While the COVID pandemic has naturally occupied all of our minds for over a year now, climate change and the steps we can take to do something about it have not gone away.
Regardless of where you stand on green issues, I was reminded just how committed the government is to the goal of zero carbon by a recent letter from the Chancellor of the Exchequer to the Chief Executive of the FCA, firmly reminding him of what the government expects from the regulator in pursuing a strategy which is in line with the country’s commitment to a greener future.
It is worth printing it in full, because although it appears as a reminder, under the heading of ‘Matters about aspects of the government’s economic policy to which the Financial Conduct Authority should have regard.’ It serves as a forceful underlining of the government’s expectations of one of our primary regulators.
vii. Climate Change
The government wishes to deliver a financial system which supports and enables a net-zero economy by mobilising private finance towards sustainable and resilient growth and is resilient to the physical and transition risks that climate change presents. The FCA should have regard to the government’s commitment to achieve a net-zero economy by 2050 under the Climate Change Act 2008 (Order 2019) when considering how to advance its objectives and discharge its functions.
Of course, cynics might argue that mortgages have no connection to melting ice caps and stranded polar bears and there is nothing stopping individual lenders and providers from turning their operations into green oases by cutting their emissions, if they choose. However, I believe government is reminding the regulator that they expect it to use its position to put more emphasis on ensuring that the mortgage finance industry plays its part in incentivising homeowners to upgrade their green credentials and look to supporting the purchase of properties with EPC certificates and the modernisation of existing property stock by making green mortgages.
I expect to see the FCA increasing its emphasis on greening the industry and its interpretation of the government’s wishes become less a nudge and more a desired expectation, by instructing lenders to ‘do their bit’ in marketing green mortgages. Indirectly, builders are going to have to buy in too, and their enthusiasm for building more eco-friendly property will depend on the tastes of the buying public becoming more sensitised to the eco message in their expectations.
EPC certificates with their current qualification criteria and the value placed upon them will, for the time being, represent a standard that all parties can understand and work with. For lenders offering green mortgages, the EPC qualification will continue to be the gold standard for a property to join the ‘green club’ and make its buyers eligible for a suitable mortgage.
However, while the buying public is becoming more sensitised to climate change and the willingness to choose more energy efficient homes, a future situation must not be allowed to develop where property discrimination exists. Current EPC standards will inevitably be recalibrated, and the bar will rise. Older property will not qualify for the best green mortgage deals as it becomes more difficult to retrofit the latest eco-enhancements. We could face a situation where older housing stock becomes the unwanted love child of the property market.
The irony is that the UK is not exactly running a surplus of housing currently and is unlikely to do so any time soon. In the meantime, the government’s ambitious targets for cutting our carbon footprint will see all parties having to develop a plan that avoids a ‘new house good, old house bad’ scenario.
According to the government’s national statistics, residential properties account for 15% of the UK’s total climate emissions. Other figures estimate that domestic heating, hot water and cooking alone accounts for 23% of our national emissions. If the UK is to meet its reduction targets by 2050, increasing the take up of alternatives to gas boilers and appliances powered by oil and LPG, along with better building practices to improve insulation, will need to accelerate rapidly. The difficulty is how to supply low carbon alternatives at a price that is not going to hinder adoption by the buying public.
In the lending sector, the promotion of mortgages that reward buyers who opt for properties with measurable eco-credentials will accelerate. The real battle will be about the levers the government can effectively use to help ensure that housing stock can keep pace with what will be increasingly expensive but necessary standards required to reduce our national footprint.