How to reduce financed emissions as a mortgage lender: policy dependencies and retrofit initiatives

Regulatory Reporting
Retrofit

Reducing emissions from a mortgage portfolio isn’t a simple task.

The mortgage portfolio is typically a very large portion of the carbon footprint of a mortgage lender (due to the poor condition of much of the UK housing stock) so it’s important to cut emissions in this area to reduce climate risk and demonstrate progress.

But lenders lack control over reducing their financed emissions from the mortgage portfolio: 

  1. Reliance on homeowners. Reducing emissions from mortgages means that homeowner customers need to take actions to improve the energy efficiency of their homes and, therefore, reduce emissions.
  1. Reliance on government policy. As it stands, retrofit progress has been slow. Upfront costs are a major factor, with many homeowners and landlords reluctant to spend thousands of pounds to improve the energy efficiency of their home. Government policy is, therefore, vital to meet housing decarbonisation targets – both in enforcing minimum energy efficiency standards and in providing grants and other funding opportunities to support homeowners with the costs. 

So how should mortgage lenders approach this? 

In terms of external policy, the best practice approach is to use scenario analysis to assess the impact of different policy scenarios on financed emissions from the mortgage portfolio.

And when it comes to homeowners, whilst lenders may feel they lack control, they’re actually in a highly influential position to drive the uptake of retrofit. 

Therefore, the best transition plans balance the impact of reliance on external policy outcomes with ambitious, actionable targets that focus on the retrofit influence that lenders do have control over.

In this article we’ll explore insights from our recent analysis of existing lender climate transition plans to see how lenders are currently approaching this problem area, and where improvements are needed.

The role of government policy in decarbonising mortgage portfolios

Government policy plays a pivotal role in the decarbonisation of UK homes. 

Future policy commitments such as Minimum Energy Efficiency Standards (MEES) for the private rental sector, switching the National Grid to low carbon energy sources, and offering substantial grants for energy efficiency improvements such as heat pumps or insulation, will have a major impact on the carbon emissions from UK homes – and, therefore, the carbon emissions from lender mortgage portfolios. 

This reality is prominently reflected in lender climate plans, with almost all lenders acknowledging that without strong policy interventions significant progress in reducing their financed emissions is unlikely. 

Plus, when we surveyed ESG professionals at UK lenders, 87% identified reliance on external policy as a major barrier to achieving their climate targets – second only to the need for better quality climate data

Kamma survey of ESG professionals at mortgage lenders 2024: biggest challenges in climate transition planning

There is a danger that this reliance on policy could leave lenders complacent, waiting for the government to come along and solve their mortgage portfolio emissions problems instead of taking responsibility themselves.

Instead, to set ambitious (but realistic) targets, lenders must quantify the potential impact of government policies on their financed emissions and decarbonisation pathways. 

This step is absolutely vital for a credible and robust climate plan which outlines the interplay between the lender’s own climate actions and external factors – but only 10% of lenders have taken the initiative to do so thus far (despite 44% conducting scenario analysis to identify those dependencies). 

Kamma analysis of mortgage lender climate transition plans 2024: scenario analysis and external dependencies

The influence of mortgage lenders on driving home retrofit uptake

Furthermore, while government policy does undeniably play an important role in the decarbonisation of mortgage portfolios, there are absolutely still actions that lenders should be taking themselves towards this. 

Lenders have a significant opportunity to influence the pace of decarbonisation through their direct relationships with homeowners at the point of sale or refinancing.

Our survey found that 86% of ESG professionals within lending institutions believe that a lack of awareness about the benefits of energy efficiency is the biggest barrier to retrofit – so there is widespread understanding of the need for greater awareness and education. 

Kamma survey of ESG professionals at mortgage lenders 2024: retrofit barriers

One of the other key barriers to retrofit is the upfront cost, which many homeowners see as prohibitively expensive. Lenders can play a crucial role in overcoming this barrier by providing targeted green lending products, such as retrofit loans or additional borrowing options on existing mortgages. These products can help to make energy efficiency improvements more accessible to a broader range of homeowners.

Yet, despite the clear potential and the understanding of retrofit barriers by ESG professionals, so far only 34% of lenders currently include retrofit education as part of their action plans to reduce financed emissions, and just 30% offer specific retrofit financing products. 

Kamma analysis of mortgage lender climate transition plans 2024: retrofit action plans

This gap between potential influence and actual action represents a missed opportunity for lenders to drive meaningful progress. It highlights the need for lenders to develop a comprehensive retrofit action plan which combines financial support with robust educational initiatives. By raising awareness about the long-term cost savings and increased property value that come with energy efficiency improvements, lenders can help shift customer perceptions and drive greater uptake of retrofit to lower their climate risk and financed emissions. 

How to balance policy dependencies with retrofit initiatives for credible climate targets and action plans

So, in summary, to set credible climate targets and then to achieve meaningful emissions reductions in their mortgage portfolios, lenders must strike a balance between the external dependencies they can’t control and the internal influence they can exert on retrofit.

This requires a two-pronged approach:

  1. Scenario analysis and quantification for external dependencies
  2. Proactive retrofit strategies to drive customer retrofit.

Scenario analysis and quantification for external dependencies

Lenders should adopt a robust scenario analysis approach which both identifies and quantifies how different policy outcomes could impact their ability to decarbonise the mortgage portfolio and meet climate targets. 

By quantifying these external dependencies lenders can set more realistic targets, whilst also being able to better communicate the need for policy action to stakeholders.

As an example of how to do this, lifetime mortgage lender Just Group worked with Kamma to conduct scenario analysis and model the impact of expected government policies on their rate of mortgage portfolio decarbonisation, towards their target of a 50% reduction in emissions by 2030.

Scenario A referred to Just’s current rate of decarbonisation. Scenario B modelled how the rate of decarbonisation would be impacted if existing and anticipating policies relating to housing decarbonisation are realised.

The analysis highlighted that if Just continued at their current rate, they would achieve 17% emissions reductions in the mortgage portfolio by 2030. Government policy is expected to contribute an additional 24%. A 9% reduction would be outstanding to meet their target. This quantification has given the Just team a core focus to close that 9% gap between their current rate of decarbonisation and the rate needed to meet their target by 2030. 

Proactive retrofit strategies to drive customer retrofit

Alongside scenario analysis, lenders must take proactive steps to influence homeowner behaviour. 

This means developing comprehensive educational resources that clearly explain the benefits of retrofit, with retrofit messaging that will cut through the top barriers identified by homeowners.

It also means offering innovative financing products that reduce the upfront cost barrier – like Octopus Real Estate’s green lending products, for example. 

Octopus Real Estate green lending webpage

Lenders should also consider providing a retrofit planning tool (such as Kamma’s Retrofit Explorer) which gives accurate information on the most cost effective energy efficiency improvements for a particular property, as well as demonstrating the benefits in terms of comfort, emissions, energy bill savings, and property valuation. 

Kamma's Retrofit Explorer

Finally, it’s essential to involve brokers in the retrofit conversation. 

As intermediaries in the mortgage process, brokers play a key role in guiding homeowners through their options. By educating brokers about the benefits of retrofit and the availability of financing products, lenders can ensure that the retrofit message reaches more customers and encourages broader adoption.

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.

The State of the 
Climate Transition for 
UK Mortgage Lenders 
in 2024. Download the report >

Share this article

Read more recent articles

Did you MEES me? Update on new Minimum Energy Efficiency Standards for the PRS

Miliband and Rayner press ahead with plans to enforce Minimum Energy Efficiency Standards that would demand improvements to 57% of the Private Rented Sector The Department for Net Zero and…

Read more

UPDATE: Understanding new ISSB financed emissions & risk requirements for climate-related financial disclosures

What are climate-related financial disclosures? And what do they mean for the UK property sector? Here’s everything you need to know

Read more

PCAF data quality scores: Best practice for mortgage lenders

As climate regulations tighten and scrutiny on financial disclosures intensifies, mortgage lenders are under increasing pressure to measure and disclose the climate impact of their loan portfolios accurately.  The Partnership…

Read more