The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.
Graham Lloyd, Director of Strategy, Performance & Sustainability, Nationwide Building Society
How can financial institutions manage refinancing requirements effectively?
Nationwide is committed to a “Just Transition” making sure the most vulnerable in society are not left behind as we transition to a net-zero future. At Nationwide Building Society, mortgages account for 80% of our emissions. I’mreally clear though, that achieving a high % of EPC A and B homes on our book can’t be mistaken for actual action. Simply refinancing the slowly expanding pool of high EPC homes doesn’t address the problem that the majority of the UK’s housing stock needs an element of retrofitting it we’re to achieve a net-zero future however there needs to be more incentives for homeowners to retrofit.
The challenge is there’s still too many barriers for the public to engage and to change. Take retrofitting your home, the upfront costs are typically high, the payback is very long and the regime governing energy pricing means that electricity, which decarbonised solutions like heat pumps use – costs more per unit than gas.
I believe as a principle that the burden must not fall on the shoulders of those who can least afford it. The question of affordability is often one of geography. And it’s a simple fact that for some people – those on low incomes, whose homes command a relatively low market value – retrofit simply won’t be economically feasible. If we, as lenders, were disincentivised from lending against these properties, or were compelled to do so at punitive rates, a lot of people on modest incomes would see the value of their homes decline; they would struggle to sell or have to sell at a discount. There is no guarantee that the buyer intends to refurbish the home, it just moves the problem from one individual to another, or one lender to another. These could be the potential unintended consequences of transition-focussed policy that doesn’t look at the social impact on the most vulnerable.
So how we manage re-financing effectively is not through penalising those in low EPC homes, but through providing people with education and awareness about what changes they could make to their home, with what benefits, pointing them to grants they can access and offering them affordable finance.
What are the key benefits of having a transition plan?
Back in 2021, at COP26, the UK Chancellor signalled that we should all work towards the UK becoming the world’s first net-zero aligned financial centre with financial flows supporting a net-zero economy. We’ve seen in recent years a wave of announcements from organisations stating their ambitions to contribute to net zero.
However, moving beyond ambition and targets through to actions is essential if we are to ever achieve net zero. This is where a transition plan is very useful and is what The Transition Plan Taskforce, launched last year, is encouraging.
A transition plan sets out how an organisation will adapt as the world transitions towards a low carbon economy. One of the key benefits of a transition plan is it supports leadership teams through a complex transformation. As an example, at Nationwide we have identified potential actions that would likely contribute to reducing our residential mortgage emissions intensity. However, when we modelled these actions, we realised there will still be a gap in the reduction needed to be in-line with a net-zero pathway. Therefore, this has galvanised our leaders, resulting in us thinking hard about what’s in our control and where we can further test actions, such as new green finance propositions. Also, we are now much more cognisant of what’s out of our control and therefore where we need to influence further for change, providing us with evidence to propose new policy action from the Government.
Transition plans also create transparency and accountability, providing useful decision-making information for stakeholders. It allows for approaches and planned actions to be compared and an assessment of their credibility to be made. This supports investors in allocating capital in a way that best supports the transition.
A good Transition plans needs action-oriented detail to demonstrate how targets can be achieved and should set out:
How can financial institutions ensure they are aligning their operations with the Paris agreement?
The Paris agreement defines alignment as making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. This will help to scale up the financial flows needed to respond to the threat of climate change.
Crucial to driving progress is standardised methods and metrics for assessing alignment as this allows comparability, and for financial organisations to be held accountable for those actions within their control.
The challenge is that the methods and metrics aren’t always fully developed. At Nationwide we’ve aligned to the SBTi methodology as we considered it important to use the industry standard tools when setting our intermediate science-based targets to 2030. Using the SBTi methodology we set intermediate targets for our scope 1, 2 and scope 3 upstream and investment emissions. This aligns to the SBTi’s principle to cover at least two-thirds of emissions.
To be Paris aligned the financial sector needs to take climate into account in all financial decisions.
It’s important to recognise that Paris alignment is more than assessment and alignment of finance flows and asset allocations, it’s about system transformation. At the systems level, collective and individual action combine with finance and investment. Alignment will not be attained through lots of individual un-coordinated projects, nor short-term, sporadic policies and organisational actions.
Identification and consideration of transition risks and mitigations, is a key part of the development of a strategy to tackle environmental, social and governance issues.
Addressing transition risk as part of a broader ESG strategy improves the chance of success of mitigating these risks, as these risks will then be addressed at a strategic level. It also allows for organisations to identify the potential upside opportunities in contributing to a move towards a sustainable future.
Transition risk also can have many potential impacts on society and so the risks are interconnected. For example, the transition risk of higher energy prices, due to potential carbon taxes and elevated energy costs impacts both homeowners and renters which could result in lower disposable income, pushing more of the public into a financially struggling category, which has knock on social impacts. As a mutual, with a wider social purpose, this is something we are concerned about and focus on.
What impact has the energy crisis had on transition plans?
Transition risk is something we have explored in our internal stress testing, but the impact of elevated energy prices is now something most people are experiencing in the real world. The energy crisis has sharply brought into focus what some of the risks could look like if we don’t have actions in place to transition. As a result of the energy crisis, at Nationwide we’ve seen more people move into the financially struggling category, households who in the past you wouldn’t have typically expected to be struggling.
The energy crisis has given a new frame of reference to talk to about the climate transition, through the lens of cost of living, where actions taken to decarbonise can reduce household costs whilst also contributing to the energy security for the UK. This has made the impact of climate change more relevant for many, with the connection between energy, cost of living and energy security increasing the demand of certain products, such as solar panels.
However, the need for energy security and lower cost energy for homes has also had a detrimental effect. The urgency needed to resolve these issues, rather than wait for more renewables to come online, leads to energy subsidies and non-renewable energy production that doesn’t help drive pace in renewable development and distorts the economics of the sector.
The crisis has certainly led to me think about Nationwide’s transition plan more broadly, to consider whether there are actions we can take, as a large financial organisation with a strong balance sheet and a purpose to serve society, to drive systemic change. For example, we have an innovation accelerator and venturing team and we can always be doing more to support innovation in energy and home decarbonisation.
Graham will be speaking at our upcoming ESG Summit.
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