Accurate climate data is the foundation for creating a credible climate transition plan and fulfilling growing climate disclosure requirements.
It’s the cornerstone for understanding a company’s existing carbon emissions responsibility and climate risk exposure, as well as for modelling realistic decarbonisation pathways to ensure achievable and adequately ambitious climate targets.
For mortgage lenders, this is a major stumbling block.
Getting hold of accurate climate data for the properties lent on in the portfolio is difficult because lenders are currently reliant on EPC data.
Our recent analysis identified that in an average mortgage portfolio 35% of homes will be missing a valid EPC. Even when EPCs are available, the inaccuracies in EPC ratings and carbon emission estimates due to flaws in the EPC methodology mean that lenders are left with an inaccurate picture of their climate impact.
Given this, it’s no wonder that data quality emerged as the number one barrier that ESG professionals at UK mortgage lenders face when it comes to climate transition planning in our recent survey.
So how bad is the data quality in the current climate plans of UK mortgage lenders? Let’s take a closer look.
The scope of the problem: Analysing data quality in lender climate transition plans
At Kamma we recently conducted a detailed analysis of the publicly available climate plans and reports of 85 UK mortgage lenders to understand progress so far as well as the biggest challenges faced and opportunities for driving housing decarbonisation.
In terms of data quality, there are three key questions to discuss:
- Are lenders disclosing their financed emissions for the mortgage portfolio?
- If so, what methodology are lenders using to calculate this?
- And how are they handling the problem of missing EPC data?
Are lenders disclosing the financed emissions for their mortgage portfolio?
The best practice approach to disclosing financed emissions as a mortgage lender is to two-fold:
- Disclose overall financed emissions as well as a breakdown for key sectors like mortgages to add nuance to the actions required – important for larger high street banks who also hold other investments alongside mortgages which count towards financed emissions.
- Disclose both the absolute financed emissions (tCO2e per year) and emissions intensity – either the physical emissions intensity (tCO2e per m2 per year for mortgaged homes) or the economic emissions intensity (tCO2e per £million lent for mortgaged homes). Emissions intensity is important because it gives a measure which is comparable across lenders with different sized mortgage books.
Our analysis identified that 71% of lenders who have a climate plan do not yet disclose their financed emissions at all within that plan.
Financed emissions calculations had not been a mandatory part of climate disclosures requirements for financial institutions in the UK before 2024, but that is now no longer the case. In January 2024 UK legislation switched from being based on the Taskforce on Climate-Related Financial Disclosures (TCFD) to the new IFRS Standards developed by the International Sustainability Standards Board (ISSB). IFRS S2 on climate disclosures requirements includes mandatory reporting on financed emissions.
It’s, therefore, surprising that so few lenders are already disclosing their financed emissions – this should be a major priority in the run up to the next reporting deadline.
Within those lenders that do disclose their financed emissions it’s common to disclose both the absolute financed emissions and emissions intensity (a key feature of climate-leading lenders) which is positive. In fact, only four lenders disclosed just an absolute figure for their financed emissions.
However, it’s less common to include a breakdown of how financed emissions differ across different aspects of an organisation’s investments – most companies are giving an overall figure for their financed emissions, with no specific calculation for the mortgage portfolio.
This makes it difficult to understand which areas have the highest emissions associated with them, and therefore should be a focus for reducing emissions.
What methodology are lenders using to calculate financed emissions for the mortgage portfolio?
For the lenders that are disclosing their financed emissions, it’s important that they are taking measures to ensure the calculation behind the financed emissions is robust and accurate.
We’ve already seen that a necessary reliance on incomplete and inaccurate EPC data is a major issue, which lenders cannot control. However, there are steps that can be taken to mitigate this as much as possible.
One step is to align financed emissions calculations with an industry-standard methodology. As well as improving data quality, this also ensures that calculations are standardised and comparable across the market which is vital for climate progress in the industry as a whole.
The current best practice methodology is that provided by the Partnership for Carbon Accounting Financials (PCAF) – with a specific guide for those in the real estate sector.
Our analysis found that only 48% of lenders with a climate plan currently use the PCAF methodology.
Of those lenders, 79% disclose their PCAF score – which is a measure of the data quality, determined by the methodology used.
PCAF scores range from 1-5, with 1 representing the highest quality data. In our analysis the average mortgage portfolio PCAF score is 3.5. This is, unfortunately, a reflection of the poor quality of EPC data and the many homes lacking an EPC which leads lenders to rely on estimates.
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Kamma’s advanced data and analytics for energy efficiency and emissions ensures lenders can achieve a best-in-class PCAF score. Atom bank’s PCAF score improved to 3.02 through partnering with Kamma, for instance. A strong PCAF score demonstrates the sophistication of your company’s climate reporting to regulators, investors, and customers.
Find out more
How are lenders handling the problem of missing EPC data in their financed emissions calculations?
Given the large proportion of missing EPCs, another step that lenders need to take to improve data quality is to adopt an approach to account for missing EPCs within the portfolio.
Shockingly, only 27% of lenders disclose the proportion of their portfolio missing EPC data within their climate plan, indicating a widespread lack of transparency around this climate data quality issue in property.
While some lenders use portfolio averages to predict missing EPCs, a more robust approach involves predictive modelling based on property characteristics. However, only 17% of lenders use this advanced method, and even fewer transparently disclose their methodology.
The path forward: Improving climate data quality to drive real progress
Encouragingly, our survey findings reveal that 90% ESG professionals at UK mortgage lenders do see improving data quality as a top priority for the next 12 months, so it seems that this could be set to change soon.
Accurate data underpins robust and credible climate transition plans, enabling lenders to set realistic targets and track progress meaningfully – and, as the pace of climate transition accelerates, the importance of reliable data will only grow.
Improving data quality is, therefore, essential for mortgage lenders as they navigate the complexities of climate planning and progress, particularly with tightening regulations on climate disclosures.
For more detail on these findings and other insights from our analysis of lender climate plans and progress, download our full report: The State of the Climate Transition for UK Mortgage Lenders in 2024.
