In the second of a two-part blog on climate transition risks in the property transactions, we consider how some of the key stakeholders can play their part in managing and mitigating climate risks through encouraging better property resilience. Also, that conveyancers understand the crucial role they play in how to advise their client through to positive outcomes.
The UK has set out in law through The Climate Act 2008 the goal to achieve net zero emissions (100% reduction of 1990 levels) by 2050. There have been some short term bumps in the road following recent signals by the Government, but industry has already been voting with its feet. Significant achievements have been made across renewable and green initiatives, transportation, energy and also in the de-carbonisation of new-build construction and also retrofitting of existing properties to be more energy efficient.
Property accounts for 26% of all carbon emissions in the UK (1). While the Government has been nervous about the impact to households during the cost of living crisis, there have already been substantial improvements in the number of properties rated C or above for energy efficiency over the last ten years, as reported recently by Groundsure following their analysis of the EPC register.
It is clear that improving our property stock to be more energy efficient is only going to help achieve our net zero goal, but it will also result in lower energy costs which will support return on investment against the retrofit investment. And a key driver of this is to identify what is required at the point of the property transaction.
Climate transition risks, such as energy performance and flood resilience, are an increasingly important part of the negotiation for each stakeholder.
Lenders must manage climate risk exposure
The approach taken by lenders to climate risk is a critically important example of transition risk as it is starting to change market practice of conveyancers.
This is evolving due in large part to regulatory pressures exerted by the Prudential Regulation Authority, the Bank of England, and other regulatory bodies. At the heart of this is the adoption of climate risk reporting / disclosure obligations (2).
This is leading to the development of climate change policies and practices which are designed to secure the long term financial resilience of lenders, including screening the existing lending book of business for climate exposures.
It has been estimated that if the UK’s banks and insurers fail to adequately manage their climate risks, this could result in credit losses of £225 billion by 2050 (3). Adequately managing climate risks means de-risking their portfolio. This would lead to less finance for real estate which is exposed to significant physical climate change risk and more finance for those that aren’t. (4)
Against this regulatory and commercial backdrop, lenders are not going to provide mortgages on standard terms for properties whose value is predicted to be reduced as a result of climate change (e.g. from coastal erosion, subsidence and flooding).
Stimulating energy and flood resilience
Equally, they are now rewarding homebuyers and owners who demonstrate that they are investing in energy improvements to move EPC ratings to at least a C, or better still a B. Significant movements can be made through roof and wall insulation, improved double glazing and more renewable energy sources.
Lenders have long been promoting “green mortgages” with lower headline rates for A & B rated properties as an incentive, but only now are they becoming practicable with interest free or tapered loans for retrofitting to act as a gateway to new, reduced rates.
It is in lenders’ interest to encourage this, especially for more marginal valued properties where the retrofit may need a longer break even. If they can support the transition with incentives, they can upgrade properties on their books previously considered an asset risk, while reducing the number of potential mortgage prisoners trapped by the mathematics.
Better flood resilience through investment in non-return valves to avoid sewer flooding, air brick covers and flood gates, can also improve insurance premiums and reduce excesses. It can also ensure loans that are contingent on insurance cover being available are then facilitated.
Expect lenders to be engaging through their panels on transition risks and how conveyancers are advising their clients on how energy and flood resilience is being negotiated in the transaction.
Where properties represent severe transition risk, lender policy may leave some of these vulnerable and impact the ability of purchasers to obtain a mortgage for a climate-impacted property and the ability of vendors to sell such properties.
Responding to more Informed Purchasers
As purchasers become better informed about the physical and transition risks, they will take a more risk-averse view of properties exposed to material climate risk over the short, medium or longer term. This, in turn, will impact the price they are willing to pay for certain properties.
A new generation of homebuyers are better informed and more concerned about climate change. They don’t distinguish between the past and the future on environmental risks – in fact, they are more concerned about their future security as they have longer on the planet than some of us. It is important that conveyancers recognise this and reflect this in a more holistic approach about advice on environmental risk that looks to the future and includes climate risks.
The role of the conveyancer
The majority of conveyancers have accommodated ClimateIndex™ climate analysis effectively as part of their overall environmental due diligence. They are rightly considering it as part of the same process, with the same PI reliance in Groundsure reports that they have had with contaminated land and flood over the last 20 or so years. By highlighting the physical risk ratings and what is driving them and using standard clauses, these are signposted to the client in a predictable manner that also meets compliance to The Law Society Guidance.
And, frankly, that’s all you need to do. Nothing more. Stay in your lane. You are not climate scientists.
Physical climate risks are perhaps already well understood precisely because they are a future looking variant of existing environmental risks (flooding, subsidence, coastal erosion).
If a solicitor fails to warn their client about climate transition risks, this may result in a claim for professional negligence, an award of damages, likely increased premiums for PI insurance and reputational damage.
No solicitor would want their client to buy a property which is uninsurable or which cannot be mortgaged. Transition risk poses this prospect and hence poses a threat to property values. That is why conveyancers need to take this risk more seriously.
For transition risks, the EPC and the drive for improved energy efficiency, together with better flood resilience with affected properties, is all about the client saving money longer term. It is also perhaps identifying the opportunity to renegotiate price to ensure quicker return on investment, as well as how they can safeguard their investment and over time make it more attractive for re-sale or to meet future minimum energy requirements (MEES).
The combined effect of physical impacts from our changing climate and the drive to net zero through transition and becoming more resilient are decisive factors on future asset value and lending access.
Through this lens, conveyancers need to think about how their client care needs to adapt. Our ClimateIndex™ analysis on physical and transition risks at no extra cost in our key residential searches and both commercial searches, provides a clear, simple and frictionless approach to support client care and meet compliance.
Find out more about ClimateIndex™, call us on 01273 257755 or email info@groundsure.com
References
- https://www.ons.gov.uk/economy/environmentalaccounts/articles/climatechangeinsightsuk/august2022#:~:text=1.-,Main%20points,UK%2C%20on%20a%20residency%20basis.
- See the PRA’s Supervisory Statement 3/19 (SS3/19) – Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change which requires lenders to improve their capabilities to monitor and manage climate risk.
- https://www.ft.com/content/0d09f5c4-b88e-440f-9d2f-598ee71281c9
- This includes coastal erosion, increased flood risk, increased shrink swell subsidence, wildfires etc caused by our changing climate which is resulting in wetter winters, warmer summers and an increase in extreme weather events