The EeDaPP Initiative aims to design and deliver a market-led-protocol to enable the recording of data relating to energy efficient mortgage assets and which will be made accessible via the design of a common data portal.
The EeDaPP Initiative is intended to both complement and build on the EeMAP Initiative – which aim to create a standardised “energy efficient mortgage” based on a financing mechanism – by addressing the current lack of large-scale standardised energy efficient asset datasets in order to help develop a true market for energy efficient financing by enhancing transparency, viability and comprehensive risk analysis.
The Energy Efficient Mortgages Initiative, under which umbrella the EeMAP and EeDaPP initiatives run in parallel, is based on the realisation that: (i) banks, in financing the purchase of homes, can play a game-changing role in supporting the EU’s energy savings targets, by bringing energy efficiency into the conversation between banks and consumers by means of a standardised approach to the financing of energy efficient buildings/renovation, and (ii) it is essential to gather and access large-scale data relating to energy efficient mortgage assets (loan-by-loan) for the purpose of risk analysis by way of an accompanying data protocol and portal.
The Energy Efficient Mortgages Initiative is built on the premise that the mortgage and covered bond industries can help to bridge the renovation gap with a private financing initiative, which is independent from but complementary to public funds, tax incentives, and utility rebates, and in this way support the EU in meeting its energy savings targets, whilst at the same time creating a strong link between the Capital Markets Union and energy efficiency agendas.
Significantly, the Energy Efficient Mortgages Initiative represents the first time a group of major banks and mortgage lenders, as well as data providers, companies, and organizations from the building and energy industries and the valuation profession, have proactively come together to discuss private financing of energy efficiency.
The EeDaPP is a market-led initiative focussed on the design and delivery of a market-led protocol, which will enable the large-scale recording of data relating to energy efficient mortgage assets (loan-by-loan), via a standardized reporting template. The data will be accessed by way of a common, centralized portal, allowing for continuous tracking of the performance of the energy efficient mortgage assets, thereby also facilitating the tagging of such assets for the purposes of energy efficient bond issuance.
The technical and financial datasets gathered under the EeDaPP Initiative is intended to allow for the linking between energy efficient features of a building, its value, and the loan performance, thereby creating a better understanding of the impact of energy efficiency on borrowers’ probability of default (PD) and on loss-given-default (LGD). The aim is to identify and demonstrate that energy efficient mortgage assets can be identified for preferential capital treatment based on large-scale standardized data and correlation analysis.
Two key assumptions
The ultimate success of the Energy Efficient Mortgages Initiative rests on two assumptions, which have already been recognized across a series of market and academic studies, and which will be further substantiated via the EeMAP and EeDaPP Initiatives. The first assumption is that improving the energy efficiency of a property has a positive impact on property value, reducing a bank’s asset risk. The second assumption is that energy efficient borrowers have a lower probability of default as a result of more disposable income in the household due to lower energy bills, reducing a bank’s credit risk:
Establishing a correlation between energy efficiency, PD and LGD provide a central business case for lenders to originate energy efficient mortgages, given the fundamental role of these risk parameters in the calculation of banks’ capital requirements. If the lower risk associated with energy efficient mortgages can be established using large-scale empirical evidence as envisioned by the EeDaPP Initiative, this should be recognized in the regulatory framework in the form of a realignment of capital requirements according to the lower risk for this type of exposure. In turn, this would represent a strong incentive for banks and investors to play an active role in the energy efficiency financing agenda.
The underlying business case captures these benefits and articulates the following clear pathway to an attractive energy efficiency mortgage investment:
Data collection and analysis with a view to establishing this correlation will begin in 2018 in the form of an EeMAP Energy Efficient Mortgages Pilot Scheme, which will also be used to ensure a workable end energy efficient mortgage design. Via the EeDaPP Initiative, the data collected will, over time, be made available to the market by way of a common, centralized portal, facilitating the earmarking of such assets for the purposes of also green/energy efficient bond issuance.
From a broader perspective, the underlying risk assumptions also drive an incentive chain which provides an economic advantage to all stakeholders involved: borrowers, lenders, investors and small and medium-sized enterprises (SMEs). In addition, the private investments foreseen will provide a flow of capital into the real economy and in doing so support privately held companies, e.g. SMEs, engaged in renovation meanwhile encouraging innovation and stimulating start-ups in the field of energy efficiency.
All stakeholders derive a concrete benefit
As a market-led Initiative, the key building blocks to design a pan-European energy efficiency data protocol and portal are being developed in cross-sectoral consultations with key market stakeholders via the following three Technical Working Groups:
The User Working Group is made up of data users and data owners/ providers including but not limited to lenders, investors, property valuers, rating agencies and central banks, who will ensure the relevance of the data to be collected and that the standardised protocol and portal are fit for purpose from a user perspective, both from the point of view of delivering the data and accessing it. The User Working Group is moderated by the EMF-ECBC.
The Architecture & Infrastructure Design Working Group consists of data repositories who will assist in the design of an overall data architecture and infrastructure, which responds to the needs of market participants. The Architecture & Infrastructure Design Working Group is moderated by the TSX.
The Data Analysis Working Group will be made up of data repositories who will support with the determining of methodology required for the analysis of the data delivered through the standardized data protocol to further substantiate the link between energy efficiency and PD and LGD. The Data Analysis Working Group is moderated by the CRIF.
In addition, the EeDaPP has an Advisory Committee consisting of political institutions at both national, European and global level which will provide regulatory and policy guidance on the key elements of the Project. The Advisory Committees is moderated by Ca’Foscari University of Venice.
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