Reimagining CEE: Following the green line – the green mortgage


Welcome to the next edition of our ‘Reimagining CEE’ series, regular Law-Now e-alerts discussing ESG-related updates with a particular focus on the impact on businesses across Central and Eastern Europe.

In the context of ever more regulatory focus on ESG matters, especially in the financial sector, the recently completed call for evidence in relation to the Mortgage Credit Directive[1] specifically considered the environmental component of ESG in consumer finance by addressing the topic of green mortgages and the support of uptake of green mortgages.  This comes in addition to the mandate envisaged by the European Commission for the European Banking Authority for an opinion on a definition for green loans and green mortgages.

Although not specifically regulated at the time, green mortgages are generally granted with the purpose of encouraging the increase of the stock of energy efficient buildings (both in terms of new developments and the renovation of the existing ones). By reference to this purpose, it is noted that improving energy efficiency is one of the ways considered by the EU Taxonomy to substantially contribute to the climate change mitigation objective envisaged thereunder.

In practice, in order to be able to access a green mortgage product offered by financial institutions, a borrower is required to obtain a special certification as a “green building”/ “green home” (although, the requirements may vary, depending on the financial institution), and not only a class “A” Energy Performance Certificate; however, if such certification is obtained, financial institutions usually offer lower interest rates for this product, on the assumption that an energy efficient building will ensure, on the long term, an increased financial stability of the borrower (e.g. lower energy bills will allow a borrower to re-direct the amounts such saved towards the repayment of the mortgage).

The prospects of regulating green mortgages should be considered also in the context of the requirements envisaged by the European Union with respect to energy efficient buildings and the (nearly) net zero target.

At the EU level, the requirements regarding the energy performance of buildings are enacted through the EPBD Recast Directive[2], which has been further implemented at the level of each Member State. For instance, in Romania the local legislative framework (including by Law no. 372/2005 regarding the energy performance of buildings, as subsequently amended and republished) is under review to align with the recent amendments adopted in relation to the Directive (in 2018 and 2019).

The EPBD Recast Directive introduced provisions relating to an almost zero energy consumption applicable for newly erected buildings, to be generated mainly from renewable sources, and encourages the use of smart metering systems for new constructions or major renovations of a building. In relation to the certificate of energy performance for buildings, the EPBD Recast Directive provides that it should include both the energy performance of a building and benchmarks, such as minimum energy performance requirements, as to give the possibility to the owners or tenants of the building to compare and evaluate energy performance of buildings.

In addition, the European Parliament and Council initiated a proposal for a new directive on the energy performance of buildings (the “Proposal Directive”), which inter alia aims to:

  1. reduce buildings’ greenhouse gas (GHG) emissions and final energy consumption by 2030 and setting a long-term vision for buildings towards EU-wide climate neutrality in 2050. From the provisions currently established under the Proposal Directive it appears that the main mean to achieve such standards is through a deep renovation of existing buildings that will address (i) structural improvements, (ii) adaptation to climate change, (iii) removing hazardous substances including asbestos, to ensure that buildings are complemented with new EU level minimum energy performance standards (triggering an increase in renovation rates) for the worst-performing public (i.e. buildings and building units owned by public bodies) and non-residential buildings;

  2. ensure comparability across the Union, proposing that all energy performance certificates must be based on a harmonised scale of energy performance classes. The energy performance classes will be rescaled with a view to the common vision for a zero-emission building stock by 2050, while taking into account national differences of building stocks: the highest-class A represents a zero-emission building, while the lowest class G shall include the 15% worst performing buildings in the national building stock. The indicator on the basis of which buildings are to be rated (primary energy use in kWh/(m2.y)) remains unchanged, and is complemented by an indicator on operational greenhouse gas emissions and renewable energy. Other indicators remain voluntary for Member States to choose from, offering a toolbox approach that can be adjusted to national conditions.

To complement the other initiatives currently developed by the EU, the Proposal Directive also introduces a definition of “mortgage portfolio standards” as a mechanism to incentivise mortgage lenders to improve the energy performance of their portfolio of buildings, and encourage owners and developers to make their properties more energy performing.

While the Proposal Directive is more advanced in the legislative process, as regards the green mortgage we would expect the EU’s authorities to have a holistic approach in setting-out the principles for this product, as well as being aligned with the objectives established under the EU Taxonomy.

In our view, both the call for evidence in relation to the Mortgage Credit Directive and the Proposal Directive are important steps in combating the green washing phenomenon and, in order to achieve the final version of these legislative proposals, EU authorities should build upon the good practices implemented at the level of credit institutions, as well as of those of real estate developers, and their experience with this product. At the same time, all relevant actors will benefit from having a clear legislative frame as to what constitutes a green mortgage and will ensure there is a uniform regime across the European Union for this type of product.

For more information on green leases and related issues, contact your CMS client partner or local CMS experts:

[1] Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010.

[2] Directive no. EU/2010/31 on the energy performance of buildings.