Introduction

The SMARTER Finance for EU (SMARTER4EU) LIFE-supported project, and its predecessor, the H2020-supported SMARTER Finance for Families project, have successfully created Green Homes and Green Mortgage (GHGM) programmes in 15 European countries. The participating Green Building Councils, national energy agencies and other expert groups involved in the project have experience in certifying holistic green and exemplary energy-efficient projects valued at over €358 billion, demonstrating that green finance standards can be set high with sufficient volume to support a vibrant climate finance industry.

Green mortgages significantly leverage private capital to provide the upfront financial resources needed to invest in the design and construction quality of nearly-zero energy building (nZEBs) and green homes. Financial institutions offering retail mortgages and construction and renovation loans are beginning to incorporate financial risk reduction for residential projects that achieve exemplary energy performance and additional green criteria into their underwriting models, offering lower-cost financing. Homeowners less exposed to increasing – and in recent years dramatically spiking – energy costs have a greater capacity to repay their loans, resulting in reduced ‘loss given default’ from properties backed by these loans. 

Residential investors are best placed to innovate and manage the significant burdens of radically changing construction approaches, materials and technologies inherent in developing nearly-zero energy residential projects. Preferential green finance alleviates the ‘first mover’ risks, rewarding investors who create positive externalities for the market. 

Newly available capacity-building from SMARTER4EU has provided banks and investors with detailed explanations of the processes and benefits, from nZEB and green approaches to new construction and renovation projects. Further expanding understanding of green finance from ESG departments to underwriting departments will better align banks’ financial practices with energy security and climate risks, reducing overall systemic financial risk for the European banking system. 
 

The business case for green homes: trust, value and risk reduction

Those familiar with the origins of the global financial crisis of 2007–2008 will recognise that one main cause was not only the extension of mortgage loans to high-risk US borrowers but, importantly, the securitisation of those loans into ‘Residential mortgage-backed securities’, whose underlying risks were not properly reflected in the aggregated financial products sold on global financial markets. It was ‘innovative’ financial engineering that reclassified these aggregated groups of high-risk assets as lower-risk investment vehicles.    

As Europe moves forward with green finance, it is essential – in this case for residential buildings – to avoid a similar fate, where the underlying projects of an investment vehicle cannot provide the risk-reduction benefits that exemplary net-zero energy and green buildings deliver.  Furthermore, beyond the necessity of climate-change mitigation and ecosystem protection, projects defined as green must deliver financial success to ensure rapid uptake in Europe and internationally. Clearly demonstrating the business case for net-zero energy and green homes to all essential stakeholders – including citizens, banks, investors and residential project developers as well as financial regulators and central banks – is a critical component of the SMARTER Finance for EU initiative.
 

How do green homes and green mortgage programmes work?

While variations in local certifications exist, projects that qualify must achieve exemplary energy performance in their market. In addition, important green criteria include mandatory indoor air-quality testing for harmful pollutants such as volatile organic compounds (VOCs) and formaldehyde, promoting healthier living environments.  Sustainable material use is encouraged, including low-VOC paints and environmentally friendly construction materials. Water efficiency is addressed through features such as low-flow fixtures and rainwater harvesting, while construction waste management aligns with EU directives to reduce landfill impact and circular-economy principles.

Additional criteria enhance comfort and liveability, including thermal performance, acoustic insulation and access to daylight. Projects are also rewarded for locations that support reduced car dependency and for applying life-cycle assessment (LCA) principles to evaluate the long-term environmental impact of materials and design choices.  These measures ensure a comprehensive, health- and environment-focused approach to green building that goes beyond energy savings alone. The roles of Certifier and Energy Auditor, who ensure these benefits are realised, are illustrated below. 

_{Figure 1: Key roles and benefits for stakeholders in Green Homes and Green Mortgage programmes, showing how SMARTER4EU aligns banks, homebuyers, developers and solution providers to drive demand for high-performing green homes. Source: Romania Green Building Council, 2009 ©}

How does the project accommodate local conditions?

The SMARTER4EU consortium shares extensive knowledge and co-creates tools, education and promotional materials to support both the international initiative and national programmes. National partners determine which homes qualify as net-zero energy and green, based on a combination of National Energy Performance Certificates and a national green residential certification system that accounts for local building approaches, environmental priorities, regional climate and traditional and cultural considerations, among other criteria. Each national certification programme has been evaluated to meet or exceed the EU Taxonomy for Sustainable Activities criteria and to conform to the Level(s) framework for evaluating green building rating systems. This ensures that programmes are properly adapted to local conditions while meeting or exceeding ambitious international standards for how a green home is defined.
 

How is financial risk reduced for the beneficiaries of the initiative?

Green mortgages both require that homes have exemplary energy and green performance, and deliver the necessary finances at the critical time to invest early in the design and construction of those homes. These homes are more durable over time and have lower monthly costs for the occupants, who have competing needs when managing their budgets. How the different participants in the project see their financial risks reduced is described below:

• Banks offering mortgage, construction or renovation loans: A bank with a mortgage portfolio of homes with low monthly operating costs, lower expected repair bills over time and higher asset values maintained over time (reducing the loss-given-default value at risk if a mortgage is not repaid) is exposed to less financial risk. One study relevant to Europe shows a 32% reduction in mortgage default rates for energy-efficient homes compared with standard homes. This lower risk allows the bank to provide preferential, more competitive mortgage interest rates without reducing profitability.
• Residential investors and project developers: Builders who create innovative net-zero-energy and green residential projects are often at risk when investing in new approaches and technologies, whose value the homebuying public may not fully understand or may view with scepticism. By credibly achieving exemplary energy and other green criteria, the GHGM programme provides assurance to buyers and access to preferential mortgage rates for those purchasing homes from qualified projects. In addition, the green label achieved by the project provides visibility and product differentiation for housing projects competing in a crowded market.
• Green Homes Solution Providers (GHSPs): These companies and building practitioners benefit from growing demand driven by citizen awareness, bank incentives and developer participation – all aligned around rigorous certification standards. This ecosystem gives GHSPs greater market visibility and importance in the process, allowing them to co-brand with certified projects, extend their marketing reach and position their products as essential to achieving certification.  All of this increases the positive financial performance of a company’s green-solutions offering.
• Homeowners: This group is the most important beneficiary of SMARTER4EU, as their appreciation of the benefits of green homes is critical to driving market demand and industry transformation, and to reducing systemic risk by improving the overall housing stock’s resilience and energy performance.

Homeowners benefit from lower total monthly costs while being able to purchase homes with a 5–15% higher design and construction cost premium, thanks to energy savings and discounted green mortgage rates (illustrated here for a low-cost apartment). Healthier homes also reduce health issues that increase medical costs and significantly interfere with household members’ ability to work. Better-designed homes reduce and defer ongoing maintenance expenses. These benefits enhance household financial stability, ensure that homebuyers can repay mortgage loans and reduce social risks such as energy poverty. SMARTER4EU provides tools and guidance for consumers to make informed choices, shifting decisions from a sole focus on up-front cost (or ‘nominal home sales price’) to a focus on minimising the total monthly cost of owning that home.
 

_{Figure 2: Green Homes and Green Mortgages – a toolkit for financial institutions. Source: Romania Green Building Council.}

How does SMARTER4EU contribute to the wider discussion among institutions focused on systemic financial risk?

In recent years, there has been a significant increase in banks reporting on environmental, social and governance (ESG) plans. SMARTER4EU’s Green Homes and Green Mortgage programmes expand the number of projects that provide credible, ongoing cost savings. Given the old adage that ’a penny saved is a penny earned’, it is reasonable that the predicted monthly energy savings of a green home, relative to a standard home, should be considered as additional income in borrowers’ mortgage applications. The National Bank of Romania provided guidance approving exactly this use of energy savings, but added (correctly) that these energy savings must be calculated using a credible methodology. Romania, like all EU Member States, has a national methodology to calculate expected energy savings via the Energy Performance Certificate (EPC) process.   

SMARTER4EU has, therefore, elevated the importance of an EPC from being merely an indicator to the building occupant of expected energy costs to becoming an important input to the essential process of a bank evaluating the future monthly cash flow of a potential borrower. This has begun to shift the topic of green mortgages from an ESG initiative of banks to becoming an important factor in the underwriting and pricing of mortgage loans. SMARTER4EU has developed, pilot-tested and launched the Green Homes Accredited Finance Professional™, a comprehensive training programme that explains the mechanics of the initiative to the banking industry and supports the launch of green financial products that drive market transformation and risk reduction. 

The Network for Greening the Financial System (NGFS) is the global coalition of central banks, financial supervisors and international institutions working to enhance the financial system’s role in managing climate and environmental risks. Most of the countries participating in SMARTER4EU also have their central banks as members of the NGFS. The NGFS has just released the report ‘Integrating adaptation into transition plans: from ambition to action’, which further demonstrates the importance of risks exacerbated by a changing climate – including floods, overheating, droughts, wildfires and more. 

The report emphasises the need for banks to embed adaptation and resilience considerations into their core planning of governance, strategy, engagement and metrics, in order to mobilise private finance towards climate-resilient investments. Both SMARTER4EU and the NGFS emphasise the need to align capital allocation with climate resilience. SMARTER4EU works from the level of the individual home upward, while the NGFS does so at the strategic and institutional level. Demonstrating the financial success and risk reduction of green residential projects, together with leadership for regulatory bodies at the highest level, will certainly help increase engagement across all banks in the sector.

Conclusions

SMARTER4EU demonstrates that integrating exemplary energy performance and green features into residential projects is crucial for market transformation. By reducing financial risks for banks, offering preferential rates to investors and increasing demand for solution providers, green homes become financially attractive. Pricing in the financial risk of homes that perform poorly over time, while rewarding those with exemplary energy performance and green features, is essential to market-driven transformation and innovation across the value chain of homebuilding and financing. 

The success of the initiative demonstrates an understanding that individual homes are the building blocks of green mortgage portfolios, and that setting and maintaining higher standards will ensure that related green bonds and other investment vehicles promising sustainability deliver on reducing systemic financial risk, improving the planet and, most importantly, the lives of citizens in Europe and beyond.