The SBA guidelines on energy efficiency in mortgages: Where things stand 180 days before coming into force - Banking blog

SBA Sustainability Blog Cover

The self-regulation guidelines from the Swiss Bankers Association (SBA) on the promotion of energy efficiency in mortgages have shone a sudden spotlight on the subject of ESG in financing. While the current guidelines are limited in scope, they nevertheless present challenges for banks in Switzerland, as they may well be extended in the future. Banks are well advised to adjust their lending operating model not only in the short term, but also strategically for the longer term.

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ESG criteria for mortgage financing are new in Switzerland

With the Paris Agreement, Switzerland set a goal of reducing greenhouse gases by 50% from a 1990 baseline by 2030. However, this is only a stepping stone to the net zero target for 2050.[i] Despite making significant progress, Switzerland narrowly missed its targets for 2020.[ii]

Buildings account for a significant proportion of greenhouse gas emissions (roughly 25%) and an even higher proportion of energy consumption (approximately 45%).[iii],[iv] Heating, much of it powered by fossil fuels such as natural gas and oil, makes up the bulk (68%) of this energy consumption.[v] Achieving climate goals will necessarily entail building renovations with focus on energy efficiency, but the 0.9% renovation rate in Switzerland remains far too low despite the incentives of a carbon tax and a building energy renovation programme.[vi] This suggests that there may be an “information deficit”. Unsurprisingly therefore, mortgages and mortgage providers are increasingly attracting attention from regulators — after all, mortgage providers have regular contact with both new and existing property owners, and consequently have opportunities to discuss sustainability issues with their clients. But while in the EU clear rules on dealing with potential climate risks from financing already exist (EBA/GL/2020/06, 4.3.5 and 4.3.6), Switzerland has so far limited itself to disclosure of climate-related financial risks, and only for category 1 and 2 banks (FINMA Circular 2016/01). Sustainability is an increasingly important topic in the political arena, fuelled among other things by the debate around UBS and CS. For example, a bill of targets in climate protection, innovation and energy independence was adopted with a substantial majority of 59.1% in the referendum of 18 June 2023, and this is likely to further intensify regulatory pressure. The SBA self-regulation “Guidelines for mortgage providers on the promotion of energy efficiency” that came into force on 1 January 2023 introduce ESG-related lending requirements for the first time in Switzerland, requiring banks to address the topic of energy efficiency in buildings with customers for mortgage financing.[vii],[viii]

Numerous challenges for banks despite narrow scope

It should be noted that there are two limitations to the guidelines. First, they are voluntary self-regulation by the Swiss Bankers Association (SBA).[ix] Unlike other self-regulation (such as CDB 20), the guidelines are only binding on SBA member institutions. This means for example that the Raiffeisen banks are not directly affected by the guidelines despite their large share of the mortgage market (approx. 17% in 2022). The same goes for insurance companies and pension funds (approx. 5% market share in 2022).[x] There are also limitations relating to the properties concerned. The guidelines apply exclusively to owner-occupied single-family and vacation homes. Nevertheless, the new requirements are sufficiently comprehensive to present banks with challenges that should not be underestimated — not least because the guidelines also apply to existing loans. The guidelines concern five main topic areas: (see Figure 1 for detailed contents of each section).

  1. Provision of information (Art. 5)
  2. Advising customers (Art. 2 & Art. 5)
  3. Terms and conditions (Art. 3)
  4. Data (Art. 4)
  5. Training and professional development (Art. 6)

With the exception of the “Terms and conditions”, the requirements in each area are compulsory and member institutions must implement them appropriately. However, implementation is complex because the guidelines contain principles-based requirements (thus leaving room for interpretation) while also covering matters that have an impact on the overall process (such as capturing energy efficiency data). Figure 1 provides an overview of the key contents along with selected implementation challenges for each topic area.

SBA image 1

Figure 1: Overview of key contents of the new guidelines and selected challenges for banks

It is unsurprising that some Swiss banks have made more progress than others with implementation, particularly in view of the transition period up to 1 January 2024. Nevertheless, banks would be well advised to obtain clarity as soon as possible as to what changes will be needed by the end of 2023.  If they fail to do so, they run the risk of having to implement a large number of tactical auxiliary measures shortly before the end of the transition period, which could impair their competitiveness. An interim analysis by the exclusive Deloitte Mortgage Survey in early June (see Figure 2) found that some 88% of institutions indicated that they had already incorporated ESG issues into their consultations. Where further-reaching measures are concerned, however, the picture is more differentiated. Just 21% of respondents use ESG as a criterion in property appraisals (for mark-up/write-down purposes), while only 33% have special terms for houses with a good eco score. By contrast, 25% of respondents plan to define ESG-related KPI targets for their mortgage portfolios, while 42% intend to introduce customer incentives for ESG renovations in 2024.

ESG_Blog_1

Figure 2: Survey on implementation status (as of 30 June 2023, n=24)

Taking the opportunity for sustainable optimisation of lending operations

While banks have the option of relying on particular tactical measures in implementing the new guidelines (e.g. manual entry of certificates and labels in customer files, fact sheets/links to subsidy programmes), this approach is likely to fall short in meeting changing regulatory demands. The provisions in some other markets go considerably further than those in Switzerland. For example, the draft of the seventh MaRisk amendment (published in September 2022) adopts parts of the previous German Federal Financial Supervisory Authority (BaFin) memorandum on managing sustainability risks, such as adjustments to credit risk strategies and appetite considering ESG risks, as well as ESG risk measurement at the portfolio level. The requirements will be subject to audit. At present this is not the case for the new SBA guidelines, but it is quite conceivable that FINMA will take similar measures in the years to come. The scope of properties affected is also likely to expand (to include, for example, investment properties). Last but not least, it is also clear that Switzerland will not be able to avoid the international trend towards better measurement and reporting of climate risks. Banks are therefore well advised not to take the changes associated with the SBA guidelines too lightly. The opportunity here is to use the momentum to achieve a better strategic alignment of their lending business with future challenges, such as those related to their future operating model (see also https://blogs.deloitte.ch/banking/2021/03/strategic-trends-and-implications-for-bank-operating-models.html). There are already examples in the market of banks with innovative, comprehensive solutions, such as home2050, a collaboration between Basellandschaftliche Kantonalbank and the canton’s leading energy supplier:  among other things this offers a solution for assessment of the potential, financing and installation of solar equipment and the associated energy system.

In deciding what to do next, banks should specifically ask themselves the following five key questions:

  1. What gaps still exist in respect of the SBA requirements?
  2. What short, medium and long-term measures can be taken to close these gaps?
  3. What further initiatives/projects could impact the implementation of the guidelines, and where can synergies be utilised?
  4. Are we seeking a purely tactical implementation for the sake of compliance, or will we utilise the momentum for a comprehensive, forward-looking transformation of the lending business?
  5. Will we implement the requirements ourselves or work with an external partner?
Marc Grueter blog

Marc Grüter, Partner, Lead FS Transformation

Marc has 16 years of experience as a partner for leading strategic consulting firms and Big Four companies in Switzerland. Within his project portfolio, he focuses on:

  • Strategy development, target operating model design and digitalisation
  • Process optimisation and re-engineering, efficiency enhancement and cost optimisation
  • Automation, transformation and application of advanced analytical tools

Email | LinkedIn

Eric blog

Eric Gutzwiller, Director, FS Transformation

Eric has more than 10 years of consulting experience for leading universal and cantonal banks. Within his project portfolio, he focuses on:

  • Front-to-back lending process optimisation, standardisation, application of digital automated technologies
  • Strategy development and redesign, front-end and sales enablement, income optimisation projects
  • Complex reorganisations and comprehensive cost optimisation initiatives at banks.

Email  | LinkedIn

  Simon heller blog

Simon Heller, Director, Lead Sustainability Services Risk Advisory

Simon has 18 years of experience in sustainability topics in the finance sector. Within his project portfolio, he focuses on:

  • Sustainability and climate strategies, climate risks
  • Net zero targeting and decarbonisation of enterprises and real estate portfolios
  • Sustainability reporting and ESG ratings

Email| Linked

  Pablo Paron

Pablo Paron, Manager, FS Transformation

Pablo has more than 5 years of consulting experience for leading universal and cantonal banks. Within his project portfolio, he focuses on:

  • Design of target operating models (TOMs) for the lending business, including strategy development and redesign
  • Front-to-back process optimisation, standardisation and application of digital automated technologies
  • Market entry strategies, due diligence and platform implementation

Email| LinkedIn 

____________________________________________________________________________________________________

[i] https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/emission-reduction/reduction-targets.html

[ii] https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/emission-reduction/reduction-targets.html

[iii] Federal Office for the Environment [FOEN] – CO2 statistics (2022)

[iv] Swiss Federal Office of Energy [SFOE] – Analysis of Swiss energy consumption 2000-2020 by specific use (2021)

[v] The Federal Council – Switzerland’s long-term climate strategy (2021)

[vi] https://www.sia.ch/de/politik/energie/modernisierung-gebaeudepark/

[vii] Requirements are only binding for SBA member banks

[viii] A transition period until 1 January 2024 applies for adaptation of internal bank processes

[ix] Cf. https://www.swissbanking.ch/en/topics/regulation-and-compliance/self-regulation

[x] Market share based on own calculations using SNB and FINMA data

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