What is the role of finance in shaping Europe’s energy-efficient housing transition?

Housing energy efficiency financing is the new talk in town. In line with its RePowerEU commitments to boost energy efficiency and savings, the European Union has recently adopted several key pieces of legislation to create a more supportive environment for private energy efficiency investments. The recast of the Energy Efficiency Directive (late 2023) and the Energy Performance of Buildings Directive (EPBD recast, 2024), along with softer measures like the Commission’s recommendation on energy efficiency financing and the establishment of the European Energy Efficiency Financing Coalition in April 2024, are all illustrations of this new policy activism. In addition, the European Investment Bank has launched a dedicated Task Force (EIB Group, 2024) focused on technological innovation, retrofitting and improving energy efficiency in European housing.

A crucial question is how effectively private banks and other market actors will tap into this emerging market. Although traditionally active in residential real estate lending, many banks have yet to jump on the green lending train. While sustainable housing is gradually reshaping both urban and financial landscapes, empowering homeowners and banks with the right tools and information is essential to drive energy-efficient renovations across Europe. Developing financial solutions for green housing to accelerate this transition is challenging, particularly due to the complexities inherent in the housing and real estate markets.

First, the diverse housing markets and stock across member states create varying challenges for policymakers in promoting green transitions. Financial products must be tailored to different housing types and ownership structures, as these require varying levels of involvement by member states. For instance, single-family homes and small condominiums, common in Italy, are easier to coordinate than large housing estates with hundreds of micro-homeowners as in Lithuania. In growing markets, residents are more responsive to energy-saving investments. In contrast, in areas with declining populations, older residents may be less inclined to invest, given the uncertain future of their properties. In this situation, lending products must be context-specific and tailored to the needs of residents and homeowners.

Second, just as housing markets are heterogeneous, so are the data. Currently, energy performance certificates (EPCs) are the main indicator used by banks, but they cover only a minority of buildings across the EU, with limited availability in about half of the member states and significant variations in methodology. Other data sources, such as energy data from utilities, technical assessors and proxies from land registries, are often fragmented, not always accessible and do not allow reliable property comparisons. Over time, these data are expected to be consolidated into more transparent renovation passports and digital logbooks (part of the Buildings Directive). However, to implement green financial products effectively, these data must also be linked with financial data (rental rates, sale prices, etc.) to appraise property values better and determine loan conditions.

Due to these complexities, implementing EU-level sustainable finance frameworks for housing renovation is a challenging and slow process. However, stimulating financial products for sustainable housing renovation is essential to address urgent issues like energy and housing poverty and to prepare for the future as homes age and become outdated. Adapting them to new standards will only become more critical over time. Beyond regulation, this potentially structural change to bank business models may also impact how banks will be supervised.