Climate-related transition risks are likely to cause significant market disruption and loss of income for mortgage lenders in coming years.
This shift will impact all financial institutions.
That includes mortgage lenders, who have particular risk due to the large size of mortgage loans and their long credit lifetimes. It’s vital for lenders to be able to measure, quantify, and assess the materiality of transition risk within their mortgage book.
But question marks remain on how to do this.
Lenders have been well aware of climate risks for a while, especially flood risk. But, whereas for flood risk there is clear guidance via CBES and NGFS of how lenders should plan for multiple scenarios, it’s much more complex for transition risk. Flood risk is a certainty. Transition risk, on the other hand, depends on regulations that have not yet been put in place – mostly policy on energy efficiency standards, but also other factors such as the impact of climate risk on capital requirements.
This uncertainty has left many lenders fearing the worst.
Scaremongering headlines suggest it will cost £69k per home to retrofit, which no homeowner will be able to afford, leading to plummeting property values and customers failing to meet repayments.
In reality this is nowhere near the truth. In a recent analysis we found that for the average mortgage book 84% of properties can meet an EPC C standard of energy efficiency with a retrofit cost of less than 5% of the property value – achievable for most homeowners, especially if lenders support with retrofit financing and education.
All lenders actually need is accurate data and a solid method to measure transition risk and assess materiality.
What is transition risk for a mortgage lender?
Transition risks are any risks to a business resulting from the shift to a low carbon economy and society, typically encompassing policy and regulatory risks, technological risks, market risks, reputational risks, and legal risks.
The UK government has ambitious targets for all fuel poor homes to be EPC C by 2030, and as many other homes to be EPC C by 2035 – with the Climate Change Committee (CCC) recommending a pathway target of 89% of homes with an EPC A-C rating by 2035.
The CCC has also recommended that lenders should be aiming to average an EPC C for their mortgage portfolio by 2030.
Progress towards these targets has been very slow so far.
That means we’re very likely to see policy ramp up in the near future to close the gaping gap between targets and reality. This will inevitably include minimum energy standards for mortgage lenders – expected to be either an average EPC C portfolio-wide, or a minimum EPC C per property.

Further, the international standard framework for climate-related financial disclosures will soon transition from TCFD to the ISSB’s ISFR S1 and S2. These new frameworks include a heightening role of transition plans which disclose how financial institutions are managing and mitigating climate risks.
For lenders, that means significant transition risk, in the form of:
- Legislative risk due to the need to comply with minimum energy standards requirements or face fines and penalties
- Financial risk due to the cost needed to retrofit the homes in a typical mortgage portfolio to achieve a minimum EPC rating; if the cost is added to the borrower’s loan this will have a significant impact on LTV ratios. In their 6th carbon budget the CCC estimated a total cost of £250 billion to upgrade all UK homes to an EPC C.
- Credit risk: customers are less able to make mortgage repayments if they are required to spend money on retrofit improvements to bring their home to an EPC C; plus the value of the asset is at risk if it is not compliant to energy efficiency standards.
- Reputational risk if a lender’s poor performance on green issues means customers choose to switch to greener, more environmentally-friendly lenders.
Since 2022 the UK has also had mandatory climate-related financial disclosures for all large companies and LLPs, adding additional transition risk through legislation that needs to be complied with and the operational need to demonstrate progress on climate targets.

Alongside this growing and changing policy landscape, lenders are also already exposed to transition risk due to changing market preferences as homeowners start to prioritise energy efficient homes – both due to a desire to reduce their environmental impact and to lower their energy bills.
Measuring transition risk as a mortgage lender: a 4-step process
Measuring transition risk for mortgage lenders means a regular (typically annual) process to:
- Quantify the energy efficiency and financed emissions of the mortgage portfolio
- Benchmark against the wider mortgage sector and government targets
- Quantify associated compliance costs
- Assess the materiality of the risk.

How to quantify energy efficiency and financed emissions in a mortgage portfolio
Quantifying the energy efficiency of a mortgage portfolio typically includes:
- Average Energy Efficiency Rating (EER) and SAP score for the whole portfolio – calculated using EPC data for all properties
- Percentage of properties in the portfolio that are below an EPC C – and a break down of the percentage in EPC D, E, F, and G
- An analysis of the EER, SAP score, and % below EPC C for specific segments of the portfolio (dependent on the lender’s focus) e.g. owner occupied vs PRS properties, variance against property age, variance against property location.
- Total financed emissions for the whole portfolio
- Average carbon emissions per property
- Average Environmental Impact Rating (EIR) – calculated using EPC data for all properties.
Progress can then also be analysed through comparing against the previous year.
🤔 How can lenders access reliable EPC data for their portfolio?
Data quality is vital for an accurate assessment of transition risk.
As we can see, much of the analysis for mortgage lenders relies on EPC data (EER, EIR, SAP score) for the portfolio.
This poses a huge problem.
Whilst EPCs are freely available via the government’s EPC register they are also notoriously inaccurate, and many homes don’t have a valid EPC in the first place.
Low quality data means a low quality risk assessment and inaccurate disclosures.
That’s why many lenders opt to work with data providers like Kamma – our enhanced dataset consolidates all available EPC data with additional data sources, and our predictive modelling is able to fill any remaining gaps with high accuracy, to give a full report on your portfolio.
Learn more: EPC Open data vs Kamma’s data
How to benchmark energy efficiency and financed emissions against the wider mortgage sector and government targets
It’s always important to be able to put metrics into context.
In the case of lender transition risk, that means benchmarking the energy efficiency (average EPC rating / SAP score) and financed emissions (EIR) of your mortgage portfolio against both the wider mortgage sector and legislative targets.
- The wider mortgage sector: how does our portfolio compare to the national average EER / SAP score / EIR for a mortgage lender’s residential portfolio?
- Legislation (current and future): at what rate would we need to increase the energy efficiency and decrease the emissions of our mortgage portfolio to align with government targets and future-proof against policy changes? How does this compare to the progress we made between now and last year?
In the transition risk reports we produce for lenders at Kamma we always benchmark against the rate of decarbonisation needed to meet both an average EPC C and a minimum EPC C across the portfolio by 2030 – to account for varying policy scenarios – and highlight the gap between a lenders’ current rate of portfolio decarbonisation and the required rates for these scenarios too.
📊 Data insight: What is the average energy efficiency rating for UK mortgage lenders in 2024?
To give an idea of what benchmarking in the UK mortgage industry looks like, let’s take a look at a snapshot of Kamma’s data.
In 2024 the average mortgage portfolio energy efficiency rating is an EPC D.
The average portfolio SAP score is actually 66.7 SAP points, putting the typical portfolio towards the top end of the EPC D band (55-68 points).
Of course, this is a very top level view and it’s important to understand how this differs across different types of property to fully assess your portfolio’s performance. A buy-to-let portfolio, for instance, is likely to be lower than this average.
To benchmark your mortgage book against the market, get in touch with our team.
How to quantify compliance costs for improving energy efficiency in a mortgage portfolio
Once you know where your mortgage book currently stands, you then need to understand the cost of compliance to decarbonise the portfolio in line with government targets, the most likely scenario being the need to retrofit to an EPC C standard.
Of course, the costs required will vary depending on what future legislation on minimum energy efficiency standards for lenders ends up being.
For now, we’d recommend modelling the two most likely scenarios – which is what we include in our Kamma transition risk reports as standard:
- An average EPC C rating across the portfolio as a whole
- A minimum EPC C rating for each individual home in the portfolio.
It’s also well worth analysing different segments of your portfolio e.g. buy-to-let vs owner occupied, pre-2000 builds vs post-2000, south east vs north west location, to see where the biggest opportunities to improve energy efficiency lie.
Recommendations on the retrofit improvements needed for a property, and the associated installation costs, are often found via a home’s EPC.

However, these recommendations and costs are highly unreliable and inaccurate:
- The energy prices (gas and electricity) used to determine the costs and energy bill savings on EPCs are based on 2012 energy prices which are much, much lower than the reality today.
- The costs are generic and do not factor in the size of the specific property the EPC relates to, meaning they give broad cost ranges e.g. cavity wall insulation will always say £500-1500 regardless of the size of the property.
- The method used to work out the overall expected cost of retrofit is to work out an average cost per SAP point improved, which is now how homeowners actually undertake retrofit, leading to a misleading view of the costs and process.
- EPC data is not cleaned or quality checked at any point before publication, leading to errors and inaccuracies.
Plus, with only 51% of UK homes actually having a valid EPC, there’s also the issue of missing EPC data for your portfolio to contend with.
This is why we’d highly recommend engaging an expert data provider like Kamma to understand accurate compliance costs for your mortgage book, rather than relying on poor EPC data.
How to assess the materiality of transition risk in a mortgage portfolio
Alongside the costs required to decarbonise your portfolio, you also need to assess the materiality of that risk i.e. how likely is it that those costs will materially impact your operating or financial performance?
At Kamma we look at two key metrics for this:
- Adjusted LTV ratio. If the cost to retrofit a property to an EPC C rating was added to the outstanding mortgage balance (e.g. via remortgaging to add an additional retrofit loan amount), would this substantially change the loan-to-value ratio? If so, the property should be flagged as high risk.

- Cost to EPC C vs asset value. How affordable is the cost to retrofit a property to an EPC rating compared to the property valuation? If the cost is more than 5% of the asset value, the property should be flagged as high risk.
As an illustrative example of the cost to EPC C vs asset value piece, we recently analysed 200,000 mortgaged homes that are currently below an EPC C standard to assess the cost needed to achieve EPC C against the value of the asset.
We found that only 16% of homes in the typical mortgage book would need energy efficiency improvements costing more than 5% of the asset value to reach a minimum EPC C standard – with 84% able to reach EPC C with improvements equivalent to less than 5% of the property’s value.

Within that 16% that would need improvements costing more than 5% of the asset value, there will inevitably be a portion of properties that require so much work that could represent a potentially unaffordable cost of compliance when we compare this to the value of the asset – this is the highest risk portion of the mortgage book.
But, most of the portfolio (84% on average!) will be full of high potential properties that do have an affordable route to energy efficiency.
Some will require support in the form of green lending options to make higher cost retrofit improvements, and others could be brought to an EPC C through simple and low-cost improvements. This insight gives you a great starting point for an action plan to improve the energy efficiency of your mortgage book through a combination of retrofit education and innovative green lending offers.
The key takeaway?
With much more accurate data and much more rigorous methods lenders can accurately quantify transition risk and assess materiality for the mortgage book, for a full understanding of the true extent and impact of transition risk.