Decarbonising UK homes demands public-private collaboration

The cost-of-living crisis is making the need for energy-efficient homes more urgent than ever. Yet, despite the UK’s strong track record on reducing carbon emissions, UK homes remain among the least energy efficient in Europe. The Government has committed almost £4 billion in funding through its Heat and Buildings Strategy to kick-start the process of decarbonising domestic heating. Yet a total investment of some £250 billion will be needed to fully decarbonise homes by 2050 (Decarbonising heat in homes – Report Summary, UK Parliament, 3 February 2022). As a result, the banking and finance sector will have a key role to play in funding the transition – from lending to homeowners ­to help them make their properties more energy efficient to funding SMEs carrying out installation and retrofitting. 

Most lenders now offer some form of green mortgage to fund energy-efficiency improvements. But so far, these have had limited take-up. In reality, a far wider range of innovative financing solutions will be required. In fact, the newly launched UK Green Home Finance Accelerator (NZIP-GHFA) programme provides up to £20 million grant funding to support UK retail lenders in designing, developing and piloting new finance propositions.

To play their part, financial institutions need certainty on future policy

However, funding new green technologies, including solar panels and heat pumps, introduces additional risks and underwriting considerations. For lenders to support the government’s ambition for net zero homes effectively, they need three things:

  • Clear policy direction and key milestones in the road to net zero to create certainty.
  • Support with underwriting some of the risks on green lending or investments, either directly through the government or indirectly for example via a development bank.
  • Support with underwriting lending to households that may be at greater risk of default, but which never-the-less will require funds to green their homes.

Key actions for lenders to take now

The rapidly diminishing window to act to achieve the UK’s 2050 net zero goal and the review of net zero strategy currently underway means policy announcements will eventually emerge. In the meantime, what can financial institutions and lenders do to prepare for their role in enabling a just transition to net zero homes. Here are a range of proposals for getting started.

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Develop new environmentally linked products

As the ESG agenda becomes more important across financial services, investor appetite for ESG-linked securities will grow. By creating more good-quality products, the sector can help drive this interest. Simply labelling securities ‘environmental’ won’t be enough. Environmental securities will need to drive greener behaviours in consumers rather than just group energy-efficient assets together. 

Build a culture of innovation

Sustainability is now a high priority for financial institutions, but finance professionals are not always given space to innovate. Financial institutions should ensure they are fostering an innovative culture and give their professionals time to develop products to help drive decarbonisation and generate new income streams.

Engage with non-mortgage customers

Around 35 per cent of homes in the UK are mortgage-free. This limits the reach of mortgage lending arrangements in terms of realising green policies. However, lenders also have a trusted relationship with millions of mortgage-free homeowners via current accounts, savings accounts or personal loans. Lenders should start developing an agreed set of clear, consistent messages to actively engage all customers and educate them on net zero home improvements and offer green financing.

Leverage local and trusted presence

The UK’s housing stock is immensely varied, so decarbonising home heating will require place-based solutions. With their strong local presence, lenders are perfectly placed to engage with communities alongside local authorities in a way that central government cannot. Lenders should leverage this position and aim to be a source of trusted information for local communities. This will both increase lenders’ visibility and reputation in local communities and enhance the quality of information consumers get in relation to greening their homes.

Capitalise on broker relationships to engage and educate customers

Brokers play a vital role in the mortgage process so this relationship will play a key part in communicating with customers and educating them about retrofitting options and the available funding, both private and public. The Mortgage Climate Action Group is currently looking at the role brokers can play in greening homes. Lenders should proactively engage with this group to ensure that the shared goals of both industries are furthered.

Ensure credit risk processes are fit for purpose

As new innovative financing arrangements are designed and offered to individuals and SMEs, lenders must embed sustainability factors in credit risk processes to ensure they are fit for purpose. Similarly, as more lending to SMEs involved in greening homes takes place, lenders must design contracting arrangements carefully, by including appropriate covenants, for example, to protect both their own interest and ensure SMEs are not restricted in using funds to grow their businesses.

Develop robust plans for greening lending portfolios

As lenders set ambitious climate targets, for example through GFANZ (Glasgow Financial Alliance for Net Zero), they will need robust transition plans and disclosures to track and measure progress. These plans should be disclosed publicly and include effective methods for greening lending portfolios in a way that supports wider societal net zero goals.

A partnership for change

Lenders and financial institutions have a vital role to play in enabling the transition to net-zero homes in the UK. But they can only play their part effectively with clear policy direction and underwriting support from the Government. In the meantime, lenders should start thinking ahead now to be ready for the changes that the growing climate emergency will have on what householders and SMEs need from their banks.


If you need support navigating the green homes transition, contact us today.