The real estate sector generates a staggering 40% of global carbon emissions, largely from heating and cooling systems. This means that net zero can only be achieved by improving the energy efficiency of buildings – for example through fitting insulation and introducing green technologies to maintain a steady indoor temperature whilst using less energy and releasing fewer emissions.

Energy efficiency offers a huge opportunity for financial institutions to capitalise on the energy transition. Since 2020, governments across the world have collectively facilitated the mobilisation of around USD$1 trillion to support energy-efficiency initiatives. And there’s far more to come, as investment levels must increase by 11% year-on-year until 2030 to align with net-zero scenarios - private finance can step in and play a key role in driving energy efficiency improvements.

There’s no one-size-fits-all approach 

There are many different ways for financial institutions to get involved.

The cost of running older, poorly insulated homes can be more than double that of newer, energy-efficient properties. Retrofitting unlocks tenant value and increases property value – both in letting and sales. Increasingly property investors, including pension funds with private rental homes in their portfolio, are looking at retrofit as a route to financial returns.

Savings on utilities bills can also shape solutions for the privately owned market. For instance, financial institutions can offer loans for homeowners to install new windows and other energy-saving measures. This raises the value of the underlying property, and may reduce repayment risk for mortgage providers as lower energy bills mean homeowners have more discretionary income. In some cases, retrofitting can increase resilience against extreme weather events, bringing benefits for insurers.

The value is not just in the assets themselves – there are opportunities to invest in companies that do retrofitting or make heat pumps, insulation materials and other green technologies – including by private equity.

With so many options available, each financial institution must determine the right approach to address energy efficiency. That means considering a range of factors that impact energy-efficiency solutions and the financing needs, including: 

The local climate. Within a single country like the USA, some regions experience hot and humid summers requiring a greater focus on cooling, while other areas can have cold winters and thus need heating.

The housing stock. The housing stock in different regions varies significantly: for example, homes in Norway and Germany retain heat three times more effectively than their British counterparts. Multiple factors contribute to building stock variations – e.g. property age and regional regulations. Many older homes were constructed with little or no insulation. This is a widespread problem in the UK, where 37% of homes were built before 1946 (far higher than the EU average of 25%).

Even in Australia, where the average home is newer than in the UK, there’s still a significant need for retrofitting. That’s partly because Australia’s national energy efficiency standards were only introduced in 2003, later than many European nations who introduced energy efficiency standards following the oil crises in the 1970s.

The structure of the housing market. In countries like the UK and Denmark, 15-20% of residential properties are social rental housing. These markets require different solutions to places like Australia, where the figure is just 5%.

For privately owned houses, financing options and the ability to access them may differ according to the portion of homes with no outstanding mortgage, which is twice as high in the UK as in Denmark. E.g. for homes without mortgages loans could be offered with repayment plans linked to expected bill savings – incentivising uptake.

Green homes have huge socioeconomic benefits

Cold, draughty homes contribute to medical conditions and impact quality of life. So, fixing them benefits population health and the economy.

Our research for Citizens Advice demonstrated that in the UK alone, improving the energy efficiency of 13 million homes could generate up to £140 billion in benefits by 2040. This includes:

  • avoiding around 6,000 excess winter deaths each year 
  • preventing 650,000 children developing asthma 
  • avoiding 570,000 mental health conditions 
  • reducing fuel poverty 
  • decreasing peak demand on the energy grid by up to 8% 
  • slashing the required spend on energy infrastructure by £4 billion 
  • cutting the UK’s overall emissions by 5%, accelerating the country’s transition to net zero. 

There’s no time to lose 

The drive for greater energy efficiency in real estate is rapidly gathering momentum. There’s a growing range of government-led initiatives that offer opportunities for financial institutions to participate. Examples include the Inflation Reduction Act in the US, the Green Finance Strategy in the UK, the EU’s European Investment Bank and Australia’s Clean Energy Finance Corporation (CEFC).

The bottom line? This is a pivotal moment for financial institutions to profit from the energy transition while building a stronger society and economy. The opportunity really is too good to miss.

For more information or to discuss the points raised in this article, please reach out to a member of the team below.

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