Is inaccurate EPC data holding back the green RMBS market?

Mortgage Lenders

Green Residential Mortgage-Backed Securities (RMBS) have the potential to drive financing into decarbonising the UK’s housing stock.

How? Well:

  • Investors seek out green RMBS investment opportunities

  • Mortgage lenders give preferential rates via green lending initiatives like green mortgages and home retrofit loans to ensure their mortgage portfolio is filled with energy efficient properties that they can securitise and sell on to investors

  • Energy efficient properties become increasingly attractive to home buyers, who are incentivised to buy an existing energy efficient home (driving demand and further increasing property value) or to retrofit less efficient homes to a higher standard – lowering energy use and carbon emissions from housing. 

In fact, in our white paper ‘Green Securitisations: Kickstarting a Green Revolution’ through analysing our environmental profiling data for the UK housing sector we found that 3 million homes and £190 billion in existing mortgage loans on EPC A and B properties could qualify for green securitisation – so it’s a huge opportunity. 

And green RMBS should already be an attractive proposition for investors. 

As an investment they should have stable returns and reduced risk – mortgages on energy efficient homes are linked with a lower chance of arrears and a high likelihood of increasing property value. Plus, investors have their own climate disclosure requirements and targets to reduce financed emissions within their portfolio, and these investments support those goals too.

But, so far there’s been a lack of both supply and demand for green RMBS. 

We think inaccurate EPC data has a lot to do with why that’s the case.

The state of the green RMBS market in 2024

ESG investment has seen dramatic growth in recent years, driven by reduced risk and heightened returns.

Harvard Law School reported that ESG assets reached $35 trillion in 2022, a 15% increase on the previous year.

And even though 2023 did see a slight slowdown in sustainable investment, sustainable funds still outperformed other investments – proving they can hold their own even in a very difficult financial environment. Which explains why investors are planning to put more funds into these sustainable investments. Morgan Stanley’s 2024 Sustainable Signals survey found that 77% of investors want to invest in ESG funds this year, with 57% saying  their interest in doing so has increased in the past two years.

Green investment vehicles have largely seen great success through the boom in green investment, one example being green bonds

We can see the growing success of green bonds in Climate Bond’s Green Pricing Paper for H1 2023, highlights including:

  • The number of green bonds on the market grew from 93 bonds with a combined volume of $93.4 billion in 2022 to 111 bonds with a combined volume of $124.6 billion in 2023. 
  • Exchange-traded Fund (ETF) assets increased by 20% in H1 2023 alone, indicating that investors are keen to funnel more financing into green bonds. 
  • 32% of green bonds on the market achieved a ‘greenium’ in H1 2023 i.e. sold for a higher price than an equivalent non-green bond. 
Graph showing the market for green bonds growing quickly from 2013 to 2020, whilst the market for green securitisations achieves much slower growth. Quote from Climate Bonds alongside: "A common barrier to scaling up green RMBS is the lack of data or access to energy performance data."

But the same simply isn’t true of green securitisations, which are seeing much slower adoption.


🤓 Expert viewpoint: green securitisations

Discussion with industry experts during our panel event on the topic of green securitisations suggested that investor demand for green securitisations would be there if the supply challenge could be solved.

Solving that challenge, of course, means increasing the number of energy efficient homes in the UK through retrofitting.

”Demand is there from the investor side. I expect that there will be more green loans created over time, as the underlying mortgage borrowers realise that being green actually saves on their heating.” – Peter Winning, Director of Asset-backed Securities at BlackRock

Missed the event? Catch up with our recap ➡️

How inaccurate EPC data is holding the Green RMBS market back

The potential of green RMBS to drive decarbonisation is currently restricted by the lack of accurate and up-to-date data on the energy performance of UK homes. 

RMBS issuers need to be able to accurately assess whether a pool of homes is ‘green’ before they can issue a green RMBS, so that they can understand its likely performance and level of risk. 

As it stands, this isn’t possible:

  • Lack of data availability. Energy performance data is not currently required when submitting residential mortgage loans for securitisation, so most RMBS issuers have a complete blind spot when it comes to the energy efficiency of homes in a mortgage pool.

  • Inaccurate data. When energy performance data is submitted it’s in the form of EPCs which are well-known to be unreliable, with a flawed methodology and only 24% of UK homes actually having an up-to-date EPC certificate. Plus, EPC ratings are not comparable across other asset classes or across countries, causing issues for larger RMBS issuers.

  • Inaccurate ‘green’ classification means a lack of green assets. The most widely accepted view is the International Capital Markets Association (ICMA) who recommend that the top 15% of energy-efficient homes can be classified as ‘green’. They determine this top 15% based on EPC data alone, which is problematic given we’ve seen this comes with many gaps and inaccuracies. This rigid classification also means there is only a very limited pool of mortgages in the UK which can be securitised under a green RMBS. 

This absence of reliable energy performance data prevents issuers being able to accurately understand the potential high performance of these securities, inhibiting them from issuing green RMBS. 

In turn, this is holding back mortgage lenders as they have no pricing incentive to push green mortgages – and therefore also holding back home retrofits as homeowners fail to see their benefit and have limited access to financing opportunities for upgrades.

So how do we overcome this barrier and unlock the virtuous circle of green lending?

Well, we need to increase the availability of energy performance data for the UK housing market, and increase the accuracy of that data too. 

Only through better data will issuers be able to clearly see the potential high performance of green RMBS and be able to confidently issue them.

An example of this already in action is Kensington Mortgages, who use Kamma’s highly accurate and real-time energy efficiency and emissions dataset to ensure that the true climate credentials of every mortgage issued are visible and their investment potential can be clearly demonstrated. 

“The UK faces a huge challenge to achieve Net Zero and energy efficiency goals in the next decade and beyond. Kensington has led the charge on green lending, developing a series of solutions that offer tangible benefits to both our customers and our investors. As a data and analytics driven lender we’re delighted to be supported with market-leading green data.”

Alex Maddox, Capital Markets and Digital Director, Kensington Mortgages


📖 White paper: The (hidden) cost of free data

The property sector is well aware of the limitations of EPC data, especially when it comes to energy performance and environmental impact. We analysed our enhanced dataset against freely available EPC data to find out the impact this is having on holding back property decarbonisation in the UK.

Get your copy ➡️

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