The greening of lending: Evidence from banks’ pricing of energy efficiency before climate-related regulation

Shocks to energy prices can have a direct impact on homeowners’ disposable income, affecting their ability to repay their mortgage and the risk of default. Energy-efficiency increases the collateral value of a property as it can provide some protection not only against increasing energy prices but also against the upfront costs of having to comply with future tightening of environmental regulations. Anecdotally, driven by either risk management and/or corporate and social responsibility, lenders have increasingly included the energy transition risk factor in the lending risk when differentiating mortgage interest rates based on energy efficiency without the need for regulatory intervention. To gather evidence of the lenders’ pricing decisions, we study interest rates of mortgages originated in the UK prior to 2018, the period before recent regulation came in. We estimate standard pricing models using a unique dataset of 1.8 million mortgages. We find no evidence of lenders charging higher rates on riskier mortgages against energy-inefficient properties. Overall, our findings do not provide conclusive evidence that lenders took energy efficiency and hence the energy transition risk into account when setting interest rates. These results contribute to the debate on lenders’ risk management and the role of regulation in the greening of the economy.