Decarbonisation and Green Home Retrofit Funding Principles

09 October 2020

Author: Orla Hanna
Practice Area: Banking & Finance

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There have been many tumultuous and headline grabbing events in 2020. Against this back drop there is a good chance that some of the most significant announcements relating to our long-term health and wealth may have fallen below the radar for many people and not received the coverage that would be expected in more normal times.

China’s announcement that it intends to cut carbon emissions to net zero by 2060, the EU setting a target to reach net zero by 2050 and on a more individual level, the eye catching rise of Tesla to become one of the world’s most valuable car companies all point to the accelerating trend to decarbonisation and the increasing economic benefits connected with that movement.

Lenders can play many roles in the broader movement towards a low-carbon economy ranging from directly funding renewables projects and infrastructure to more indirect support through ensuring that assessment of current and future financial risks and opportunities arising from climate and environmental factors are integrated into mainstream credit decision-making processes and that the market for “green” financial products becomes more robust.

In July 2019, the UK government set up the Green Finance Institution (GFI) and published its “Green Finance Strategy”. The GFI aims to work with the government to address market barriers to greater and swifter application of capital into priority green sectors.

On 28 September 2020, the GFI launched the Green Home Retrofit Finance Principles (GHRFPs). The principles were developed in collaboration with the Loan Market Association (LMA) and provide a framework of guidelines for financial institutions to use for allocation of finance towards retrofitting works in the UK’s domestic buildings.

The retrofit market is important because improving and retrofitting our existing housing stock is key to reducing the emissions from home energy usage and meeting net-zero commitments.

The general idea of the GHRFPs is to provide a consistent and transparent methodology for lenders to use when lending money to borrowers to use for so-called Green Home Retrofit (GHR) projects. A GHR project is essentially one which relates to a UK domestic building and whose purpose is to improve the energy efficiency (for example, by reducing carbon emissions and energy consumption) and to adapt those buildings to be more climate resilient. Initially the focus is on buildings which are owner-occupied or privately rented, with the hope that this focus will be expanded.

The GHRFPs cover the four main areas: (i) how proceeds should be used, (ii) the evaluation and selection procedure for loans for GHR projects, (iii) managing GHR loans in the lender’s internal systems and (iv) reporting to evidence the energy efficiency improvement (for example, updating Energy Performance Certificates).

Practically this has initially translated into new products such as discounted mortgage pricing linked to a property’s climate impact or one off “thank you” payments to customers who borrow to make climate friendly home improvements. It is hoped that the framework will encourage innovation and growth in the provision of lending for energy efficiency work in UK homes.

Several financial institutions, UK Finance, the Building Societies Association and property industry organisations are supporting the GHRFPs and the full details of GHRFPs can be viewed here:

https://www.greenfinanceinstitute.co.uk/wp-content/uploads/2020/09/GREEN-FINANCE-GREEN-HOMES-REPORT.pdf.

If you have any queries the Banking team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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