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.
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.
