The pressure is on for companies to demonstrate their climate progress – from regulatory climate disclosures requirements, to investor demand for ESG credentials, to consumers seeking climate transparency, to their own risk management needs.
For mortgage lenders, it is the homes financed which carry the majority of the climate risk exposure and carbon emissions footprint. Financed emissions from those homes are typically over 700 times higher than the direct emissions of the lender as a company itself.
It’s, therefore, vital for lenders to have a robust plan to reduce emissions from the mortgage portfolio.
So, which UK mortgage lenders are currently leading the market in terms of their climate plans and progress? And what sets them apart from their peers?
The top 5 climate-leading mortgage lenders
We conducted a comprehensive analysis of the publicly available climate plans of 85 UK mortgage lenders. The plans were evaluated against a rigorous set of criteria which, combined, make for a robust and credible climate plan.
The analysis revealed that leading the charge are:
- Nationwide Building Society
- Ecology Building Society
- Handelsbanken
- OneSavings Bank Plc
- Lloyds Banking Group
What makes these lenders the market leaders for climate progress?
There are 4 key areas in which the climate plans of these lenders stand apart from the rest of the markets:
- Detailed, transparent climate plans and reporting
- Robust financed emissions calculations
- Data-driven climate targets
- Retrofit-focused action plans.
Let’s take a closer look at each of these.
Detailed, transparent climate plans and reporting
Lenders should be clearly and openly communicating their plans for tackling climate risk and financed emissions, including how this relates to their mortgage portfolio.
This is crucial information for investors, customers, and other stakeholders who are evaluating the organisation’s climate credentials so it’s important that it’s accessible and easy to understand.
At the same time, it’s increasingly becoming a legal necessity, as climate disclosures requirements become more and more stringent. In particular, in January 2024 climate reporting requirements in the UK switched from the Taskforce on Climate-related Financial Disclosures (TCFD) guidance to the new International Financial Reporting Standards (IFRS). This change makes it mandatory for companies to report their financed emissions and transition risk, so it’s vital that lenders have a clear structure for doing so.
The new IFRS Standards also make it mandatory for companies to disclose whether they have a climate transition plan in place. Climate transition plans are the best practice medium for communicating climate plans, targets, and progress – with the government commissioned Transition Plan Taskforce (TPT) framework now seen as the ‘gold standard’ approach. It’s therefore sensible to align climate plans and reporting with this framework to future-proof against growing legislative requirements.
One of the top 5 lenders already has a climate transition plan which is stated as being in alignment with the TPT framework: Nationwide. However, the other top lenders have climate plans in place which are easy to find and which cover all the key elements needed – including financed emissions calculations and transition risk assessments.
Robust financed emissions calculations for the mortgage portfolio
The emissions from the homes financed by lenders typically make up the vast majority of their climate impact.
Therefore, it’s important for lenders to ensure accurate calculations of the financed emissions from the mortgage portfolio, and to disclose this within their climate plans – and this is also a requirement of the new IFRS Standards for climate disclosures, so it’s mandatory in terms of regulatory reporting too.
Accurately calculating financed emissions is a major challenge for lenders, especially due to climate data quality issues for the carbon emissions from UK housing. This leaves many lenders failing to disclose their financed emissions publicly or including mortgages within a top level financed emissions calculation for all investments (for larger lenders) which cannot be sufficiently interrogated. For lenders that do disclose their mortgage portfolio financed emissions, there’s often a cloud of mystery surrounding the data source and approach for this.
This isn’t the case for our top 5 lenders.
All of the top lenders specifically disclose the financed emissions for the mortgages that they lend on – rather than giving a top-level financed emissions figure for all investments. They also disclose emissions intensity alongside an absolute figure to allow for comparison across lenders with different portfolio sizes.
Further, they each explicitly follow the industry-standard PCAF methodology for calculating the financed emissions for their mortgage portfolio, making it easy to understand the approach taken. As part of this methodology, they all openly disclose the PCAF score as a measure of data quality. Nationwide, OneSavings Bank, and Lloyds all have a better than average (3.5) PCAF score, indicating a higher level of data quality.
One important aspect of data quality for mortgage lenders is how they handle missing EPC data. In the average mortgage portfolio 35% of homes will have no valid EPC, which is a crucial data source for understanding emissions. Many lenders fail to acknowledge this data issue at all or, if it is mentioned, share no explanation as to how the missing data has been accounted for in calculations. In contrast, two of our top 5 lenders (Nationwide and OneSavings Bank) explain their use of modelling to predict the missing EPCs.
Data-driven climate targets
Setting clear, realistic, and ambitious targets is another important area where these lenders shine.
All of the top lenders include detailed targets relating to reducing the absolute emissions and/or emissions intensity for their mortgage portfolio – rather than loose or top level targets for the company as a whole which do little to illuminate plans. These clear targets bolster the transparency of climate plans and enable regulators, investors, and customers alike to easily understand the progress of the lender against that target.
The top 5 lenders also all use scenario analysis to develop realistic decarbonisation pathways for their mortgage portfolios, that deliberately account for external dependencies such as future government policy on energy efficiency.
Nationwide and OneSavings Bank have taken this a step further by quantifying the impact of the dependencies identified through scenario analysis. This ensures that the targets committed to are actually achievable and highlights the responsibility of the lender vs factors outside of their control so that progress on both can be monitored.
Retrofit-focused action plans
Each of the top lenders clearly outline an action plan for decarbonising the mortgage portfolio, and report progress against targets transparently.
Their action plans include robust commitments relating to both increasing retrofit understanding amongst their customer base and supporting customers with the upfront costs via financing options. This is vital because encouraging retrofit is within lender control as a decarbonisation action – whereas many lenders are relying too heavily on government policy to solve their mortgage portfolio emissions problems.
Perhaps the most important factor that sets apart our top lenders is that action is already underway.
All 5 top lenders already have educational content on home energy efficiency and a retrofit financing product already available for customers.
For example, Nationwide has a Green Housing hub on their website, which includes information on their 0% green additional borrowing mortgage which supports customers with the upfront costs of retrofit.
Similarly, Ecology Building Society has a renovation hub which even includes case studies of positive stories of energy efficiency improvements.
Ecology was also one of the very first lenders to launch a green mortgage focused on retrofit improvements, with their C-Change Discounts which is still available today.
By acting early and putting actions into place now instead of waiting for policy changes as target deadlines draw closer, they give themselves ample time to test, learn, and iterate to identify the actions that will truly support customers and drive down emissions.
In fact, two of the lenders have already made significant progress in reducing the emissions from their mortgage portfolio: Ecology and Handelskbanken. Within our approach to the analysis we defined ‘significant progress’ as achieving year-on-year reductions of -7.5% or more, in line with the UN pathway for staying within 1.5 degrees of warming. Replicating this across the industry would deliver a step-change in the pace of decarbonisation of mortgaged properties.
The road ahead for the mortgage industry as a whole
It’s important to highlight that, even within this top 5, no lender currently has a perfect climate plan, and the majority are not yet making adequate progress on reducing the emissions (and therefore risk) within the mortgage portfolio.
It’s clear that there’s still much work to be done – especially in the areas mentioned above of data quality, realistic decarbonisation pathways, and driving customer retrofit action.
However, Nationwide, Ecology Building Society, Handelsbanken, OneSavings Bank, and Lloyds are setting a strong example for the rest of the industry on the starting points for a robust and credible climate plan, and their progress is commendable.
As the climate crisis intensifies, the actions of leading lenders like these will set the pace for the entire industry. Now is the time for all mortgage lenders to step up and ensure their climate transition plans are both credible and actionable.
To dive deeper into these findings and explore the full ranking, download our full report ‘The State of the Climate Transition for UK Mortgage Lenders in 2024’.