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Institutional investors ready to spend big on energy efficient buildings


6 min read

Close up of smart home thermostat on side of a household radiator Photo: Bosch
Bosch smart home thermostat

Photo: Bosch

Banks, building societies and funds are crucial for pumping private sector money into Europe’s energy efficiency drive. As many of them have also committed to making their investment portfolios greener, what are they doing to help finance the EU’s quest to reduce energy demand from its 210mn buildings? Energy journalist Karolin Schaps reports.

On its mission to wean itself off energy imports from Russia, the European Union (EU) has earmarked even deeper energy efficiency targets as one of the keys to greater energy independence. In its REpowerEU package, announced following Russia’s invasion of Ukraine, the European Commission (EC) set out to increase the bloc’s binding 2030 energy efficiency target to 13% from 9%, based on 2020 levels, previously aimed at under its Green Deal legislation.


In parallel, member states will soon be legally bound to reducing final energy use by 36% below 1990 levels as part of the EU’s ‘Fit for 55’ climate transition package that aims to put the continent on track to reduce greenhouse gas (GHG) emissions by at least 55% on its path to a net zero economy by 2050.


The EU’s buildings consume around 40% of the bloc’s energy, the highest of any individual sector. Up to 95% of today’s buildings in the EU will still be standing in 2050, but three quarters of them have a poor energy rating. This spells out the immense task at hand to not only improve efficiency in existing buildings but also to invest in equipping new ones with state-of-the-art energy efficiency measures.


Private sector money 
Through various funds, including the €672bn Recovery and Resilience Facility, the EC is releasing financial support to member states to finance efficiency investments. But with €275bn estimated to be necessary every year to meet the EU’s 2030 targets, private sector money is absolutely essential to help bring the EU’s buildings up to an efficient standard.


‘Given the investment volumes needed, financial institutions will be critical to the roll-out of the EU’s energy efficiency programmes,’ says Sebastian Carneiro, Managing Partner at Solas Capital, a Swiss-based fund backed by the European Investment Bank which invests in energy-saving projects such as combined heat and power (CHP, or cogeneration), rooftop solar or LED lighting.


The International Energy Agency (IEA) estimates that, globally, around €190bn in sustainable recovery spending has been mobilised in the private sector on the back of the economic restart following the COVID-19 pandemic. This will be allocated to energy efficiency measures every year between 2021–2023. The agency estimates that if global energy intensity is improved by 4%/y until 2030, households will save at least €650bn on energy bills.


The need for private sector cash, mainly distributed through credit lines and funds, to help finance this huge task goes hand in hand with the ever-increasing importance of ESG-conscious investment criteria among financial institutions. The establishment of the EU’s taxonomy on environmentally sustainable economic activities is a strong driver in channelling private sector funding to areas mitigating GHG emissions, such as the energy efficiency market.


‘Creating demand [among energy users] and further collaboration between public and private sector financial institutions in creating fit-for-purpose financing solutions will be key to accelerating growth and reaching the EU’s targets,’ Carneiro says.


New financing tools 
As part of their drive to fulfil ESG criteria and to sustainability-proof their investment portfolios, some financial institutions have started to offer new financing tools that are particularly well suited to the energy efficiency sector. Traditional project finance deals, especially in the energy sector, are large-size tickets sometimes stretching into the billions when considering offshore wind, for example. But energy efficiency projects require smaller investment sums that often do not suit traditional project financing methods.


German real estate financier Berlin Hyp, for example, has developed a series of credit facilities that put particular emphasis on sustainability. The bank’s Energy Efficiency Loans are awarded to buildings that score high in terms of energy efficiency and other environmental criteria.


Berlin Hyp also offers so-called ‘transformation loans’ that are specifically aimed at energy efficient building upgrades and the higher the ESG ambition of a project the more favourable the financing terms. By 2025, it wants at least one third of its loans portfolio to be awarded to certified, green buildings.


‘The real estate sector is responsible for 30–40% of CO2 emissions. Therefore, the real estate industry has an obligation to make its contribution to CO2 reduction,’ says Maria Teresa Dreo-Tempsch, Chief Market Officer at Berlin Hyp. ‘Financiers are transformation belts for the successful transformation in the building sector [because] banks channel capital into sustainable investments, integrate ESG into their own risk management, and promote transparency and a long-term view on financial and economic activity.’


In the Netherlands, bank ABN Amro, which finances over 10% of the country’s buildings, is offering discounted mortgage interest rates to customers purchasing energy efficient properties or renovating buildings to newbuild standards.


Homes with a registered ‘A’ energy label can obtain a 0.15% discount on mortgage interest rates, while ‘B’-rated buildings are awarded a 0.10% discount. The offer plays into the hands of the Dutch bank’s ambition to make its lending portfolio greener. By 2030, ABN Amro wants all its financed residential and commercial properties to have an ‘A’ energy label.


In the Netherlands, ABN Amro is offering discounted mortgage interest rates to customers purchasing energy efficient properties or renovating buildings to newbuild standards.


In France, the built environment consumes around 44% of the country’s energy, above the EU average of 40%, placing a critical importance on energy efficiency improvements of existing buildings. The IEA has urged France to employ much more energy efficiency solutions if it wants to meet its net zero goal by 2050.


One of the financial lenders to France’s energy efficiency programme is bank Caisse de Depots. Its subsidiary Banque des Territoires has set the target to finance the thermal efficiency improvement of 20mn m2 of public buildings and that of more than 500,000 social housing units by 2024.


These examples show that financial institutions are starting to assume their responsibility in enabling investments necessary to clean up Europe’s building stock. Their roles as lenders and investors are crucial to help money flow to the right projects that are paving the way towards a net zero European economy by 2050.


Institutional investors 
Institutional investors are also waking up to the multiple benefits of energy efficiency investments and are looking beyond evaluating projects based on how much energy they save. Especially in the context of creating sustainable investment portfolios, energy efficiency investments fulfil many of the requirements, including reducing GHG emissions, strengthening energy security and independence and reducing energy poverty.


‘In the same way that lenders should not finance new oil and gas exploration and production assets they should also not finance the construction of new buildings that are not energy efficient,’ says Gabriela Herculano, Manager of the iClima Smart Energy UCITS ETF fund which includes companies offering products and services to reduce carbon emissions. ‘Only financing the buildings with smart energy and smart water aspects, or making the financing terms more appealing, would be a very strong signal to developers.’


As energy efficiency has jumped to the top of the political agenda in the name of creating greater energy independence, the industry will also require the support of financial institutions to allow a ramp-up in production of energy-saving products.


Most notably, heat pumps have seen an enormous increase in demand in recent months as they are a direct alternative to gas-burning boilers used for heating. Germany alone has committed to installing half a million new heat pumps every year from 2024, a huge rise compared to 154,000 new heat pumps put in place in the country last year.


woman holding phone showing app control functions for heat pump

The indoor unit of a heat pump with integrated DHW cylinder from Viessmann – the units can be controlled via an app
Photo: Viessmann


Other popular products to improve energy efficiency are insulation, including filling cavity walls or insulating roofs and lofts, double and triple glazing windows and doors, upgrading lighting to LED light bulbs, installing solar panels and using energy more efficiently with a smart meter.


Lack of insight? 
Although financial institutions are gearing up financing of energy efficiency projects, their involvement is still limited. Some argue that financial investors lack insight into how energy efficiency improves the financial health of a building and decreases risks, therefore offering an attractive investment opportunity.


‘The Energy Efficiency Financial Institutions Group’s (EEFIG) [a network of energy efficiency investors jointly convened by the European Commission and the UN] efforts have contributed to some extent to creating a better understanding among financial institutions of energy efficiency, but so far this has not led to a breakthrough for the energy efficiency sector,’ comments Rüdiger Lohse, Managing Director at DENEFF EDL_Hub, a German-based network of companies offering energy efficiency services.


‘With pressure [from energy prices] mounting day by day, users are looking for quick options to finance energy efficiency investments but the market in Germany is not going very well,’ Lohse says. He adds that the main hurdles standing in the way of accessing financing quickly include the lack of lending products specifically aimed at the energy efficiency market, often unattractive financial conditions and the complexity of subsidy programmes available.


As the EU’s quest for more energy independence is heating up, institutional investors are desperately required to offer tailored financing instruments that suit companies, industries and individuals alike in their plans to install energy-saving measures. A number are stepping up to the challenge but many more initiatives are needed to pave the road towards net zero.