Introduction

Europe’s building renovation challenge requires financing models capable of translating energy performance and building smartness into reliable evidence for credit, investment and property valuation decisions. Drawing on the SmarterEPC report ‘De-risking financing of energy efficiency and smartness upgrade measures’, this article examines how EPCs and the SRI can be used as complementary inputs across the renovation financing lifecycle.

The article proposes an implementation pathway for financial institutions: collect EPC data at loan origination and use SRI throughout the customer and financing lifecycle to support tailored renovation advice, upgrade sequencing, performance verification and monitoring. It also identifies the conditions required for scale, including accessible and interoperable data, robust assessment standards, integration into banking and valuation processes, public-private risk sharing and closer collaboration among lenders, building owners, public authorities, insurers, valuers, contractors and data providers. The central argument is that EPC and SRI can turn building renovation from a perceived risk into a measurable and investable opportunity.

From EU sustainable finance regulation to banking strategy

The European sustainable finance framework is transforming how banks assess risk, allocate capital and finance real estate. At its core, the EU Taxonomy Regulation establishes common criteria for identifying environmentally sustainable economic activities. It guides investment decisions, reduces greenwashing and applies to mortgage lending and related funding instruments, including covered bonds and securitisations. The Taxonomy also supports disclosure and regulatory measures such as the Corporate Sustainability Reporting Directive (CSRD), Sustainable Finance Disclosure Regulation (SFDR), Energy Performance of Buildings Directive (EPBD) and Green Asset Ratio.

However, disclosure alone is not sufficient to address climate-related financial risks. The same information must also inform banks’ credit assessment, collateral management and prudential decision-making. Prudential regulation further reinforces this transition. The European Banking Authority recommends integrating environmental factors into the valuation of property used as loan collateral. Banks should consider whether current market values adequately reflect climate-related physical risks, transition risks and other environmental factors throughout the life of an exposure, from loan origination to subsequent monitoring and revaluation.

Overall, the regulatory framework is embedding energy performance and environmental, social and governance (ESG) considerations into lending, disclosure, collateral valuation and risk management. This development supports decarbonisation while helping financial institutions identify risks, improve compliance and direct capital towards more resilient and sustainable buildings.

The practical challenge is therefore to convert this regulatory architecture into operational strategies, measurable targets and repeatable banking processes. European financial institutions are moving from broad sustainability commitments towards operational, data-driven decarbonisation strategies. This transition is both a regulatory requirement and a strategic priority affecting credit risk, product development, capital allocation, competitiveness and long-term profitability.

The effectiveness of these strategies depends primarily on whether institutions possess sufficiently detailed information to measure their starting position and monitor progress over time. Accurate, granular and verifiable data at client, loan and building level is essential. Information such as EPC class, energy consumption, renovation plans, expected savings and climate-risk exposure enables banks to measure financed emissions, establish science-based targets, evaluate transition risks and comply with the EU Taxonomy and CSRD requirements.

Accordingly, data collection must be accompanied by governance arrangements and financial products capable of translating identified risks into concrete lending and investment decisions. Effective decarbonisation strategies should embed ESG factors into governance, credit policies, risk management and capital allocation. They require sector-specific transition pathways, clear accountability, and measurable indicators such as the Green Asset Ratio. Green mortgages, sustainability-linked loans and renovation credit lines can encourage households and small and medium-sized enterprises (SMEs) to improve energy efficiency. However, green lending remains limited and is concentrated mainly on new buildings. Common EU definitions and voluntary labels could improve market transparency and support financing for transitional activities.

While these products operate primarily on the lending side, the same energy-performance information can also support banks’ funding strategies. Banks can also issue green covered bonds backed by energy-efficient assets, obtaining favourable funding, attracting sustainability-focused investors and generating liquidity for further green lending.

Evidence from Banca d’Italia indicates that Italian banks are increasingly incorporating decarbonisation targets into strategic planning, with larger institutions leading and smaller banks progressively following. Overall, institutions combining reliable data, credible transition plans, green products and sustainable funding can reduce portfolio emissions, improve resilience, strengthen regulatory compliance and capture new business opportunities.

To implement this combination consistently, banks need standardised indicators that connect technical building characteristics with financially relevant information. EPCs and SRI-related indicators can perform precisely this function.

EPC and SRI as tools for financial de-risking

EPCs and SRI can help lenders, investors, valuers and public authorities reduce financial and property-related risks while supporting green mortgage origination. Their effective use depends on standardised, accessible and reliable data capable of supporting underwriting, valuation, investor reporting and secondary market demand.

EPCs provide a standardised assessment of a building’s energy demand, CO₂ intensity and performance class. They enable portfolio segmentation, EU Taxonomy screening, cross-market comparison and sustainability disclosures. The SRI complements EPC information by assessing a building’s ability to monitor, control, and optimise energy use through automation, storage, demand response and on-site generation. Together, EPCs and the SRI provide evidence of efficiency, adaptability and the persistence of energy savings.

Their combined value becomes particularly clear when these technical characteristics are translated into the risk parameters and valuation assumptions used by financial institutions.

These instruments support financial de-risking through three channels. First, lower and more stable energy expenditure can improve borrower affordability and potentially reduce the probability of default (PD). Second, efficient and smart-ready buildings may retain stronger marketability, face less regulatory obsolescence and reduce loss given default (LGD) by supporting collateral values. Third, EPC and SRI information can strengthen property valuations through evidence-based adjustments to comparable prices, operating costs, capitalisation rates and obsolescence assumptions.

These channels establish the financial rationale for using EPC and SRI data. The next step is to determine where each instrument can be applied most effectively within the lending lifecycle.

In practice, EPCs are particularly suitable for loan origination, where they support eligibility screening, risk segmentation, pricing and reporting. The SRI is more relevant to customer advisory, renovation planning and post-origination monitoring. It can identify cost-effective upgrades, verify savings through commissioning and smart-meter data and support pricing incentives and green-loan classification.

An effective financing workflow combines EPC baselines with SRI-based improvement plans, estimated capital expenditure, energy and monetary savings, avoided emissions, public support, execution monitoring and impact reporting. Experience from European public schemes shows that stable incentives, quality assurance, consumer protection and integrated advice can reduce execution risk and mobilise private finance. Indicators such as net present value and internal rate of return can further improve the comparison, sequencing and bankability of smart renovation measures.

Energy-efficient buildings can improve borrower cash flow through lower energy costs, potentially reducing the PD. Better-performing properties may also retain stronger marketability and collateral value, potentially reducing LGD. These effects connect sustainability with prudential frameworks such as the Capital Requirements Regulation, as more resilient borrowers and collateral can support better risk assessment and capital allocation.

Each ecosystem participant has a specific function. Homeowners authorise and implement improvements; banks provide performance-linked financing; insurers mitigate underperformance and climate risks; contractors and energy service companies (ESCOs) deliver and document interventions; public authorities provide incentives, guarantees, regulation and data infrastructure; and data providers and valuers ensure interoperability and incorporate sustainability into collateral assessments.

_{Figure 1: Example of an energy efficiency renovation process in collaboration with an ESCO. Source: elaboration by CRIF.}

From green mortgage evidence to market-wide implementation

Evidence from European mortgage markets increasingly demonstrates that better building energy performance is associated with lower financial risk. EPCs, complemented where relevant by the SRI, can help banks and investors assess borrower creditworthiness, collateral resilience and transition risk. Although adoption is still developing, these indicators provide an empirical basis for de-risking green finance.

Green mortgages commonly offer preferential terms, such as interest-rate discounts or higher loan-to-value limits, for efficient buildings and energy renovations. The underlying risk rationale is that lower energy expenses improve borrower affordability and may reduce PD. Under the Energy efficiency Data Protocol and Portal (EeDaPP) project, an econometric analysis of more than 72,000 Italian residential mortgages found a statistically significant negative relationship between energy efficiency and mortgage default risk. Even incremental improvements from the lowest EPC classes produced material risk reductions. Comparable findings in the Netherlands and the United Kingdom reinforce this relationship.

The Netherlands illustrates the practical integration of EPCs into lending. Some mortgage providers offer interest-rate reductions of approximately 0.05–0.10 percentage points for highly efficient properties. Households may also obtain an additional €10,000–20,000 for efficiency improvements, depending on the property’s energy label. The SRI, however, is not yet widely incorporated into mortgage underwriting. In Italy, green mortgages represented approximately 6% of new originations in 2022 and generally offered modest pricing discounts.

These product-level developments are significant, but their full impact emerges when energy-performance data are applied across entire mortgage portfolios.

Banks are also incorporating EPC data into portfolio risk management. Segmenting mortgage exposures by EPC class helps identify concentrations in inefficient properties vulnerable to transition risk, regulatory changes and energy-price shocks. Some institutions now analyse default and loss indicators by EPC band and include energy performance in climate stress testing.

Once EPC information is systematically collected and standardised at portfolio level, it can serve not only internal risk management but also external funding and investor-reporting purposes.

At capital-market level, EPC-based eligibility criteria support green bonds and covered bonds backed by efficient mortgage pools. Standardised EPC data improves investor transparency, supports EU Taxonomy alignment and may facilitate diversified, competitively priced funding. The Energy Efficient Mortgages Initiative (EEMI) and the EeDaPP project demonstrate that linking EPC registries with credit data can strengthen risk monitoring while supporting credible green securitisations.

_{Figure 2: Example of a green bond issuance process and its outcome. Source: elaboration by CRIF.} 

The central policy question is therefore no longer whether these approaches are technically feasible, but how they can be extended from selected portfolios and pilot products to ordinary banking practice.

Scaling green finance requires moving EPC- and SRI-based assessment from pilot initiatives and niche products into mainstream financial processes across the EU. This means systematically integrating energy performance into loan origination, pricing, monitoring, collateral valuation, portfolio management and funding, while protecting consumers and maintaining financial stability.

First, banks should treat EPCs and, where available, SRI indicators as core credit-risk inputs rather than optional ESG information. Energy performance can support risk identification, differentiated pricing, decarbonisation strategies and portfolio steering. Valuation frameworks, including professional appraisals and automated valuation models, should also reflect energy efficiency, transition risk, physical risk and resilience improvements at origination and throughout loan monitoring. Embedding energy performance in formal risk and valuation frameworks is therefore the first condition for scale. A second condition is ensuring that these processes remain operationally manageable for institutions and customers.

Second, operational barriers must be reduced. Collecting, verifying and monitoring EPC, SRI and renovation data remains costly, particularly where databases are incomplete or fragmented. Standardised eligibility criteria, proxy methodologies and reporting templates can help banks classify green mortgages, assess portfolios and meet EU Taxonomy requirements. Policy continuity is equally important, since unstable incentives and temporary pilot structures discourage investment and prevent financial institutions from developing scalable products and processes.

Reducing process costs, however, will have limited effect unless the underlying data can be accessed and exchanged efficiently.

Third, EPC data must become accessible, interoperable, comparable and suitable for automated use. Reliable connections between national EPC registries, banking systems, valuation platforms and investor-reporting frameworks are necessary for risk modelling and decarbonisation planning. Italian evidence highlights both methodological difficulties in identifying taxonomy-aligned buildings and the continued concentration of certified properties in low energy classes.

Even with stronger data infrastructure, some renovation projects may remain difficult to finance because of high upfront costs, uncertain execution outcomes or limited borrower capacity.

Overall, scaling requires coordinated action on risk integration, valuation, operational simplification, data standardisation, stable policies, consumer protection and public-private risk sharing.

Banks should make EPC collection a standard practice at loan origination and during portfolio monitoring. EPC information provides the baseline for risk segmentation, eligibility screening, decarbonisation planning and sustainability reporting. Without systematic collection, institutions cannot reliably assess portfolio exposure, demonstrate progress towards climate targets or scale green lending under appropriate governance.

Green finance should also fund measurable performance rather than rely only on labels. While EPCs describe baseline efficiency, the SRI captures a building’s capacity to monitor, control, and optimise energy use. SRI-related features can improve the persistence and verification of savings, reduce sensitivity to energy-price volatility and strengthen borrower affordability.

A pragmatic implementation sequence would use EPCs at origination for baseline assessment, risk segmentation and eligibility screening, followed by SRI-based advisory, upgrade planning and performance monitoring throughout the customer relationship. This approach allows immediate portfolio steering while supporting the gradual, controlled integration of newer indicators into risk processes.

Scaling also requires interoperable data infrastructure. Building logbooks, digital renovation passports, smart meters and connected devices form the data layer needed to verify results and reduce information asymmetries.

By systematically collecting EPCs and financing smartness, banks can transform energy performance from a static label into a measurable mechanism for reducing risk, strengthening affordability and improving the scalability and credibility of green building finance.

Conclusions

Building energy performance is becoming a material component of financial risk management and Europe’s decarbonisation strategy. EPCs provide the standardised baseline banks need for credit assessment, property valuation, portfolio monitoring and regulatory reporting, while the SRI complements them by measuring operational intelligence and supporting the verification of persistent energy savings. Together, these tools can improve borrower affordability, strengthen collateral resilience and mobilise private investment for renovation. Scaling their use requires interoperable data, consistent standards, stable public support, and cooperation among financial institutions, property owners, insurers, technical providers and authorities. This integrated approach can make Europe’s renovation market more measurable, investable, inclusive and resilient.