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Sustainable, or green, finance and the demands of modern economies are sometimes uncomfortable bedfellows.

The huge investment needed to convert our existing industries, and alter the way that investment is structured to become more environmentally responsible, is undeniably a drain on resources at a time of testing economic conditions in Europe.

It’s popular to demand that the most profitable companies – many of which have benefited from current crises – take the lion’s share of the responsibility and bear the cost. But some of the biggest and most problematic polluters simply can’t afford to. Who are they? Homeowners.

Buildings account for 40 per cent of EU energy consumption, making them the biggest energy users in Europe. And they are responsible for 36 per cent of energy-related direct and indirect greenhouse gas (GHG) emissions, two-thirds of which can be attributed to residential properties, according to European Commission figures.

The EU’s hugely ambitious Green Deal – a set of policies that aims to make the European Union climate neutral by 2050 – wants to see buildings’ GHG emissions cut by 60 per cent, a decrease in general energy consumption of 14 per cent, and a reduction of 18 per cent for heating and cooling specifically.

And yet the International Monetary Fund in March predicted that a third of all European households could find themselves financially stretched by the end of 2023, rising to 45 per cent under the worst forecasts (who are also responsible for 40 per cent of mortgage repayments).

Not the best conditions in which to push forward with expensive measures to decarbonise housing stock, which could burden families to breaking point. That’s why lenders are being encouraged to incentivise and support them.

Nine Net Zero Targets

ING is a global bank with a strong European base and since 2018 it’s adopted what it calls the Terra approach to steering the most carbon-intensive parts of its portfolio towards net zero by 2050.

Terra was developed in partnership with the 2 Degrees Investing Initiative (2DII), using its Paris Agreement Capital Transition Assessment (PACTA) tool, and it’s focussed on nine sectors that are responsible for most GHG emissions: fossil fuels, automotive, shipping, aviation, steel, cement, commercial real estate – and residential mortgages.

impact we have – through business travel, for instance – and we have a clear target.

“But where we have the most impact, in terms of CO2 emissions, is through the lending we grant to our clients. Using a science-based approach, we have identified nine sectors and have a clear view on how they need to change. We are making sure we foster the changes that are required in those various sectors to decarbonise their activities.”

By far the most contentious of the sectors that come within Terra’s scope is fossil fuels. Major oil and gas producers – whose profits have doubled since Russia began its war in Ukraine – and the banks who fund them have come in for sustained criticism. It’s something Castelnau is keen to tackle head-on.

“Yes, oil and gas is a particularly sensitive area and we are glad to be challenged on that front. I think society needs that kind of debate,” she says. “At the same time, as a bank, we finance the real economy, and we are also conscious of the impact bold changes may have on it. For the next 20 years, the world will continue to need oil and gas, so we cannot just step out.

In its 2022 climate report, ING revealed that it was on track to reach net zero by 2050 with five of these sectors, three were close, and aviation was a long way behind.

Anne-Sophie Castelnau, ING’s global head of sustainability, explains: “We, as a bank, contribute to CO2 emissions. We monitor and we reduce, year after year, our energy use as an institution, but also the

“It is a question of balance between our sustainability ambitions and energy affordability for people, ultimately, to be able to warm their homes, as well as security of supply. We have announced that we’re not willing to be involved in project financing for new oil and gas fields, but also we know that, for a while, we’ll need to continue to support that industry.

“In the meantime, we want to accelerate financing renewables, because this is where we need to ensure sufficient supply comes from in the future.”

If fossils fuels is the most contentious, then mortgage lending is the most complex asset to tackle under the climate agenda. It’s also the single biggest risk sitting on ING’s book, with approximately €320billion in outstanding home loans, representing around a third of its balance sheet. That could negatively impact the bank’s metrics when it comes to achieving a good ‘green asset’ score under new EU reporting rules.

“In terms of exposure for ING, this is as big as our entire wholesale banking book,” says Castelnau. “We talk a lot about our wholesale portfolio, because this is the big piece that is very visible. But mortgages are a massive part that we are also tackling.”

A Work In Progress

While institutions may well be sincere in wanting to avert environmental disaster, they are also under pressure to transform in light of reporting requirements that will inevitably influence shareholder sentiment.

Since the beginning of this year, an EU classification system (the EU Taxonomy) has given lenders criteria for checking if individual financed projects, such as a home loan or a home improvement loan, are ‘green’. Environmentally positive assets will count towards a lender’s published Green Asset Ratio (GAR) from next year. A recent European Banking Association sample of 29 EU banks calculated their average GAR to be in single figures. There’s a long way to go.

ING itself quotes the Buildings Performance Institute Europe (BPIE) when it says: “More than 95 per cent of EU buildings are currently not energy efficient (EPC below A) and the speed of renovation is low. Each year, only one per cent undergo energy renovation. This is too little to reach the EU’s climate ambitions, and shows the need to address the transition of the existing building stock.”

The variations within Europe are revealing. Intelligent home climate management company tado° examined 80,000 homes in 11 European countries between December 2019 and January 2020 and found that Norway and Germany had the lowest home temperature losses: the UK’s lost heat three times faster. The EU Building Stock Observatory points out that most residential buildings in the EU were built before the first thermal standards were introduced in the 1970s.

“We know what needs to happen here,” says Castelnau. “The big difference is the way we engage with retail customers. For wholesale banking clients, we have one-on-one conversations, and we can really understand their journey, and how they tackle CO2. For retail clients, we want to make sure we engage, but that’s not on a one-on-one basis.

“These days, more than half of our contacts are through digital channels, so we need to make sure we have the ability to inform customers and give them access to more products that help them to take action themselves, whilst giving them incentives in that direction.”

In 2019, the bank began introducing lower-interest green personal home loans for up to €10,000. In Holland, it offered customers discounts on ‘sustainable housing’ products and services via its online ING marketplace. They could also take advantage of a free home energy scan and an expert investment plan to upgrade their home.

At the time, about 55 per cent of the homes across all the bank’s mortgages had an Energy Performance Certificate (EPC rating) of D to G (the very worst) and its goal was to upgrade at least half of them to a C by 2022 ‘by making homeowners and homebuyers more aware and motivated to upgrade, while at the same time making the financing simply too good to refuse’.

Insights To Fuel Change

ING has learned a lot over the past three years, not least how tough it is to maintain that kind of ambition across multiple countries with different housing stock, different population engagement levels, variations in domestic regulation and different energy mixes in their grids.

In its 2022 Climate Report, the bank said: “While our products have shown the promise of change to come, we note that demand among clients is still not at the level required to drive the transition. We continue to call on governments to implement ambitious and consistent legislation that mandates transition milestones for residential real estate.”

ING now has Eco Mortgages for homes with the highest EPC ratings in most of its territories and is planning to roll out eco renovation lending products to customers in all its markets by 2025.

All of this, says Castelnau, is underpinned by striving for better knowledge of customers’ behaviours, which can give insights into their energy consumption.

“Even more visibility has come with last year’s launch of our carbon footprint tracking app,” she adds. “Developed together with the fintech Cogo, it gives insights into how their spending translates into CO2 emissions. Clients can get an idea of their CO2 footprint, compare themselves to what is happening in their local market, and also get tips on how they can adjust how they act. It’s a knowledge tool, and an awareness tool.

“In the future, we will see apps like these become a one-stop shop, where customers can see in real-time how their behaviour impacts the environment but also how their mortgage incentives respond to those behaviours.

“It’ll all be integrated to give customers a full picture of how they can ultimately lessen their negative impact on the world.”