, to provide a premium to all the Taxonomy compliant classes (A4-A1);
- The minimum ERWA value (0.5) is given to mortgages for purchasing existing buildings with the lowest external costs (A4 buildings);
- The maximum ERWA value (1.5) is assigned to the energy class with the highest external costs (G).
5.2. ERWAs Values for Credits Related to the Renovation of Existing Building (Taxonomy Section 7.2)
- The neutral ERWA value of 1.0 is assigned to renovations that allow a reduction of primary energy savings of less than 30% (the Taxonomy criteria is not achieved notwithstanding the energy savings achieved) and to renovations that do not allow any energy class change (grey area);
- The minimum ERWA value is assigned to Taxonomy compliant renovations that allow us to achieve the maximum potential reduction of external cost starting from each class (the maximum potential is always achieved by reaching A4 class);
- ERWAs values for all other class changes are calculated proportionally to the actual benefit (external cost reduction) coming from the building’s renewal compared to the maximum potential benefit for the starting class—for instance, ERWA value for a renewal from class G to C is obtained through the formula 1 − 0.5 ∗ (BG-C/BG-A4) = 1 − 0.5 ∗ (894/1208) = 0.63, where 894 euro/100 m2 is the external cost reduction obtained with a renewal from class G to C and 1208 euro/100 m2 is the maximum achievable external cost reduction for renovations starting from class G (i.e., the benefit from class G to A4).
- As we cannot exclude that some building renovations (not aimed to the building’s energy requalification) may lead to a worsening of the energy class of the building, ERWAs are provided until the maximum value of 1.5. Symmetrically, the criteria are proportional to the additional external costs of the renewal compared to the maximum potential increase in the external costs for the starting energy class.
5.3. ERWAs Values for Lending to the Construction/Purchase of New Buildings (Taxonomy Sections 7.1 and 7.7.2)
5.4. ERWAs Values for Credits Aimed at a Renovation Intervention of a Purchased House
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
Appendix A. Detailed Tables for Emissions and External Costs
|Natural Gas—Total Emissions from Well to Household Heat|
|Electricity—total LCA emissions (Italian mix of sources for gross domestic electricity consumptions)|
|Natural gas and electricity consumptions—Emissions of all processes|
|Climate Change||Air Pollution|
|Any stack height||107.9||1136||22,299|
|stack height < 100 m or unknown height)||14,556||13,111||45,022|
|stack height ≥ 100 m)||11,759||11,627||21,783|
|Natural Gas, WTH (from Well to Heat)||Combustion||Production, Transport and Distribution||Total External Costs|
|CO2 eq||NOx||SO2||NMVOC||PM2.5||NH3||All Emissions (Greenhouse Gases and Macro-Pollutants)|
|Electricity (mix of gross consumptions)—All generation and production processes||Generation||Production processes||Total external costs|
|CO2 eq||NOx||SO2||NMVOC||PM2.5||NH3||All emissions (greenhouse gases and macro-pollutants)|
|Natural gas and electricity—All processes||Energy generation processes||Upstream processes||Total external costs|
|CO2 eq||NOx||SO2||NMVOC||PM2.5||NH3||All emissions (greenhouse gases and macro-pollutants)|
Appendix B. A Stress Test on Green Mortgage in Italy
- A first scenario where banks, faced with very different capital requirements between inefficient home purchases and renovations, fully succeed to convince borrowers to include in the mortgage a building renovation project (100% of mortgages for house purchase with renovations).
- A second scenario where banks convince clients representing only half of the assets (50% of mortgages with renovations).
- A third scenario, which finds out the minimum percentage of renovations that is needed to maintain the same level of convenience of the baseline scenario (the starting ratio between the capital requirements and total assets).
|LTV Class||% of New Mortgages||New Mortgages *||RW Coefficient||RWA *|
|Baseline (Current Regulatory Framework)||ERWA Scenario||ERWA Scenario||ERWA Scenario Parity of Ratio between Capital Reserves and Assets|
|Renovations = 100% of Purchase||Renovations = 50% of Purchases||Renovations = 87.5% of Purchases|
|Ratio between capital reserves (RWA or ERWA) and assets (mortgages)||0.271||0.262||0.302||0.271|
|Variation of capital reserve in each scenario as compared to baseline||n.a.||+15%||+22%||16%|
|Variation of asset value in each scenario as compared to baseline||n.a.||+19%||+9%||+16%|
|Variation of capital reserves to assets ratio as compared to baseline||n.a.||−4%||+12%||0%|
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|ERWAs must be calibrated carefully due to the complexity of the global value chains of production .||In  both a direct and an indirect life-cycle approach using input–output analysis is proposed to this end. More detailed sector-based external cost values for air emissions in Italy using this approach are provided in , with insights on how to calculate values for all countries using OECD input–output tables and covering sectoral global supply chains.|
|Without granular data, it is not possible to separate the impacts of each stage of the production chain by country .||This issue is discussed in details in . Sectoral data can be used as default values. More granular data at the company level are going to be collected by banks in the UE under the regulatory process of NFRD described above.|
|It can overburden banks .||ERWAs can be linked to the new data and Key Performance Indicators required by the Taxonomy and the NFRD regulations, allowing a gradual implementation; at any rate, a gradualist approach is always used in banking regulation.|
|Potential effects of ERWAs on macroeconomic, financial and environmental variables are not explored .||More empirical analyses are needed to test the ERWAs effect, as it was made to test Basel 2 and Basel 3 requirements. However, ERWAs are a micro-prudential tool and should be appraised as such, while macroeconomic and macro-financial variables should be preferred when assessing macroprudential tools.|
|There is no widely accepted methodology yet to assess climate-related risks and verify whether financial firms take these risks into account in their lending practices. For this purpose, the main tool is a reliable scenario analysis .||ERWAs are based on the external costs of air emission (related to the asset/borrower) because they are widely used as indicators related to environmental damages. Scenario analysis can be used to properly estimate the expected external costs of air emissions although in a macroprudential environment.|
|LTV Bands||Below 50%||50–60%||60–70%||80–90%||90–100%||Above 100%|
|General Residential Real Estate||20%||25%||30%||40%||50%||70%|
|Income-producing Residential Real Estate||30%||35%||45%||60%||75%||105%|
(% of the Total Sample of Mortgages)
(% within the Category)
|Category of Activity||Description of the Activity||Technical Screening Criteria|
|7.1 Construction of new buildings||Development of building projects for residential and nonresidential buildings…for later sale as well as the construction of complete residential or nonresidential buildings, on own account for sale or on a fee or contract basis.|
(NACE codes F41.1, F41.2, F43)
|The Primary Energy Demand (PED), defining the energy performance of the building resulting from the construction, is at least 10 % lower than the threshold set for the nearly zero-energy building (NZEB) requirements in national measures implementing Directive 2010/31/EU of the European Parliament and of the Council. The energy performance is certified using an as built Energy Performance Certificate (EPC).|
|7.2 Renovation of existing buildings||Construction and civil engineering works or preparation thereof.|
(NACE codes: F41, F43)
|The building renovation complies with the applicable requirements for major renovations (as set in national and regional regulations). Alternatively, it leads to a reduction of primary energy demand (PED) of at least 30%. The 30% improvement results from an actual reduction in primary energy demand (where the reductions in net primary energy demand through renewable energy sources are not considered) and can be achieved through a succession of measures within a maximum of three years.|
|7.7 Acquisition and ownership of buildings||Buying real estate and exercising ownership of that real estate.|
(NACE code: L68).
|1. For buildings built before 31 December 2020, the building has an Energy Performance Certificate (EPC) of at least of class A. As an alternative, the building is within the top 15% of the national or regional building stock expressed as operational PED (with adequate evidence), which at least compares the performance of the relevant asset to the performance of the national or regional stock built within 31 December 2020 and at least distinguishes between residential and nonresidential buildings. |
2. For buildings built after 31 December 2020, the building meets the criteria specified in Section 7.1 of this Annex that are relevant at the time of the acquisition.
|EPC-Buildings||Total Area of Certified Buildings||Area/EPC|
|Total Natural Gas Consumptions||Average Gas Consumptions|
|Million m3||%||m3/100 m2|
|Total Electricity Consumptions||Average Consumptions|
|Total Primary Energy Consumptions||Average Consumptions (EPgl,nren)|
|Natural Gas and Electricity Consumptions—LCA Emissions|
|kg-a/100 m2||kg-a/100 m2||kg-a/100 m2||kg-a/100 m2||kg-a/100 m2||kg-a/100 m2|
|Natural Gas and Electricity Consumptions—External Costs of LCA Emissions||Total External Costs of LCA Emissions|
|CO2 eq||NOx||SO2||NMVOC||PM2.5||NH3||All Emissions|
|EPC||External Costs Related to the Life-Cycle Emissions of the Buildings’ Energy Consumptions||ERWA|
|From Row to Column||A4||A3||A2||A1||B||C||D||E||F||G|
|From Row to Column||A4||A3||A2||A1||B||C||D||E||F||G|
|From Row to Column||A4||A3||A2||A1||B||C||D||E||F||G|
|Categories||Examples||Primary Energy Consumptions of Nonrenewable Sources (EPGL,NREN)||Air Emissions’ External Costs of nZEBs||ERWA|
|Examples||kWh/100 m2||euro/100 m2|
|nZEB compliant with EU regulations, but not compliant with the Taxonomy technical screening criteria 7.7.2||equivalent threshold for climatic zone E (average of primary energy consumptions of nZEBs)||4280||141.4||1.00|
|example 1: 7% reduction of the nZEBs’ threshold||3980||131.5||1.00|
|nZEB compliant with the Taxonomy technical screening criteria (at least a 10% reduction of the nZEBs’ threshold)||example 2: 10% reduction of the nZEBs’ threshold||3852||127.3||0.95|
|example 3: 29% reduction of the nZEBs’ threshold (average of nZEB A1 consumptions)||3031||100.2||0.85|
|example 4: 75% reduction of the nZEBs’ threshold||1070||35.4||0.63|
|Zero Emissions Building (ERWA minimum)||zero emissions/zero external costs||0||0||0.50|
|Renewal from Row Class to Column Class|
|Purchase of Existing Building||G||F||E||D||C||B||A1||A2||A3||A4|
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Esposito, L.; Mastromatteo, G.; Molocchi, A.; Brambilla, P.C.; Carvalho, M.L.; Girardi, P.; Marmiroli, B.; Mela, G. Green Mortgages, EU Taxonomy and Environment Risk Weighted Assets: A Key Link for the Transition. Sustainability 2022, 14, 1633. https://doi.org/10.3390/su14031633
Esposito L, Mastromatteo G, Molocchi A, Brambilla PC, Carvalho ML, Girardi P, Marmiroli B, Mela G. Green Mortgages, EU Taxonomy and Environment Risk Weighted Assets: A Key Link for the Transition. Sustainability. 2022; 14(3):1633. https://doi.org/10.3390/su14031633Chicago/Turabian Style
Esposito, Lorenzo, Giuseppe Mastromatteo, Andrea Molocchi, Paola Cristina Brambilla, Maria Leonor Carvalho, Pierpaolo Girardi, Benedetta Marmiroli, and Giulio Mela. 2022. "Green Mortgages, EU Taxonomy and Environment Risk Weighted Assets: A Key Link for the Transition" Sustainability 14, no. 3: 1633. https://doi.org/10.3390/su14031633