CO2 Emissions Can Be Checked By Stringent Regulations and Subsidies

Buildings account for 39% of total CO2 emissions including construction at 11% and operation at 28%. Governments will have to bring in stringent regulations on new builds as well as provide subsidies for the adaptation of current stock. One consequence of this will be drastically changing the credit profiles of builders and building owners, who will be faced with costly conversion projects and falling values of unconverted assets.

The International Energy Agency (IEA) tracks the progress of economic sectors, towards goals outlined by the International Panel on Climate Change (IPCC). These reports can be used to assess where the regulatory focus must be if sustainability targets are to be met. For the ‘buildings’ sector, the IEA track specific sub-categories with the following grades:

Building Envelope - ‘not on track’

Heating - ‘not on track’

Heat Pumps - ‘more effort needed’

Cooling - ‘more effort needed’

Lighting - ‘more work needed’

The fact that the IEA views buildings as ‘not on track’, and the huge CO2 emission contribution represented by the sector, is strongly indicative that policies and regulations are imminent. This should be an alarm bell for banks to expect extreme turbulence on their balance sheet valuations.

The US and the EU have both made announcements in this area, with the EU in particular, putting several building related policies in place, as it fleshes out its ‘green new deal’. It is also the case that countries are adopting all or part of the International Green Construction Code (IgCC), which sets standards on - ‘sustainable sites’, ‘energy efficiency’, ‘water efficiency’, ‘materials and resource use’, ‘indoor environmental quality’, ‘greenhouse gas emissions’, and ‘operations and maintenance’.

These standards provide banks with useful guidelines for the types of adaptations that will be required and the impact of those project costs on borrower credit profiles. Given the need for massive private funding and the central role that banks will have to play in that financing, they must familiarize themselves with the building code and likely regulatory changes, price credit facilities appropriately, and work innovatively with borrowers towards greater sustainability, through incentivized credit terms.

GreenCap is a platform designed to allow banks to reprice its balance sheet, taking both physical and transitional climate change into account. By running short- and mid-term scenarios, banks’ RWAs can be used to categorize climate change risks properly. They can also be used to ensure that strategies are in place so that banks remain financially stable and become active change agents in the bid to hold global warming to 2 degrees or less by 2100.