Try putting a baby to sleep during a heatwave, when the nights that will not cool below 25°C and the apartment will just not let go of the heat trapped during days of relentless heat.
A poorly insulated home is not just a winter problem anytime, the same building that lets heat escape in January lets heat pour in during a heatwave. This summer’s heatwaves demonstrated that energy efficiency isn’t seasonal, but it is structural and that the same building will now fail you (at least) twice.
In Brussels, all buildings must have Energy Performance Certificate (EPC) labels by 2031, with the weakest two labels, F and G becoming obsolete by 2033, and D and E in 2045. Meanwhile, the city’s building stock is particularly vulnerable: 85% of its structures were built before 1960, Brussels buildings are responsible for half of GHG emissions and unsurprisingly half holds the lowest energy label of F or G.
Even if renovation policy deadlines are pushed and put aside, the market is already quietly diverging by EPC label. Recent studies point to the fact that mortgages with lower energy ratings are more prone to default, though the effect is still low. A study for the Dutch housing market find better energy efficiency is associated with lower probability of mortgage default. A Belgian study between 2011 and 2021, found that houses, otherwise with identical characteristics, those that have better energy performance saw more price increase, attesting to already changing perception in the housing market.
Climate transition and physical risks are already inside asset prices and the (un)winding of the regulatory clock will not change it, but likely to accelerate the market reprising that is already underway.
What looks like a housing story until now can quickly turn into a banking story. Belgian banks hold roughly €273 billion of residential mortgage exposure to Belgian residents. A homeowner facing a renovation bill, heating bill and now a cooling bill has less room to service their debt, like mortgage and other credit lines. These inefficiencies pose risks of accelerated depreciation leading to equity erosion and possibly higher default rates and increased financial exposure for banks.
The financial risk
Then there is the question of costs. Bringing just half of Brussels' worst-rated homes up to a decent energy label would cost between €5.75 billion and €8.63 billion. The entire Brussels regional budget is about €7 billion in 2023. The region's flagship renovation programme, Renolution, gets €35 million a year. Public money alone cannot close this gap, not at this rate and unlikely by the 2050 deadline.
Banks have a responsibility to manage its risks and supervisors closely watch that they do. Managing climate transition and physical risks is on the list and will increasingly feature prominently as shocks accelerate and increase in magnitude. Renovation credit is a way to manage these risks, it is collateral value protection as well as credit risk protection.
The financing gap will not close itself, rather it sits on someone's balance sheet until it does. If/when Brussels' energy-inefficient buildings depreciate under market reprising, regulatory pressure, or their occupants default because bills they cannot control keep rising, banks absorb it. This could happen directly through underwater mortgages, and indirectly, through the covered bonds and asset-backed securities built on top of those mortgages.
But the good news is, the same energy efficiency measures that are aimed to decrease winter bill (insulation, window glazing, shading etc.) now also cut summer cooling costs too. Recent research estimates that up to 60% of peak cooling demand could be lowered by energy efficiency measures. This means that renovation demand banks might face could increase on two fronts.
This should focus minds. A bank wants to respond to demand, borrowers who can pay, a balance sheet that is controlled for risks, collateral that holds its value and a way to know which loans are exposed.
They are already holding the risk, whether they have priced it in or not. That gives them a reason to help build affordable, scalable renovation credit lines, green bonds, and financing tools the region needs and fast. There is no shortage of technical solutions. Our financial institutions can rise to the challenge by simply following the model they already have, that is, protecting asset quality, responding to increasing demand and making a profit riding the green transition wave.
The next heatwave will not wait for anyone to figure that out.
