Sustainable Bonds: Bothered by buildings?

In November last year, sustainable markets experienced some turmoil following the publication of the European Commission’s draft delegated act establishing the technical screening criteria for climate change mitigation and climate change adaptation.

In particular, the proposals for green buildings caused quite a stir, by requiring those built before the end of 2020 to have energy performance certificates (EPC) at least in class A.

That many were caught off guard by these proposals can be explained by the shift that was made versus the technical screening criteria recommendations of the Technical Export Group (TEG) in March last year.

In line with market practice, the TEG proposed the use of a best in class approach, where green buildings should belong to the top 15% low carbon buildings.

While EPC labels could be used as evidence of meeting the top 15% requirement, the TEG was reluctant to include a minimum EPC reference level, recognising that more work needed to be done in order to define thresholds corresponding to the top 15% of the building stock.

Indeed, EPC labels do differ widely from country to country and often lack comparability. These differences in national EPC label methodologies may, for instance, result in buildings being labelled A in one country, while for a country with a similar type of building stock but stricter EPC criteria, a comparable building could be labelled B or C. Subjecting buildings built before 31 December 2020 to a class A energy performance certificate requirement would also leave various European countries with a negligible part of their building loans as eligible for green bond issuance. Besides, for banks it is complicated to obtain the required EPC label information for their mortgage lending books. This is why issuers often rely on year of construction information to identify the 15% most energy efficient buildings.

In this publication we take a closer look at some of the issues that may arise for the green bank bond market on the back of the technical screening criteria proposals for building, particularly in the event that the EPC label A proposals remain intact.