Climate and environmental risks for the property market: using data to take action

The risks created by climate change are impacting many sectors of the economy, including property. Constrained by ever tighter regulations, banks are having to factor environmental issues into their business activities, with data having a key role to play in that process. Hervé Phaure, Risk Advisory Partner at Deloitte, analyses the situation.

Taking account of environmental risks

In France, the construction industry is the biggest consumer of energy (44%). Along with its energy issues, the sector is also having to deal with a wide range of environmental challenges. “From a financial institution’s viewpoint, climate and environmental risks have an impact on all the factors that can affect a borrower’s ability to secure credit and the stability of a financial transaction,” says Hervé Phaure. In practice, there are two types of risks, physical ones and those related to the energy transition. The former refers to natural disasters, the severity and frequency of which are only likely to increase in the years ahead. As for the latter, he explains: “They mainly affect companies that need to adjust their business models to deal with decarbonisation. But they also affect housing trends, with second-home buyers now turning away from southern regions of France, for example, and looking more at the Loire and Brittany because of the cost of installing air conditioning or building a swimming pool.”

A difficult regulatory environment

Last year, the European Central Bank carried out stress tests among banks in Europe to find out about their management and modelling for environmental risks. The results were mixed and prompted the ECB to take a tougher line by publishing a detailed timeline on November 2 that obliges financial institutions to categorise their various risks and complete a full assessment of their impact on their business activities by March 2023. Banks were also given until the end of 2024 to respond to all the other prudential expectations in terms of climate risks. “The regulators’ action started several years ago, and banks had to commit to comprehensive roadmaps for managing their climate risks,” says Hervé Phaure.

For a bank, climate and environmental risks related to property exist at several different levels. “It affects them if they own buildings outright or if they provide finance to companies operating in the property market, whether in the construction sector or property management, for example, or in the provision of mortgages to homebuyers,” he adds.

What’s the impact on the property market and the availability of mortgages?

In practice, climate and environmental risks can lead to an increase or decrease in the value of a property. Buildings on a flood plain or located somewhere in the south of France – a region more exposed to high temperatures – will have those risk factors taken into account when it comes to obtaining a loan. “The market is also affected by the Energy Performance Certificate (EPC). Investors and homebuyers are going to avoid certain properties, in favour of more energy efficient ones, especially given the constraints imposed by the Alur law in France,” explains Hervé Phaure, highlighting the EPC’s impact on a person’s ability to secure a mortgage. “For example, if someone wants to borrow up to their limit to buy a house with a poor EPC, and therefore have to pay high energy bills from their remaining income, that will inevitably affect their ability to secure a mortgage from the bank. Because the borrower might find it difficult to renovate the property or to stay on top of their spending.”

Taking action, with the help of data 

The challenge is to take all these environmental factors and turn them into opportunities. For banks to position themselves properly in such a market, the ability to collect data is key. “The more detailed data you have about a customer and a property, the better you will not only understand the risks and challenges involved, but also the way in which a customer might respond to an offer.” Thanks to the data, for example, in addition to a mortgage, a bank might also offer their customer some complementary financing specifically for renovating their property’s energy supply. Data can also anticipate the potential difficulties facing a customer who owns an energy-intensive home and can offer targeted products for improving their property. “It’s a useful way to build customer loyalty. Financial institutions need to demonstrate that they are working towards an ever more sustainable property portfolio in terms of the environment, by being more selective in their granting of mortgages and in the way they can help customers make their homes more energy efficient.” To do that, you need to know those customers well and have reliable data available.

However, there is a problem: banks do not have access to all the data they need. “In situations like this, working with partners like Homiwoo is very attractive. They provide up-to-date information, notably on EPCs, and have more accurate valuations of properties than a bank would have. They can also identify the types of properties that need to be differentiated according to their future values (those destined to rise or fall). That involves a deep understanding of the market and the ability to identify emerging trends,” says Hervé Phaure. “So, to develop in the years ahead, banks will need innovative solutions like these.”