Before long, you can rest assured, green and ESG factors will be coming to the world of debt, wrapped in a mortgage, HP, BNPL or a PCP, or the multitude of other products.
Fuelled by pressure from special interest groups, as consumer awareness grows, we expect ESG to have an increasing impact on brokers, lenders and platforms from as soon as 2022.
The government has also expressed interest in exploring plans to link mortgages to green home improvements, with new targets for lenders designed to help decarbonise housing. In its net zero strategy, the government has said it is working with mortgage lenders to support homeowners in improving the energy performance of their properties, including setting targets to improve the average EPC rating of the properties in their lending portfolio to at least band C by 2030.
Consumer awareness is growing
Lender, BML caried out some ESG research. It found 60 per cent of investors wanted greater transparency on the environmental and social impact of different products or assets.
BML’s research also found that 22 per cent of investors said ESG factors have played an increasingly significant role in their investment decisions, and 29 per cent stated that they will now consider the environmental or social impact of the businesses or assets they invest in.
Mounting issues for advisers and platforms
As every reader knows, price alone is not the only factor for a consumer when selecting a mortgage.
Being aware of all additional borrower considerations including ESG, and explaining your stance on ESG will I predictbecome essential for advisers, including having this information accessible on mortgage platforms going forward. Similarly, we would expect the consumer aggregator sites such as MoneySupermarket or Confused to start promoting ESG scores even before labelling standards have been agreed.
Addressing the mismatch between green products and green providers
We recently conducted an analysis of four lenders active in the green mortgage sector. We put an eye over their ESG credentials as provider entities rather than just looking at their products. The lenders were Barclays, NatWest, Lloyds and Virgin Money.
We won’t go into the specific details by lender, but in summary all the companies performed relatively well. All of these banks are currently ranked within the top 20 per cent of all companies and top 30 per cent of the companies within the industry. Specifically, they ranked 637, 914, 2753 and 2854 out of 15,712 listed companies.
However, when we looked at the firms’ performance on a more granular E, S and G level, the story was slightly different. Overall, the results showed that these banks perform the best in terms of their social metrics and worse in the environmental metrics. The governance metrics lie somewhere in between.
As consumer awareness grows, then so will their understanding of the ESG silos. In the UK, we typically talk about ‘green’ mortgages which highlights the focus on environmental issues rather than on social and governance ones.
However, if you compare this with the USA, consumers are often more interested in the social factors, such as a provider’s performance on issues such as diversity and inclusion and gender pay gaps when making ESG decisions.
What to watch out for in the near future
Awareness will grow with regards to what the individual ESG criteria are and what non adherence means.
ESG will overarch financial services so that issues in one silo of a firm’s business will impact other silos. For example, if a major bank’s investment arm has an issue, this will reputationally impact other sectors such as lending and their ESG scores.
The ability to call your product ‘green’ will be addressed. Current self-certified ESG claims will need, before too long, to be independently assessed against agreed standards. The regulator may even demand ESG performance-linked disclosure and/or the adoption of common standards or ratings such as those of Defaqto, which already covers many financial products.
We would also expect to see mortgage platforms include real-time ESG analysis on the lenders and the mortgage products. Similarly, we would also expect brokers and advisers to adopt ESG policies, though ESG rating of smaller, privately-owned businesses is still some way off.
Gordon Tveito-Duncan is co-founder and director of GaiaLens
