Energy Performance Data: Essential for Managing Climate-Related Credit Risk – Frank Elderson

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Frank Elderson, a Member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the ECB’s Supervisory Board, delivered a welcome address at the European Central Bank conference on real estate climate data industry good practices, held in Frankfurt am Main on 23 September 2024. Elderson emphasized the critical importance of integrating energy performance data into credit risk management to effectively manage climate-related risks in the real estate sector.

According to the statement released through The Bank of International Settlement (BIS) said Since 2019, ECB Banking Supervision has made significant progress in engaging with European banks on climate-related and environmental risk management. Elderson noted that real estate lending comprises a substantial portion of supervised banks’ portfolios, making it essential to address the physical and transition risks impacting credit risk. He asserted that to manage risks effectively, banks must have reliable data, especially regarding buildings’ energy efficiency. This information is crucial for accurately valuing collateral and assessing borrowers’ capacity to repay loans.

The ECB began targeted reviews in 2021 to assess banks’ practices in obtaining energy performance data. While significant advancements have been made for new lending, where data often come from energy performance certificates, the existing stock of loans remains a challenge due to the reliance on proxy data. Elderson praised banks that have made strides in collecting real energy performance data and encouraged others to adopt these best practices.

Looking forward, Elderson highlighted the upcoming legislative changes under the revised Energy Performance of Buildings Directive, which mandates the establishment of national databases on building energy performance across the European Union. He urged banks not to wait for a harmonized database but to continue improving data collection efforts.

The conference agenda included discussions on physical risks, such as properties vulnerable to floods and wildfires. Recent floods in Austria, Italy, and other regions underscored the importance of factoring these risks into collateral valuations. The ECB plans to release a report examining how climate risks are priced into residential mortgage rates, though Elderson cautioned that climate-related risks are still underpriced by many banks.

Elderson concluded by reaffirming the ECB’s commitment to supporting banks in preparing for climate and nature-related risks. He encouraged ongoing dialogue and the sharing of good practices among banks to ensure a resilient financial system in the face of evolving environmental challenges.

The speech reinforced that reliable energy performance data are crucial to managing climate risks, and banks that integrate such data into their credit risk management processes will be better positioned to navigate the challenges ahead.


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