Core statements of the research paper “Sustainability in the mortgage business
In an effort to position the Swiss financial centre as a global leader in sustainable financial services, the Federal Council is taking on a subsidiary role and pursuing a market-based approach This means that market participants independently develop solutions and drive innovation in the area of sustainable financial services within a regulated framework. Instead of intervening directly or imposing strict regulations, the market-based approach supports self-regulation within the industry and encourages players to develop voluntary standards and best practices. To address sustainability criteria specifically in real estate finance, guidelines for mortgage providers were set by the SBA in June 2022 as part of the self-regulatory process and will apply from 1 January this year (Swiss Bankers Association, 2022).
The importance of mortgages to achieve the 2050 climate targets
- The building sector is a major contributor to energy consumption and CO2 emissions, so sustainable retrofits and energy-efficient design are necessary to achieve the 2050 climate targets.
- Mortgages are crucial for energy retrofits and efficiency improvements of buildings. By aligning mortgage terms with sustainability goals, banks and lenders can incentivise owners to green their properties and thus contribute to achieving climate goals.
- Within the framework of self-regulation, banks undertake to create better incentives for more sustainability in the areas of loan-to-value, affordability, amortisation and interest rates, especially for private owners. A large proportion of mortgages are granted to private owners.
The role of private owners
- Private owners are fundamentally worse off in terms of sustainability compared to institutional owners, although for a long time the problem was at the level of “will”. Increased energy prices and interest costs, as well as increased regulation and public interest, have likely increased willingness.
- Cognitive barriers need to be broken down through comprehensive advice in order to increase the renovation rate among private owners. Many owners do not realise that sustainability can be financially rewarding as it can lead to higher occupancy rates, rental income, lower operating costs, higher liquidity and lower risk premiums, which in turn increases the value of the property.
- Financial barriers need to be removed to increase the rate of renovation among private owners. Attractive mortgage conditions can ultimately persuade them to act after readiness and education.
Offering green mortgages
- Mortgage financing that financially rewards and encourages sustainable behaviour already exists and is integrated into the product offerings of many lenders. There is currently no standard taxonomy and various certificates are used to classify sustainability.
- Green mortgages include advantageous terms but can be criticised for inefficiencies and potential greenwashing. In addition, positions and environmental impacts are rarely communicated externally.
- Lenders that are actually engaged can finance their lending of green mortgages by issuing green bonds and thus be more efficient and transparent. In doing so, they also increase their competitiveness and enhance their credibility.
What should be expected as a private owner?
- Owners should be aware that green practices can increase property values in different ways, while less sustainable buildings risk becoming stranded assets due to future regulatory measures and market changes.
- In the future, an improved database and more accurate tools may allow for a more precise recording of CO2 emissions and grey energy of real estate, which would lead to more efficient and symmetrical pricing in lending. This would allow green properties to be financed at more favourable conditions, while non-green properties might receive less favourable conditions.
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