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Sustainable lending in Realkredit Danmark
1 |
Sustainable lending in
Realkredit Danmark
Climate change
May 2020
Sustainable lending in Realkredit Danmark
2 |
Contents
Why this report ........................................................................................................................................ 3
EU to define what green looks like .......................................................................................................... 4
TCFD says risks are more imminent than we think ................................................................................ 8
UN codifies responsible banking ........................................................................................................... 10
Twenty recommendations to deliver on ................................................................................................ 11
Denmark at the forefront ....................................................................................................................... 13
Denmark is half way on 2030 targets for cuts in emissions .............................................................. 13
Renewable energy has become part of the Danish brand ................................................................ 14
District heating is a platform .............................................................................................................. 15
Households now run on 64 percent renewable energy ..................................................................... 17
Building energy efficiency ..................................................................................................................... 18
EPCs provide an assessment of energy efficiency ............................................................................ 20
The Realkredit Danmark mortgage book GHG footprint ....................................................................... 26
EPCs show A or B mortgages worth DKK 70bn................................................................................ 26
Heating the mortgage book ............................................................................................................... 30
GHG footprint for specific exposures ................................................................................................ 32
Utilities ........................................................................................................................................... 33
Agriculture ...................................................................................................................................... 33
How to assist our customers in their green transition ........................................................................... 35
The first green covered bonds to see the Danish market ................................................................. 35
Green certificates as a viable alternative .......................................................................................... 36
Financing improvements in energy efficiency ................................................................................... 37
Underwriting climate-related risk ....................................................................................................... 40
Underwriting energy inefficient properties ..................................................................................... 41
Underwriting GHG emitting industries .......................................................................................... 42
Underwriting flood risk ................................................................................................................... 43
Sustainable lending in Realkredit Danmark
3 |
Why this report
Climate change is a global challenge that fundamentally alters the risks that people, businesses and
the financial sector face. Denmark is committed to taking the lead on the path towards a more sustain-
able and greener future. In December 2019, the Danish Parliament passed the first climate law com-
mitting the current and future Parliament assemblies to the targets of cutting greenhouse gas emissions
by 70 percent by 2030 and becoming carbon neutral by 2050.
Delivering on the targets will require enormous efforts. These efforts will build on past investments in
e.g. renewable energy, public transportation, public energy supply, and high building standards, which
have given Denmark a head start on becoming green. Already today, renewable energy accounts for
nearly 40 percent of total production in Denmark. On a windy day, renewable energy suffices to cover
all needs.
At Realkredit Danmark, we want to help society in succeeding with the green transition and delivering
on the targets set forth. As a mortgage bank, we have only limited impact in terms of our own environ-
mental footprint. We can, however, generate significant impact by supporting our customers in their
efforts to become more climate-friendly. To this end, we are committed to financing energy-efficient
properties and improvements in the energy-efficiency of existing properties, renewable energy and en-
ergy supplies based on renewable energy. In doing so, we can turn Denmark just a little bit greener for
each mortgage we underwrite.
Thinking green is not new to us. In 2019, we launched the first green covered bond to see the Danish
market. In this report, we shed more light on where we are and where we are headed on the path
towards a more sustainable and greener economy. Financial disclosure on sustainability is still in its
infancy. In terms of metrics, we will use the information at hand and compare to the EU taxonomy as
we expect it to come through and recommendations from the Task Force on Climate-related Financial
Disclosure and the Danish Forum for Sustainable Finance. This report will be followed by frequent
disclosure on the green aspects of our mortgage book.
Sustainable lending in Realkredit Danmark
4 |
EU to define what green looks like
Defining what green looks like is the first step of the EU action plan on sustainable finance. With the
action plan EU aims at mobilising more private capital for green investments, manage risks to the finan-
cial system from climate change, resource depletion and environmental, and fostering transparency
and long-termism in financial and economic activities. For the action plan to work across the EU a com-
mon definition of what green looks like is necessary as a baseline.
In June 2018, EU tasked the Technical Expert Group on
Sustainable Finance (TEG) with the definition of green and
in March 2020, TEG delivered on the task with detailed re-
commendations for a green taxonomy in a final version1.
Meanwhile, in December 2019, the European Commission
and the European Parliament agreed on regulations to
create a legal basis for the taxonomy. What now remains
is for the EU Commission to transcribe the TEG recommen-
dations into delegated acts whereby the taxonomy be-
comes binding EU law. At time of writing, expectations are
for a narrow transcription.
The definition of green spans different industries and areas of economic activity.
Agriculture and
forestry
Manufacturing Utilities Water, sewage
and waste
Transportation Information and
technology
Construction and
real estate
In this report, we zoom in on construction and real estate and utilities as these assets are eligible for
covered bond funding also. Screening criteria for construction and real estate and utilities, respectively,
are:
1 See Taxonomy Final report of the Technical Expert Group on sustainable finance, March 2020 (TEG report)
Sustainable lending in Realkredit Danmark
5 |
Construction of new properties is green if the primary energy need is at
least 20 percent lower than needs resulting from local net zero emis-
sion building (NZEB) requirements
Renovations are green if compliant with energy performance stand-
ards2 or if they achieve energy savings of at least 30 percent when
compared to baseline energy consumption or if property within top 15
percent/NZEB minus 20 percent after renovation
Installation of renewable energy and energy-saving equipment, insula-
tion and replacement of windows, doors etc. to higher energy-savings
standards are green
For buildings constructed before year-end 2020, acquisition and own-
ership are green if the energy performance of the property belongs to
the top 15 percent of the local building stock
Acquisition of property constructed before end 2020 if belonging to the
top 15 percent
Acquisitions of property are green if the property meets the criteria for
new properties for building constructed before end 2020
For buildings constructed after year-end 2020, acquisition and ownership
are green if the primary energy need is at least 20 percent lower than
needs resulting from local net zero emission building (NZEB) requirements
TEG anchors the screening criterion for new construction after year-end 2020 in national NZEBs which
by no means are uniform across the EU. At the one end of the scale, the NZEB for Denmark is at 20
kWh/m2 reflecting energy standards for new construction are high. At the other end of the scale, the
NZEB for Austria is 160 kWh/m2 eight times higher that of Denmark3. With the screening criteria for new
construction, TEG is at risk of labelling more Austrian than Danish assets green going forward.
TEG takes a proven path when it comes to construction before year-end 2020. In alignment with green
bond frameworks already in operation, green is defined by the asset belonging to the top 15 percent in
terms of energy efficiency. In a Danish context, the criterion is the equivalent of an energy performance
certificate (EPC) A2020, A2015, A2010 or B whereas the criterion for new construction is the equivalent of the
best part of EPC A2020 only. Consequently, the needles eye is much bigger for construction before year-
end 2020 than for construction after year-end 2020 which is by no means unjustified. From a life-cycle
perspective, new construction emits far more greenhouse gasses than old construction renovated to
new standards which we will look further into later on. Constructing new is not the best answer in all
scenarios to climate change.
TEG also takes a proven path when it comes to building renovations. The 30 percent threshold for
energy renovations is also found in green bond frameworks operated by issuers today. At a first glance,
the needles eye for energy renovations seems larger than for new construction which reflects the above
observation well. In practice, the 30 percent threshold will require documentation which may prove dif-
ficult and costly to provide.
2 See the Energy Performance Building Directive (EPBD) 3 Source BPIE, as of 2015
Sustainable lending in Realkredit Danmark
6 |
TEG recommends to tighten criteria over time. For new construction, TEG recommends review of NZEBs
from 2020 to 2030. For buildings constructed before year end-2020, TEG recommends maximum emis-
sions per m2 per annum commensurate with the criterion that the building belongs to the top 15 percent
be scaled down by one sixth every five years to arrive at a zero emission standard by year-end 2050.
Criteria for green will be applied at time of origination only. Once green, a mortgage will remain green
until maturity or prepayment even though the property which secures the property fail to meet future
criteria for green as they are tightened. That said, TEG contemplates to introduce a renovation criterion
for green financial instruments with a tenure of 10 years or more.
Energy supplies and utilities are at the core of plans to fight climate-change as both the transition to-
wards renewable energy and the better distribution of energy, irrespective of source, are important
steps on the path towards green. For energy, green is:
Renewable energy facilities including solar, wind, ocean and hydro, geo-
thermal, gas combustion operating at life-cycle emissions lower the
100gCO2e/kwh declining to 0gCO2e/kwh by 2050 are green,
Bioenergy facilities operating at less than 80 percent of greenhouse
gas emissions to the fossil fuel comparator increasing to 100 percent
by 2050 are green
Facilities to transmit and distribute energy if in systems on the trajec-
tory to full decarbonisation or if meeting other criteria4 are green
Investments in electricity storage are green
Production of biomass, biogas and biofuels is green
Retrofit of gas transmission and distribution networks whose main pur-
pose is the integration of hydrogen and other low-carbon gases is green
District heating and cooling systems if using at least 50 percent renewa-
ble energy or 50 percent waste heat or 75 percent cogenerated heat or
50 percent of such energy and heat are green
The TEG tags the green label to most sources of renewable energy and a wide range of facilities to trans-
mit, distribute, or store energy.
The energy sector is in need of investments. Generation of electricity is the source of a quarter of
greenhouse gas emissions across the EU. Reductions call for investments in both transition to renew-
able energy sources and better transmission and distribution of energy whether the source.
4 See the TEG report chapter 22
Sustainable lending in Realkredit Danmark
7 |
With the screening criteria for green in the making, an EU green bond standard is viable.
An EU green bond standard will operate on a look-through basis. A mortgage is green if the property
pledged as collateral is green following the screening criteria for green as outlined in the above. Further,
a bond is green if collateralised by green mortgages and so forth.
Following TEG proposal5, application of the EU green bond standard will be voluntary. While the label
EU Green Bond will be reserved to those green bond programmes wholly compliant with the screening
criteria for green adopted by the EU, issuers have the option to issue green bonds in a non-compliant
format. At the end of day, it will be the call of the investor community if non-compliant formats remain
viable.
TEG recognises the variety of green bonds already in issue. TEG proposes a grand-fathering whereby
programmes can earn the EU Green Bond label though funded by non-conforming assets provided all
new assets will be conforming at time of inclusion. With this proposal, the EU Green Bond standard
holds the potential to pick-up the liquidity of all green bond programmes already in issue.
5 See Usability Guide TEG proposal for an EU green bond standard, March 2020
Sustainable lending in Realkredit Danmark
8 |
TCFD says risks are more imminent than we think
The Task force on Climate-related Financial Disclosure (TCFD) reported to the Financial Stability Board
(FSB) back in June 2017. The report is available at fsb-tcfd.org.
The TCFD found one of the most significant, and perhaps
most misunderstood, risks that organizations face today
relates to climate change. While it is widely recognized that
continued emission of greenhouse gases will cause further
warming of the planet and this warming could lead to dam-
aging economic and social consequences, the exact tim-
ing and severity of physical effects are difficult to estimate.
The large-scale and long-term nature of the problem
makes it uniquely challenging, especially in the context of
economic decision making. Accordingly, many organiza-
tions incorrectly perceive the implications of climate
change to be long term and, therefore, not necessarily rel-
evant to decisions made today.
The TCFD has a fair and valid point. Risk managers often tend to focus on those risk which are obvious
and tangible leaving behind those risks which are complex and intangible. This may very well also apply
to climate-related risks. While focusing on the first-order effects of climate-change, risk managers miss
the second-order effects from societies adapting to climate-change before climate-change actually ma-
terialises.
The TCFD encouraged risk managers in financial institutions to broaden their view on which climate-
related risks they face and will be facing in the future. To this end, the TCFD worked out a risk matrix
distinguishing between transition risks and physical risks.
The TCFD further encouraged financial institution to invest efforts and resources in disclosure on cli-
mate-related risks to foster the transparency needed for financial markets to work efficiently in allocating
resources and capital. To this end, the TCFD worked out a disclosure model.
As part of Danske Bank Group, Realkredit Danmark remains fully committed to meeting the recommen-
dations of the TCFD.
Sustainable lending in Realkredit Danmark
9 |
Tra
ns
itio
n r
isks
Po
licy
an
d le
ga
l Increased pricing of greenhouse gas emissions
Enhanced emission-reporting obligations
Mandates on and regulation of existing products and services
Exposure to litigation
Te
ch
no
log
y Substitution of existing product and services with lower emissions options
Unsuccessful investment in new technologies
Costs to transition to lower emissions technology
Ma
rke
t
Changing customer behaviour
Uncertainty in market signals
Increased cost of raw materials
Re
pu
tati
on
Shifts in consumer preferences
Stigmatisation of sector
Increased stakeholder concern or negative stakeholder feedback
Ph
ysic
al r
isks
Ac
ute
Increased severity of extreme weather events such as cyclones and floods
Ch
ron
ic Changes in precipitation patterns and extreme variability in weather patterns
Rising mean temperatures
Rising sea levels
Source: Final report, Recommendations of the Task Force on Climate-related Financial Disclosures (extract)
Sustainable lending in Realkredit Danmark
10 |
UN codifies responsible banking
Danske Bank Group signed up to the UN principles for re-
sponsible banking in September 2019. In doing so,
Danske Bank Group joined 129 other banks from 49 coun-
tries across the in supporting UN on promoting responsible
banking across the world.
UNEPFI motivates the principles by As society’s expecta-
tions change, banks must be transparent and clear about
how their products and services create value for their cus-
tomers, clients, investors, as well as society. The Princi-
ples for Responsible Banking help any bank – whatever its
starting point – to align its business strategy with society’s
goals.
The principles of responsible banking are:
1. Alignment 2. Impact and target setting 3. Clients and customers
We align our business strategy to
be consistent with and contribute
to individual’s needs and society’s
goals as expressed in the Sustain-
able Development Goals, the Paris
Climate Agreement and relevant
national and regional frameworks
We will continuously increase our
positive impacts while reducing
the negative impacts on, and man-
aging the risks to, people and envi-
ronment from our activities, prod-
ucts, and services. To this end, we
will set and publish targets where
we can have the most significant
impacts
We will work responsibly with our
clients and our customers to en-
courage sustainable practices
and enable economic activities
that create shared prosperity for
current and future generations
4. Stakeholders 5. Governance and culture 6. Transparency & accountability
We will proactively and responsi-
bly consult, engage and partner
with relevant stakeholders to
achieve society’s goals
We will implement our commit-
ment to these Principles through
effective governance and a culture
of responsible banking
We will periodically review our in-
dividual and collective implemen-
tation of these Principles and be
transparent about and accounta-
ble for our positive and negative
impacts and our contribution to
society’s goals
Source: unepfi.org
By signing up to the principles Danske Bank Group is committed to conducting analysis into where the
bank has significant positive and negative impacts on society, the environment and the economy, set-
ting and implementing ambitious targets to address the significant impacts identified, and report pro-
gress to the public.
As part of Danske Bank Group, Realkredit Danmark remains fully committed to these obligations.
Sustainable lending in Realkredit Danmark
11 |
Twenty recommendations to deliver on
Industry organisation Finance Denmark established the Forum for Sustainable Finance to recommend
on how the financial industry may contribute to the transitions towards a sustainable economy. The
Forum brought together NGOs, trade organistions, financial and non-financial corporates, and subject
matter experts on climate and greenhouse gas emissions.
Forum concluded in December 2019 offering twenty
recommendations to the financial industry as well as other
industries and regulators. Forum found (1) the transition to
a sustainable economy to be one of the most important
challenges facing society, (2) the financial industry should
take the lead, and (3) transparency is imperative. These
findings form the backdrop for the recommendations.
Finance Denmark, which represents all financial
institutions in Denmark, has accepted all twenty
recommendations with a promise to deliver. This promise
extends to Danske Bank and Realkredit Danmark.
Not all recommendations are equally important to
mortgage banking. In what follows we highlight those
recommendations we believe most relevant to our
activities.
1 Incorporate sustainability into business model
Forum recommends all members of Finance Denmark to integrate sustainability into their busi-
ness model
2 Offer more sustainable products
Forum recommends all members of Finance Denmark to offer lending and investments products
for green and sustainable economic activities
3 Operate your our business sustainably
Forum recommends all members of Finance Denmark to improve internal procedures to include
sustainability aspects
4 Disclose clear and reliable documentation on sustainability
Forum recommends to all members of Finance Denmark to provide transparency on sustainability
of both lending and investment activities and internal procedures
5 Disclose carbon footprint and set targets for future reductions
Sustainable lending in Realkredit Danmark
12 |
Forum recommends to all members of Finance Denmark to measure by common definitions and
disclose the carbon footprint of lending and investment activities and to set individual targets for
reductions
6 Screen for carbon
Forum recommends to all members of Finance Denmark to screen large exposures for economic
sustainability in an environment where emissions are heavier taxed and regulated
7 Classify lending and investment activities on a sustainability scale
Forum recommends to all members of Finance Denmark to classify lending and investments on the
EU taxonomy sustainability scale
10 Focus on improving skills and knowledge on sustainability in the industry
Forum recommends investments be made in improving skills and knowledge on sustainability at all
levels of organisations
13 Advance financing green and sustainable properties
Forum recommends financial institutions to advance financing of green and sustainable properties
Source: Forum for Sustainable Finance, 20 recommendations to Finance Denmark (extract) (our translation)
Sustainable lending in Realkredit Danmark
13 |
Denmark at the forefront
Denmark has taken a lead on the transition towards a green and sustainable economy and is committed
to retain this position in the future. With the passing of the climate law in December 2019, Denmark has
set the ambitious targets to cut greenhouse gas emissions by 70 percent to 1990-levels by 2030 and
get to a full stop by 2050. In the 2020 Climate Change Performance Index, Denmark is ranked second
best with Sweden taking the top position.
The climate law adds to a long list of initiatives and reforms to cut greenhouse gas emissions and
accelerate the transition to a green and sustainable economy. In the 1990s, Denmark reformed the
utilities sector to promote district heating and privatise electricity markets. These initiatives were fol-
lowed by reforms to promote renewable energy sources and phase-out fossil fuels. In recent years,
ambitious targets have been set to accelerate the transition further leading up to the passing of the
climate law.
Denmark is half way on 2030 targets for cuts in emissions
Three decades of efforts to cut greenhouse gas emissions have worked their part. Emissions are now
at 68 percent of 1990-levels. The 32 percent reduction is sourced in both cuts in energy consumption
and the transition to renewable energy.
While Denmark has come far on the path to a green and sustainable economy, the target reductions of
70 percent by 2030 and 100 percent by 2050 call for the transition to accelerate. If no further measures
to cut emissions are implemented, reductions will only reach 55 percent by 2030.
Source: Statistics Denmark and Ministry of Finance
0
30
60
90
120
150
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029
Greenhouse gas emissions
Sustainable lending in Realkredit Danmark
14 |
So far, cuts in greenhouse gas emissions have not harmed economic growth. The Danish economy
has become less energy intensive. While the economy has grown by 53 percent in real terms, energy
consumption is up by only two percent. For every good and service we produce, we use less energy.
Note: 1990=100
Source: Statistics Denmark and Ministry of Finance
Renewable energy has become part of the Danish brand
Cuts in energy needs will not bring Denmark to the target levels for greenhouse gas emissions on their
own. The transition to renewable energy is the hallmark of Danish efforts to cut greenhouse gases.
Investments in renewable energy sources have not only cut greenhouse gas emissions. They have also
fostered fast-growing industries.
Note: 1990=100
Source: Danish Energy Agency and Ministry of Finance
In the public eye, Denmark is deeply associated with wind energy. Thanks to national treasures like
Vestas and Ørsted, wind energy has become part of the Danish brand.
Wind energy is however only part of the truth. The primary source of renewable energy is actually
biomass. In 2017, biomass was the source of 63 percent of all renewable energy, whereas wind ac-
counted for 17 percent. On a windy day, however, wind energy suffices to cover all energy needs.
0
50
100
150
200
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Energy intensity
GDP Gross energy consumption Greenhouse gas emissions
0
25
50
75
100
125
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Sources of energy
Fossil fuels Renewable energy
Sustainable lending in Realkredit Danmark
15 |
Source: Statistics Denmark and Ministry of Finance
District heating is a platform
District heating has walked hand-in-hand with renewable energy.
Since the 1990s, the expansion of district heating and natural gas has been a key priority of energy
policies. In 1990, 1,063,000 houses ran on district heating. By 2017, this number had grown into
1,826,000 houses. During the same period, the number of houses heated by an oil burner contracted
from 824,000 to 255,000. Similar trends apply to offices and retail.
Source: Danish Energy Agency
District heating is centralised and large-scale. In essence, district heating provides the platform to plug-
in new, renewable energy source faster and more efficiently. Just think of the challenge in replacing the
824,000 individual oil burners in operation in 1990 with renewable energy such as biomass or wind.
It should come as no surprise that district heating has turned to renewable energy sources ahead of the
economy at large. In 2017, 69 percent of district heating was from renewable energy sources. For elec-
tricity, the ratio was 64 percent.
0
1000
2000
3000
1990 2000 2010 2018
Heating source by number of houses (thousands)
Oil burner Natural gas burner District heating Others
0
25
50
75
100
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Renewable energy by source
Wind Biomass Other
Sustainable lending in Realkredit Danmark
16 |
Source: Statistics Denmark and Ministry of Finance
The transition to renewable energy has cut greenhouse gas emissions from district heating and elec-
tricity markedly. In 1990, district heating and electricity were the sources of 36 percent of emissions
whereas in 2017, only 21 percent of emissions came from the sector and, bear in mind, during this
period total emissions were cut by 32 percent.
Source: Statistics Denmark and Ministry of Finance
District heating is predominantly urban. Obviously, it is more costly to expand the district heating grid in
rural areas where properties are located apart. With the expansion of the district heating grid, we have
harvested the low-hanging fruits. The next steps are less accessible.
0
20
40
60
80
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Renewable energy to total
Electricity District heating Other
0
50
100
150
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Greenhouse gas emissions
Logistics Agriculture Manufactoring Non-district heating, households District heating and electricity
Sustainable lending in Realkredit Danmark
17 |
Source: Danish Energy Agency
Households now run on 64 percent renewable energy
Zooming in on households, we find that 28 percent of energy consumed is from renewable energy
sources, directly. However, if we adjust for district heating at 36 percent of energy consumed and elec-
tricity at 18 percent of energy consumed be 69 percent renewable and 64 percent renewable, respec-
tively, we get to 64 percent of total energy consumed be from renewable sources.
Note: Numbers in PJ
Source: Danish energy agency
0
50
100
150
200
250
1990 1995 2000 2005 2010 2015
Energy consumed by households by source
Oil Natural gas Coal and coke Renewable energy Electricity District heating Gas works gas
Blue areas mark district heating
Yellow areas mark natural gas
Sustainable lending in Realkredit Danmark
18 |
Building energy efficiency
Next we zoom in on energy efficiency in properties. We focus on residential properties and office and
retail as these are our primary borrower segments.
Energy efficiency of properties remains important, not only from an owner’s perspective but also from
a climate change perspective. Nearly 60 percent of all energy consumed by households is for heating
purposes. Though increasingly renewable, see the above, cuts in energy consumption from improve-
ments in energy efficiency remains a viable and efficient way to cut greenhouse gas emissions.
Energy efficiency has improved. When compared to 1990, energy consumed for each square meter of
floor heated has been reduced by 15 percent. However, the reduction is countered by a 25 percent
increase in floor space heated. Consequently, energy consumed for heating of housing is up by 6 per-
cent since 1990.
Note: 1990 equals 100
Source: Danish Energy Agency
We often point to new construction as the answer to the question of how to improve energy efficiency
in housing. Certainly, new construction is more energy efficient in the user phase, which is evidenced
by higher EPCs, see the below. Yet, new construction is also larger in size construction with the average
single family house climbing in size from 137m2 in 1990 to 209m2 in 2018.
50
75
100
125
150
1990 1995 2000 2005 2010 2015
Energy consumption for housing
Heated floor space Final energy consumption Final energy consumption per m2
Sustainable lending in Realkredit Danmark
19 |
Source: Statistics Denmark
More importantly, new construction does not come cheap in terms of greenhouse gas emissions. Emis-
sions embedded in building materials are substantial. For new construction meeting current standards
of energy efficiency, greenhouse gas emissions embedded in construction materials account for nearly
three quarters of lifetime emissions leaving only one quarter for the user phase, studies from the Danish
Association of Architectural Firms confirms. A study from Danish engineering, design and consultancy
company Rambøll compares greenhouse gas emissions from the demolition and construction of a new
house to the re-construction of the old house. The comparison reveals emissions for demolition and
construction of a new house at 56 times that for re-constructing the old house with the same end result
in terms of energy-efficiency.
Note: Examples of embedded GHG emission
Source: Rambøll and Danish Association of Architectural Firms
0
50
100
150
200
250
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Average size of new housing
New construction scenario
Demolition
Transport to re-cycling and landfill
Dismantling and re-cycling
Construction of new components
Transport to construction site
Construction
New house
1,625,000 kg
Re-cycling scenario
Transport to construction site
Re-construction
29,000 kg
Dismantling and re-cycling
Re-cycling of construction
Construction of new components
New house
Sustainable lending in Realkredit Danmark
20 |
In 2017, the Danish Council on Climate Change, established to independently advise the government
on climate issues, reached similar conclusions. The council pointed to energy renovations of properties
as the initiative with the greatest potential to help society in becoming green and sustainable and at the
lowest economic costs.
Co
ntr
ibu
tio
n to
20
50
tra
ns
itio
n
Hig
h
EVs
Large-scale heat
pumps
Solar energy
Energy renovation of
properties
Mid
Public transportation
Electric powered
trains
Reductions in dairy
production
Small-scale heat
pumps
Po
or
Biofuels
Highly expensive Expensive Mid Inexpensive Highly inexpensive
Implied economic costs to society
Source: Danish Council on Climate Change, 2017
EPCs provide an assessment of energy efficiency
For properties already brought into use, the Energy Performance Certificates (EPC) provides an assess-
ment of energy efficiency property-for-property. With nearly 650,000 EPCs completed since 2010, the
scheme is both wide-spread and well-known.
EPCs are assigned by a certified surveyor following a detailed review of the property. The EPC repre-
sents a baseline assessment of the energy efficiency performance of the property taking into the ac-
count all technical aspects of the property including insulation and source of heating.
EPCs do not consider energy consumed for the production of building materials nor greenhouse gas
emissions embedded in building materials. Consequently, EPCs apply only to user phase and not to the
entire lifetime of the property. In principle, a high-performing EPC property may emit more greenhouse
gases than a low-performing EPC property when adjusting for the construction phase, but we do not
know. This is a material weakness of the EPC which will probably be difficult to remedy.
The EPC report includes both a grade on a scale from A to G, with A further split into A2020, A2015, and
A2010 referencing the year of the building standards to which the property complies, and recommenda-
tions to improve energy efficiency and possibly the EPC grade.
Sustainable lending in Realkredit Danmark
21 |
Source: sparenergi.dk
EPC grades indicate baseline energy consumption for heating. For each grade thresholds for maximum
energy consumption are set. For EPC A2020 the threshold is 27kWh/m2, whereas for EPC F the threshold
is 286 kWh/m2 for a 140m2 dwelling, more than ten times as much.
A2020 A2015 A2010 B C D E F G
Note: Thresholds for kWh/m2
for dwellings at 140m2
Source: sparenergi.dk
The scale is relatively harsh when compared to peers. A Danish EPC C would translate into a Norwe-
gian6 EPC B and so forth. So far, the EU has not succeeded in harmonising scales which could prove
difficult taking the different climate zones into consideration.
EPCs do not only apply to housing. The scheme also encompasses offices and retail. While the scheme
is obligatory for housing when sold, sublet for more than four weeks, and for new construction, the
scheme remains voluntary for offices and retail. Coverage is therefore lower.
The nearly 650,000 EPCs completed are split on 430,000 detached houses, 150,000 terrace houses,
55,000 apartment properties, and 15,000 properties for office or retail purposes. EPCs are assigned to
apartment properties property-for-property. Each EPC may therefore apply to a number of individual
apartments. When broken down into individual apartments, the number of EPCs outstanding grows to
more than 780,000. With nearly 1.2m of detached houses and 400,000 terrace houses across Denmark,
coverage of the EPC scheme is just below 40 percent for these categories, which is far from perfect.
Unless made obligatory, complete coverage is beyond reach due to a life span of ten year for the indi-
vidual EPC.
Combining A2020, A2015, and A2010 we find 82,999 properties in the EPC A category. Further, we find
52,343 properties in the EPC B category. Adding the numbers, we find 135,342 in 783,667 properties
to meet the criteria for green as defined in our Green Bond Framework. This equals 17.3 percent.
6 https://www.energimerking.no/no/energimerking-bygg/energimerking-av-bolig/om-energiattesten/energimerkeskalaen/
27 37 64 86 133 180 227286
∞
Sustainable lending in Realkredit Danmark
22 |
Note: Number of properties
Source: e-nettet
The bulk of the building mass we find in the EPC C to E range at a combined 544,177 in 783,667
properties. This is the equivalent of 69.4 percent.
The energy in-efficient properties in the EPC F and G range are at a combined 104,148 in 783,667
properties. This is the equivalent of just 13.3 percent.
Construction year is a strong indicator of the EPC. In general, EPC A or B is only attainable for properties
constructed since 1999, EPC C, D or E are attainable for properties constructed from since 1973
whereas properties constructed before 1972 are found in EPC D to G range.
EPC and construction year
2009-
1999-2008
1979-1998
1973-1978
1962-1972
-1951
A B C D E F G
Source: sparenergi.dk
High EPCs are therefore found in areas of high construction activity whereas low EPCs are found in
areas where the building mass is mature at age.
Recent year construction activity has diverged across the landscape. Continued urbanisation has
fuelled demand for more building space in inner city areas. Yet, densely populated city areas have left
little room for new construction and instead construction has taken place in proximity to inner city areas
in new such as Ørestad and Nordhavn in Copenhagen, Tietgenbyen in Odense, and harbour areas in
Aarhus and Aalborg.
82.999
52.343
195.102
235.718
113.357
58.01946.129
A B C D E F G
Sustainable lending in Realkredit Danmark
23 |
Zooming in on housing, we find 24 percent of construction to have taken place in Eastern Jutland home
to only 15 percent of Danish households. At the other end of the scale, Copenhagen, home to 14 per-
cent of Danish households, has seen only 8.9 percent of new construction. Consequently, the building
mass is replaced much faster in some parts of Denmark than others.
Source: Statistics Denmark
Plotting EPCs on the map therefore shows a diverse picture of user-phase energy efficiency. To exem-
plify we zoom in on the municipality of Frederiksberg, located in Copenhagen, exhibiting the highest
market values per m2 across Denmark. Frederiksberg is however densely populated leaving only little
room for new housing and since 2010 only 62 new houses have been constructed within city limits. The
below map exhibits EPCs for Frederiksberg.
Frederiksberg municipality EPCs
Source: sparenergi.dk
Though one of the most treasured places to live in Denmark and certainly one of the most expensive,
Frederiksberg is painted in yellow, red, and brown when it comes to EPCs, simply because housing in
Frederiksberg is mature at age. For detached housing and terrace housing, nearly three in four EPCs
are in the range from C to D.
-10%
0%
10%
20%
30%
Ea
ste
rnJu
tla
nd
We
ste
rnJu
tla
nd
Ea
ste
rnZ
ea
lan
d
No
rth
ern
Ze
ala
nd
So
uth
ern
Jutl
an
d
No
rth
ern
Jutl
an
d
Fu
ne
n
Co
pe
nh
ag
en
su
rbu
rbs
We
ste
rn a
nd
So
uth
ern
Ze
ala
nd
Co
pe
nh
ag
en
Construction of new housing and households by geography
Construction since 2010 Households in residence Difference
Sustainable lending in Realkredit Danmark
24 |
Note: EPCs for detached housing and terrace housing in the municipality of Frederiksberg
Source: sparenergi.dk
Green is further far apart in rural areas where construction is far between though building lots are readily
available. In some rural areas, we find more than half of EPCs be wither F or G.
Note: EPCs for detached housing in the municipality of Lolland
Source: sparenergi.dk
At the other end of the spectrum we find the Copenhagen South Port and the Ørestaden, both newly
established parts of Copenhagen with new housing meeting modern standards and EPCs in green and
yellow, yet also much more affordable than Frederiksberg.
Copenhagen South Port EPCs Ørestad and Tårnby EPCs
Source: sparenergi.dk
2,8% 2,5%
14,7%
31,0%27,0%
14,0%8,1%
A B C D E F G
1,2% 2,2%
9,5%
21,1% 19,9% 19,3%
26,9%
A B C D E F G
Sustainable lending in Realkredit Danmark
25 |
Tearing down the most part of Frederiksberg and re-locating residents affected to newly established
parts of Copenhagen is not a viable solution. Moving forward, focus should be on improving energy
efficiency in the housing already established. Improving energy efficiency in a residence from EPC F to
E will save more energy than improving from EPC E to D.
We deep dived into the micro economic aspects of investments to improve energy efficiency in 2020.
In general, an improvement by two notches from e.g. EPC F to D is attainable. Overstepping the EPC C
threshold will usually require a fundamental refurbishment of the property. In general, EPC A and B is
reserved for new construction.
We noted earlier that the best way to achieve energy efficiency in properties is by means of energy
renovations rather than through demolition and new construction. This is poorly reflected in current EPC
framework giving favour to new construction without considering the construction phase. While tempt-
ing, we should be careful to pay too much tribute to high EPC new construction when assessing energy
efficiency.
In the deep dive, we further referenced studies to show high EPCs to have a positive impact on market
values, however, only by a margin to reflect the discounted savings in future heating costs. Investments
in energy efficiency is not a shortcut to economic gains. That said, higher heating costs from higher fuel
prices or from higher green taxes would imply higher savings and thus higher differences in market
values on a discounted savings basis.
So far, we see only little signs of weakening demand for low EPC housing. In 2018/2019, EPC G housing
was 2.9 percent of all traded houses albeit 5.9 percent of the housing stock which could be a sign of
weakening demand. On the other hand, the same trend applied to EPC A housing, which makes it
difficult to draw any conclusions. In the below chart, the first column marks the share of housing units
sold by EPC, the next column marks the share of housing stock by EPC, and the third column marks
the difference. Differences below zero marks properties be sold less frequently than should be ex-
pected.
Note: in percent
Source: boligsiden.dk
-10
0
10
20
30
40
A B C D E F G
Sustainable lending in Realkredit Danmark
26 |
The Realkredit Danmark mortgage book GHG footprint
Next we zoom in our mortgage book and its implied greenhouse gas footprint. We do not have at hand
the information needed to come up with a precise estimate of total emissions in this report. Here we
zoom in on various determinants of the greenhouse gas footprint and how they relate to the mortgage
book.
EPCs show A or B mortgages worth DKK 70bn
The Realkredit Danmark mortgage book held a total of 442,976 mortgages worth DKK 808.2bn end third
quarter 2019. Of these, 128,208 mortgages worth DKK 359.5bn had a valid EPC. EPC coverage was at
29 percent by number of mortgages and 44.5 percent by mortgage debt outstanding, respectively, at
par with Denmark.
Mortgages worth DKK 70.1bn were EPC A or B. This part of the mortgage book meet the criteria for
green applied in our green covered bond programme and the criteria for green following from the TEG
recommendations for an EU taxonomy. If not already funded, this part of the mortgage book would be
eligible for green covered bond funding in a format meeting the EU green bond standard, assuming TEG
recommendations are written into EU law as is.
EPC A or B were thus at 19.5 percent of the mortgage book for which the EPC is available in terms of
mortgaged debt outstanding.
Note: Mortgage debt outstanding by EPC in DKKbn
Source: e-nettet and Realkredit Danmark
The bulk of the mortgage book was in the EPC C, D, or E range at DKK 257.7bn combined. At 71.7
percent of mortgage debt outstanding, this is at par with the Danish market.
The low performing part of the mortgage book with an EPC F or G amounted to DKK 31.6bn at 8.8
percent of mortgage outstanding. The low performing part of the mortgage book is thus less than half
the size of the high performing part of the mortgage book.
43,5
26,6
94,5
113,8
49,4
19,911,7
A B C D E F G
Sustainable lending in Realkredit Danmark
27 |
Recent years show a positive trend. Coverage is up, but so is the share of mortgage debt in high EPC
segments whereas mortgage debt in low EPC segments have remained stable. We see no reason why
this trend should not continue in the near future.
Note: Mortgage debt outstanding by EPC in DKKbn
Source: e-nettet and Realkredit Danmark
In the previous section, we referenced studies to show higher EPCs mean higher market value. At
mortgage book level, we can confirm this trend. For detached housing and terrace housing we find
market values to be positively correlated to EPCs. One obvious explanation might be EPC A and B is
new construction only, and new construction tends to be priced above market average. The homebuyer
preference for new housing is however difficult to single out to find the real market value of better EPCs.
Note: Average market value in DKKt
Source: e-nettet and Realkredit Danmark
In the previous section we further established new housing mean spacious housing. Adjusting for dif-
ferences in size, we still find market values be positively correlated to EPCs.
Note: Average market value per m2 in DKK
Source: e-nettet and Realkredit Danmark
0
30
60
90
120
A B C D E F G
2015 I
2019 I
27.045 27.322 25.906 27.08924.851
22.21020.214
A B C D E F G
5.2044.748 5.014 5.240
4.386
3.395 3.549
A B C D E F G
Sustainable lending in Realkredit Danmark
28 |
Finally, higher EPCs mean higher mortgage debt outstanding. Higher EPCs meaning both new housing
and valuable housing, this should come as no surprise. Differences are however substantial with out-
standing debt for each EPC A at 2.35 times the size of outstanding debt for each EPC G for detached
and terrace housing.
Note: Average mortgage debt outstanding in DKKt
Source: e-nettet and Realkredit Danmark
Next we zoom in on each end of the EPC spectre; A and G, respectively.
In the previous section we showed maps of Frederiksberg and Copenhagen South Port and Ørestad,
respectively pinpointing EPCs in each area. We saw Frederiksberg coloured in yellow, red, and brown
from properties mature at age and we saw new parts of Copenhagen in green colours from new con-
struction.
In the below, we map all EPC A and G properties which we have mortgaged across Denmark to see
how the mortgage book fits.
EPCs A and B EPCs F and G
Source: Realkredit Danmark
3.912
2.8042.472 2.397 2.088 1.796 1.662
A B C D E F G
• EPC A
• EPC B
• EPC F
• EPC G
Sustainable lending in Realkredit Danmark
29 |
The map confirms EPC A is predominantly urban. EPC A is new housing which is needed in urban rather
than rural areas, if not in inner city areas such as Frederiksberg where building lots are scarce, then in
proximity to inner city areas.
We have already established EPC A housing to be expensive on average from being new. Being urban
does not make EPC A housing less expensive. On the contrary, EPC A housing is predominantly found
at prices of more than DKK 2m. Notably, very few EPC A houses are available at prices less than 1m.
This is not a surprise as construction costs of a new house are typically around DKK 2m or more. EPC
A is simply not affordable to everyone.
Note: Number of EPC A properties by market value range
Source: e-nettet and Realkredit Danmark
The map confirms some EPC Gs are found in inner city areas where the building mass is mature at age.
Yet, the map points to rural areas as the primary location for EPC G housing.
Some rural areas suffer from the effects of urbanisation causing jobs and inhabitants to leave. Against
this backdrop, construction activity is low and the building mass ages every day. Market values for
housing come under pressure.
This is contrasted by EPC G properties in inner city areas such as Frederiksberg remaining in strong
demand and attaining high market prices when put up for sale. EPC G is therefore found at both ends
of the market value spectre.
Note: Number of EPC A properties by market value range
Source: e-nettet and Realkredit Danmark
EPC G housing located in rural areas attaining low market prices if put up for sale is a real challenge.
Most likely, improvements in energy efficiency will not be near fully rewarded by higher market prices,
74 467
5909
1718
280 526
-1m 1m-2m 2m-5m 5m-8- 8m-10- 10m-
1321
1800 1837
454
88 151
-1m 1m-2m 2m-5m 5m-8- 8m-10- 10m-
Sustainable lending in Realkredit Danmark
30 |
simply because the local market cannot carry such a high price, and will pay-off only long-term in terms
on savings on heating costs. When not rewarded by higher market prices, improvements in energy
efficiency are difficult to finance as no collateral is available.
Heating the mortgage book
Next we turn to the heating of our mortgage book properties. For this section of the report, we consider
residential property only for which information on the EPC is available.
Source of heating is a key determinant of greenhouse gas emission levels. For an averaged sized
dwelling rated at C or D on the EPC scale, emissions vary from 0kg to 5,600kg of greenhouse gas
emissions per annum (CO2 equivalents) by source of heating
Note: Emissions in kg per annum for heating
Source: Bolius
Our mortgage book properties are heated by district heating predominantly at 67.3 percent by debt
outstanding. Earlier we mapped the district heating across Denmark to show high coverage in urban
areas where the great part of mortgage book properties are situated.
Renewable at 1.1 percent of debt outstanding includes heating sourced directly in renewables only. In
addition, nearly 70 percent of district heating is sourced in renewables.
Heat pumps are at 2.9 percent of debt outstanding includes properties where heat pumps are the pri-
mary source of heat. In addition, heat pumps are often installed secondary to oil burners or other burn-
ers.
Natural gas at 7.6 percent of debt outstanding is below Denmark average.
Electricity powered radiators at 2.8 percent of debt outstanding include heating powered by electricity
other than heat pumps.
Oil burners at 1.9 percent of debt outstanding is way below Denmark average. A probable reason may
be that the next category »burners other than oil« at 16.3 percent includes a substantial number of oil
burners and natural gas burners as well as this category comes without details on fuel sources actually
applied. At the one end of the spectre, the fuel source may be biomass and at the other end, coal. At
this stage, we do not know.
0
1700 1700
3800
5300 5600
Renewable District heating Heat pump Natural gas Electricity poweredradiator
Oil burner
Sustainable lending in Realkredit Danmark
31 |
Note: Outstanding debt to residential in DKKbn
Source: e.nettet and Realkredit Danmark
Next we plot the source of heating against the EPC knowing well the EPC factors in the source of heating.
Consequently, we should expect low emission sources of heating to go hand-in-hand with high EPCs.
First we turn to high performing properties with an EPC A or B. For these properties, we find a greater
than average concentration on district heating, heat pumps and renewables which are all low emission
heating sources. We also find a fair share of properties heated by burners at DKK 5.9bn. We expect
these to be based on biomass or natural gas predominantly, but again we do not know. Properties
heated by oil burners, on the other hand, are far between.
Note: Outstanding debt to residential in DKKbn
Source: e.nettet and Realkredit Danmark
Next we turn to the mid-performing category with an EPC C, D or E. For these properties, district heating
remains the preferred source of heating, yet we do also find more properties heated by fossil fuels
predominantly gas and non-oil.
Note: Outstanding debt to residential in DKKbn
Source: e.nettet and Realkredit Danmark
3,3
204,9
8,7 23,2 8,6 5,849,7
Renewable District heating Heat pump Natural gas Electricitypoweredradiator
Oil burner Burner, otherthan oil
1,1
42,0
6,3 2,4 0,6 0,15,9
Renewable District heating Heat pump Natural gas Electricitypoweredradiator
Oil burner Burner, otherthan oil
1,6
153,3
2,218,7 3,2 3,4
38,1
Renewable District heating Heat pump Natural gas Electricitypoweredradiator
Oil burner Burner, otherthan oil
Sustainable lending in Realkredit Danmark
32 |
Finally we turn to properties with an EPC F or G. For this group of properties, we find more high emission
energy sources than the mortgage book average. These include electricity powered radiators, oil burn-
ers and other burners which are all above the mortgage book average. District heating only provides
37.8 percent of energy for this group of properties to reflect this group hosts a fair share of rural housing.
Other low emission energy sources such as renewable energy sources and heat pumps are far be-
tween. These numbers suggest one way to transition from high emission to low emission energy
sources would be to replace electricity powered radiators with heat pumps.
Note: Outstanding debt to residential in DKKbn
Source: e.nettet and Realkredit Danmark
Numbers available confirm our expectations that energy efficient housing runs on low emission energy
sources predominantly whereas energy inefficient housing tends be heated by energy sources with a
higher emission intensity. Obviously, this is an imperfect mix.
From this we may draw the lesson that further investments in bringing low EPC housing up the EPC
scale and further investments in replacing high emission energy sources by low ones hold the potential
to significantly cut greenhouse gas emissions in particular if directed to the group of properties with poor
performance on both dimensions.
GHG footprint for specific exposures
Next we turn to exposures in industries known for greenhouse gas emissions.
Danish Central Bank Nationalbanken has indexed greenhouse gas emission for specific industries
against the energy industry singling out agriculture and logistics as high emission industries whereas
manufacturing has already transitioned to low emission production. Here, we focus on energy and ag-
riculture, omitting logistics as emissions from this industry are not linked to the property we mortgage.
Note: Greenhouse gas emissions to value of production index, energy equals 100
Source: Statistics Denmark and the Danish Central Bank
0,6
9,5
0,22,1
4,8
2,3
5,7
Renewable District heating Heat pump Natural gas Electricitypoweredradiator
Oil burner Burner, otherthan oil
10069 56
4 1 1
Energy Agriculture Logistics Manufacturing Housing Service and trade
Sustainable lending in Realkredit Danmark
33 |
Utilities
Our mortgage book exposures to utilities and related activities stood at DKK 4.4bn end third quarter
2019. Of these, DKK 808m finance windmills and DKK 267m finance district heating based on renewable
energy, marked green in below chart. Further, DKK 2,204m finance distribution of electricity sourced in
both renewable energy and fossil fuels and DKK 61m finance district heating running on a mix of bio-
mass and fossil fuels, marked yellow. The remaining DKK 985m finance production and distribution
sourced in fossil fuels, marked red.
District heating and electricity production based on fossil fuels financed by Realkredit Danmark are
scheduled for transition to renewable energy sources by no later than 2030. Since 2018, Realkredit
Danmark has pursued policy not to underwrite companies with more than 30 percent of revenues from
coal-fired power generation and oil from tar sands.
Source: Realkredit Danmark
Agriculture
Mortgage book exposures to agriculture stood at DKK 37.2bn end third quarter 2019. The mortgage
book is concentrated on crops, pork, and dairy at 46 percent, 25 percent and 19 percent of book value,
respectively.
Source: Realkredit Danmark
DKK37.2bn Crops 46%
Dairy and beef 19%
Pork 25%
Poultry 1%
Mixed 5% Other 4%
DKK4.4bn
Electricity production, renewable energy19%
District heating, renewable energy6%
Electricity trading, renewable energy0%
Distribution of electriciy51%
District heating, mixed1%
District heating, fossil fuels8%
Electricity production, fossil fuels7%
Distribution of gas8%
Sustainable lending in Realkredit Danmark
34 |
The intensity of greenhouse gas emissions vary greatly across production branches. For each kg of
food produced, embedded emissions vary from 0.2kg to 13.9kg with potatoes and beef marking the
lower and upper limit, respectively.
Note: greenhouse gas emission in kg (CO2-equivalents) per food in kg produced
Source: University of Aarhus
The Realkredit Danmark mortgage book shows high concentration on production branches for which
greenhouse gas emissions are low. To this end, we notice the category dairy and beef is dairy predom-
inantly.
13,9
4,63,2
1,0
8,810,6
0,5 0,2 0,8 0,9
Beef Pork Poultry Milk Cheese Butter Lettuce Potatoes Bread Cereals
Meat Dairy Crops
Sustainable lending in Realkredit Danmark
35 |
How to assist our customers in their green transition
In this section, we discuss how we best can assist our customers in their green transition and thereby
Denmark’s transition We believe our primary role is to support our customers by providing the needed
finance and thereby enable them to invest in their green transition. As an organisation we need to
minimise our direct environmental footprint, yet our main contribution to combating climate change lies
in assisting our customers.
The first green covered bonds to see the Danish market
In April 2019, we launched the first green covered bond to see the Danish market. We launched green
covered bonds to establish a link between borrowers wanting to build green and bondholders wanting
to invest green.
We issue green covered bonds to finance green properties, green investments in energy-efficiency in
properties, green utilities, and renewable energy only.
Green properties Green utilities Renewable energy
We define green properties by an
EPC at A or B or equivalent or
otherwise determined to be top
15 percent
We define green utilities by facil-
ities to transmit and distribute
renewable energy
We define renewable energy to
include wind, solar, geothermal,
biofuel etc.
We define green investments in
energy-efficiency by improve-
ments of at least 30 percent to
baseline
Source: Danske Bank Group green bond framework available at rd.dk/investor
We apply these criteria to give investors assurance that issuing proceeds are used for green purposes
only. Having this assurance, investors are willing to pay a premium in terms of lower interest rates which
we pass on to the borrowers. Consequently, mortgages with green covered bond financing come with
a financial benefit, though minor.
Sustainable lending in Realkredit Danmark
36 |
Green bonds are on a growth path. Climate Bond Initiative estimates worldwide issuance at USD 165bn
for 2018. Of these, USD 52bn were issued by financial institutions, USD 47bn were issued by non-
financial corporates, whereas the remaining USD 28bn were issued by regional or local governments or
supra-nationals. Yet, green bonds remain in their infancy with volumes at only 0.1 percent of total debts
worldwide.
We issue green covered bonds to finance large exposure mortgages only. We apply strict screening
procedures to ensure only green mortgages are financed by green covered bonds which would be
difficult and prone-to-risk to implement for retail exposures. Further, green covered bonds are some-
what at odds with the Danish mortgage financing model, see next section.
Since launch, we have issued green covered bonds worth DKK 815m. Further, we have green covered
bonds ready for issuance worth an additional DKK 1,247m. We have issued green covered bonds to
finance green properties and renewable energy, in particular. We expect issuance to accelerate in 2020.
Green properties Green utilities Renewable energy
Note: Numbers in DKKm
Green certificates as a viable alternative
Green covered bond financing is not without frictions. Green covered bond financing is at odds with the
Danish mortgage financing model whereby mortgages are pass-through financed in covered bonds until
the mortgage matures or is refinanced. For green covered bond financing to work in practice, the issuing
financial institution must be able to (1) include in the green covered bond register mortgages once es-
tablished they are green and, importantly, (2) exclude mortgages which fade from green over time as
criteria are tightened. To the latter point, bear in mind standard mortgage lifetime is 30 year and even
the greenest mortgage today, we expect, will not be considered green in thirty years from now. Yet,
including and excluding mortgages from the green covered bond register is at odds with the fixed link
between mortgage assets and covered bond liabilities implied by pass-through financing.
A workable solution has been outlined by the Danish Central Bank in December 2019 proposing to
issue green certificates which when combined with public debt issued by Central Bank constitute a
green bond ISIN-by-ISIN. The principle may be outlined as:
800
Disbused Approved
155
Disbused Approved
660
447
Disbused Approved
Sustainable lending in Realkredit Danmark
37 |
Source: Danish Central Bank
The green certificates model further remains neutral to market liquidity. Green covered bond issuance
is at risk of a loss of market liquidity from the split of issuance into conventional and green covered
bonds. This drawback to green financing is fully mitigated with the green certificates model only a single
set of bonds being issued.
With the model and our mortgage book as is, Realkredit Danmark would be able to issue green certifi-
cates to the tune of DKK 70bn under our current Green Bond Framework which we expect will meet the
EU green bond standard. In doing so, we could potentially foster a large market for green covered bonds
on an internal scale.
We will observe investor reactions to the green certificates model carefully going forward.
Financing improvements in energy efficiency
The launch of green covered bond is a spearhead initiative to provide customers with financing for
green initiatives within housing, distribution and transmission of energy, and renewable energy extrac-
tion. In scope for green covered bond financing is the greenest of properties only. We have defined
eligibility by EPC A or B or equivalent which leaves out of scope eight in ten properties.
The eight in ten properties left out of scope, today emit far more greenhouse gases and, consequently,
these properties hold the greatest potential for reductions in emissions going forward. We find it im-
portant to broaden the scope of our efforts to assist also customers residing in EPC B and lower housing
in their green transition.
On 10 February, we launched our initiative to finance improvements in energy efficiency on favourable
terms. With this initiative, we waive all transactions costs worth DKK 7,400 when underwriting a mort-
gage for which the purpose is to finance energy improvements in housing.
Green bond
Financial obligation
Funds
Conventional bond Green certificate
Green obligation
Funds
= +
Investor Investor Investor
The Kingdom of Denmark The Kingdom of Denmark The Kingdom of Denmark
Investment
Sustainable lending in Realkredit Danmark
38 |
We define energy improvements by the same definitions shortlisted for tax deductibility7. These im-
provements include:
Source : Realkredit Danmark
We further define purpose by at least 50 percent of mortgage proceeds be invested in eligible improve-
ments in energy efficiency.
We extend the scope of eligible improvements beyond the definitions of the EU taxonomy. Notably, with
the initiative we finance improvements which do not reach the 30 percent thresholds for improvements
in baseline energy efficiency stipulated in the EU taxonomy. Consequently, mortgages coming out of
this initiative will not qualify as green and cannot be marketed as such.
We apply these criteria for the reasons of 30 percent improvements in baseline energy efficiency can
be difficult to get at and may extend beyond what is economically reasonable. Further, in real-life, it can
prove challenging to measure the energy effect and follow up on the investment as a mortgage lender.
With the initiative we want to assist our customers also in less than 30 percent improvements in energy
efficient. Every improvement counts.
The improvements which we support are by no means without effect. Calculations by Danish Ministry
on Climate, Energy and Utilities suggest savings in greenhouse gas emissions from insulating a house
of 120 m2 at 4,900 kilos per annum and savings in emissions from expanding insulation from 50mm to
250mm for same size house at 1,000 kilos per annum8. Further examples from the Danish Energy
Agency show a reduction in emissions at 1,100 kilos per annum from replacing an old gas boiler by a
new condensing gas boiler, a reduction at 1,000 kilos per annum from investing in a ventilation system
with heat recovery, a reduction at 400 kilos per annum from replacing old windows by new low energy
7 See https://skat.dk/skat.aspx?oid=2234759 8 See https://www.bolius.dk/saadan-nedsaetter-du-co2-udslip-fra-dit-hjem-16364
Insulation of roof
Replacement of exterior doors and windows
Repair and improvement of chimneys
Insulation of exterior walls
Insulation of floors Installation or replacement of heating facility
Work on solar panels and wind mills
Repair or replacement of gas burners
Dismantling of wood burners
Repair or replacement of district heating units, heat pumps, geothermal heat units etc.
Sustainable lending in Realkredit Danmark
39 |
windows and finally a reduction at 500 kilos per annum from investing in solar heating for producing hot
water9.
Note: Savings in kWh per annum for a 140m2 sized detached house
Source: https://svk.teknologisk.dk/PDF/standardværdikatalog%208.2.pdf
The initiative to finance improvements in energy efficiency will contribute to lower greenhouse gas emis-
sions from households. By how much will depend on the customer appetite for our initiative, the sort of
energy investments made, and the source of heating.
9 See https://sparenergi.dk/sites/forbruger.dk/files/contents/publication/guide-til-energirenovering/energirenovering-af-
huse-2019.pdf
0 10.000 20.000 30.000
Oil boiler from before 1978 is replaced by heat pump
Non-condensing oil boiler from 1978 or newer is replaced…
Exterior post insulation of uninsulated full wall / timber to at…
Condensing gas or oil boiler is replaced by heat pump
Post-insulation of concrete basement wall in heated…
From oil boiler before 1978 to district heating
Internal post-insulation of uninsulated full wall / timber for at…
From electric heating to district heating
Oil boiler from before 1978 is replaced by condensing gas…
From non-condensing gas or oil boiler from 1978 or newer…
Exterior post insulation of exterior walls erected before 1972
Wooden pellet boiler or solid fuel boiler from before 2010 is…
Wooden pellet boiler or solid fuel boiler from 2010 or later…
Replacement of non-condensing gas boiler with gas blower…
Post-insulation of deck over crawl cellar, from 0-20 mm to…
Exterior post insulation of concrete elements from 1972-…
Internal post insulation of insulated cavity walls, at least 45…
Post-insulation of terrain tires, from 0-20 mm to at least…
Oil boiler from 1978 or newer is replaced by condensing…
Exterior post insulation of insulated exterior walls erected…
Post-insulation of deck over unheated basement. From 0-20…
Establishment of mechanical ventilation with heat recovery,…
Condensing gas or oil boiler is replaced by district heating
Replacement of windows for A-windows, an estimated 10…
Post insulation in the ceiling, from 50-95 mm to a further at…
Solar heating system for domestic water and space heating,…
Post-insulation of basement floor in heated basement, from…
Post-insulation of terrain tires, from 25-45 mm to at least…
Solar water heating system, 4m2
Replacement of old heat pump
Replacement of district heating installation from before…
Weather compensation for radiator systems
From 1-strand radiator to 2-string
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40 |
The average reduction in energy consumption from moving a notch up the EPC scale is around 7,450
kWh for the poor part of EPCs below C and at an average size of 140 m2. The Danish Energy Agency
estimates cost at DKK 300,000 to 500,000 for improve an average house from energy label G to C. This
corresponds to an investment of DKK 75,000 to 125,000 per notch.
In real life, it proves difficult to improve the EPC more than two notches within what is economically
reasonable for the reasons of marginal costs going up as further improvements are made. We have not
come across a rule-of-thumb to this end, but from anecdotal evidence we estimate the first notch im-
provement to be attainable at cost of DKK 50,000 to 100,000 This is broadly in line with the assessment
from the Danish Energy Agency when taking into account the wide range of EPCs they consider for their
calculation.
A reduction of 7,450 kWh implies a reduction in greenhouse gas emissions of 1,500 kilos per annum if
heated by a natural gas burner and around 500 kilos per annum if heated by district heating. Consider-
ing the above factors, we can roughly estimate that for each DKK million underwritten for the purpose
of improving energy efficiency the result is an implied reduction in greenhouse gas emissions of around
6,5 to 30 tons per annum.
Underwriting climate-related risk
While climate-change may offer possibilities to offer new products and services, climate-change will
also pose a risk to most if not all parts of society in the medium-term to long-term.
Risks related to climate-change are complex. The TCFD recommendations distinguish between transi-
tion risk and physical risks, warning organisations not to devote all their attention to long-term physical
risks, which may prove difficult to respond to here and now, and miss out on short-term transition risks,
which may be far more imminent.
In the same line of thinking, the Network for Greening the Financial System (NGFS) has developed a
scenario matrix which may serve as an overall framework for analysis of climate-related risks.
Source: ngfs.net
Disorderly Sudden and unanticipated response is dis-ruptive but sufficient to meet climate tar-gets
Too little, too late We do not do enough to meet climate tar-gets, the presence of physical risks spurs a disorderly transition
Orderly We start reducing emissions now in a measured way to meet climate targets
Hot house world We continue to increase emissions, doing very little, if anything, to avert the physical risks
Strength of response
Climate targets are met Climate targets are not met
Tra
ns
itio
n r
isks
Physical risks
Tra
ns
ition
pa
thw
ay
Ord
erly
Diso
rde
rly
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41 |
Having the TCFD and NGFS in mind, we need a broad scope to approach and handle climate-related
risks properly. We need to think both short-term and long-term and we need to think of both direct and
indirect implications from climate change.
With the public and political attention drawn to the agenda, climate-change has grown into a major
market force with the potential to influence behaviour and demand and disrupt markets faster and more
profoundly than otherwise observed. Indirect implications from climate-change may stretch far beyond
and materialise much earlier than direct implications.
This holds true for property markets as well. Property markets will factor in the economic value of the
direct implications of climate-change such as flood risk in coastline and low lying areas and the eco-
nomic value of climate taxes, but even greater implications are likely from changes in market demand
and behaviour. Energy inefficient housing may see less demand simply because Danes, compelled to
act on climate-change, do not want to live there. The same may hold true to housing heated by an oil
burner, though average on energy efficiency, or for housing located outside the public transportation
grid whereby future owners will need to transport themselves by car to get to their workplace. The thirty
year duration of a standard mortgage only adds to the complexity. With the momentum currently ob-
served for the climate-change agenda and with the development in technology, we simply do not know
the state of property markets in thirty years.
Yet, underwriting climate-related risks is part of our everyday business. When we underwrite a mort-
gage, we also underwrite the associated climate-related risk. Our capacity to underwrite risk is limited.
Too much risk may bring us to the point where we cannot continue our operations and fulfil our role in
society. Society, our customers, and we have a joint interest in risks be managed properly and this
pertains to climate-related risks also.
Like other risks, we should respond to climate-related risks proportionately. At the one end of the scale,
it would be disproportionate to simply ignore climate-related risks. In doing so, we would fail society’s
expectations and bring our customers and ourselves at great risk from acting too late. At the other end
of the scale, it would prove equally disproportionate to shy away from all economic activities which are
not purely green. In doing so, we would fail to meet customer needs for mortgage finance on a broad
scale and help only the few in becoming green and sustainable. In essence, we have to find the middle
ground. Having the TCFD and the NGFS in mind again, the greatest risk is most likely to do too little.
Underwriting energy inefficient properties
First, we zoom in on risks from underwriting energy inefficient properties.
In due time, we expect energy inefficient properties to be in a less demand and be priced with a discount
to energy efficient properties of same size, quality, and location from higher green taxes and from mar-
ket aversion towards energy inefficiency and implied greenhouse gas emissions, in general. We further
expect the price gap to grow over time. Both contributing factors point to this direction.
A property seeing less demand and pricing at a discount is a risk to the property owner as well as to us
as a mortgage lender. The property owner suffers a capital loss if putting the property up for sale. We
suffer a loss if the property owner fails to pay the mortgage. As the effects grow over time the risk grows,
but so does the incentive to improve energy efficiency and bring the property up to market standard.
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42 |
The investment need varies greatly. If available, the EPC will provide an expert assessment of invest-
ments needed to improve energy efficiency and the cost implied. Generally, on a rule of thumb basis,
improving a detached house of average size from EPC G to EPC E will cost around DKK 100,000 to
200,000. Improvements beyond two notches on the EPC scale are difficult to achieve.
Underwriting responsibly, we will further integrate energy efficiency into our customer advisory and
underwriting procedures. In general, we will encourage customers to improve the standard of below
standard energy efficient property. In some instances, we will condition our underwriting on improve-
ments in energy efficiency be made.
Source. Realkredit Danmark
In doing so, we aim to mitigate both customer and our risk and, at the same time, to reduce the green-
house gas emissions through higher energy efficiency. These aims go hand-in-hand.
We will be challenged on our approach when underwriting in areas where market values are low even
for energy efficient properties. Here, the market value will often not be able to support the cost from
improving energy efficiency in full. Consequently, we cannot encourage the customer to undertake the
improvements in energy efficiency from an economic perspective and we cannot offer to finance the
improvements as no collateral will be available. Bottom line, investments may depend on homeowner
savings or non-secured lending.
Underwriting GHG emitting industries
Greenhouse gas emitting industries are exposed to elevated risks from the risk of green disruptions,
green taxes, and market aversion towards the products or services delivered.
We do not underwrite corporates with 30 percent or more of the revenue be sourced in coal-fired power
generation and oil from tar sands.
We will continue to underwrite agriculture as the industry remains low on emissions when compared to
industries in peer nations. Emission intensity vary greatly between the different branches of agriculture
with beef production at top and crops at the bottom. Going forward, we want to support the industry in
further reductions in emission.
Having emission intensity in mind, we will continue to underwrite crop, pork, and dairy, primarily.
We have only limited exposure to greenhouse gas emitting logistics and manufacturing.
Underwriting with encouragement
Contingent underwriting
Refusal
We encourage to improve energy efficiency
We condition underwriting upon improvements in energy efficiency be made
We refuse to underwrite
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Underwriting flood risk
Operating in Denmark, we are exposed to flood risk from rising sea levels and from extreme weather.
So far, we have seen local floods with little economic impact only, yet with current predictions for future
sea levels and weather conditions, the flood risk will become real for a great part of Denmark. Bear in
mind, most cities in Denmark are located in proximity to water.
Safeguarding property pledged as collateral for a mortgage from floods remains the responsibility of the
property owner. In our capacity as a mortgage lender we have a strong interest in helping the property
owner in meeting this responsibility. If the property owner fails at the responsibility to safeguard the
property from floods or other damages we may suffer losses as well.
The long-term scale of flood risk calls for climate change adaptations beyond what each property owner
can do on an individual basis. The below map plots properties pledged as collateral for a mortgage with
a financial institution operating in Denmark by risk of floods at sea levels and weather conditions pre-
dicted for the year 2100.
Source: Danish Central Bank
We have time to act to mitigate the risk of floods. Plans for climate-change adaptation to stem the risk
of floods are in the making. Likely, plans will point to the need for substantial investments at the ex-
pense, directly or indirectly, of property owners. Likely, expenses will be factored into property market
values way before flood risk actually materialises. Consequently, flood risk is something we need to
look at already when underwriting a mortgage today. Underwriting responsibly, we need to ensure the
proper headroom for future investments to stem flood risk.
Collateral prone to flood risk
Collateral safe from flood risk