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Sustainable lending in Realkredit Danmark

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Sustainable lending in

Realkredit Danmark

Climate change

May 2020


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Contents

Why this report ........................................................................................................................................ 3

EU to define what green looks like .......................................................................................................... 4

TCFD says risks are more imminent than we think ................................................................................ 8

UN codifies responsible banking ........................................................................................................... 10

Twenty recommendations to deliver on ................................................................................................ 11

Denmark at the forefront ....................................................................................................................... 13

Denmark is half way on 2030 targets for cuts in emissions .............................................................. 13

Renewable energy has become part of the Danish brand ................................................................ 14

District heating is a platform .............................................................................................................. 15

Households now run on 64 percent renewable energy ..................................................................... 17

Building energy efficiency ..................................................................................................................... 18

EPCs provide an assessment of energy efficiency ............................................................................ 20

The Realkredit Danmark mortgage book GHG footprint ....................................................................... 26

EPCs show A or B mortgages worth DKK 70bn................................................................................ 26

Heating the mortgage book ............................................................................................................... 30

GHG footprint for specific exposures ................................................................................................ 32

Utilities ........................................................................................................................................... 33

Agriculture ...................................................................................................................................... 33

How to assist our customers in their green transition ........................................................................... 35

The first green covered bonds to see the Danish market ................................................................. 35

Green certificates as a viable alternative .......................................................................................... 36

Financing improvements in energy efficiency ................................................................................... 37

Underwriting climate-related risk ....................................................................................................... 40

Underwriting energy inefficient properties ..................................................................................... 41

Underwriting GHG emitting industries .......................................................................................... 42

Underwriting flood risk ................................................................................................................... 43


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Why this report

Climate change is a global challenge that fundamentally alters the risks that people, businesses and

the financial sector face. Denmark is committed to taking the lead on the path towards a more sustain-

able and greener future. In December 2019, the Danish Parliament passed the first climate law com-

mitting the current and future Parliament assemblies to the targets of cutting greenhouse gas emissions

by 70 percent by 2030 and becoming carbon neutral by 2050.

Delivering on the targets will require enormous efforts. These efforts will build on past investments in

e.g. renewable energy, public transportation, public energy supply, and high building standards, which

have given Denmark a head start on becoming green. Already today, renewable energy accounts for

nearly 40 percent of total production in Denmark. On a windy day, renewable energy suffices to cover

all needs.

At Realkredit Danmark, we want to help society in succeeding with the green transition and delivering

on the targets set forth. As a mortgage bank, we have only limited impact in terms of our own environ-

mental footprint. We can, however, generate significant impact by supporting our customers in their

efforts to become more climate-friendly. To this end, we are committed to financing energy-efficient

properties and improvements in the energy-efficiency of existing properties, renewable energy and en-

ergy supplies based on renewable energy. In doing so, we can turn Denmark just a little bit greener for

each mortgage we underwrite.

Thinking green is not new to us. In 2019, we launched the first green covered bond to see the Danish

market. In this report, we shed more light on where we are and where we are headed on the path

towards a more sustainable and greener economy. Financial disclosure on sustainability is still in its

infancy. In terms of metrics, we will use the information at hand and compare to the EU taxonomy as

we expect it to come through and recommendations from the Task Force on Climate-related Financial

Disclosure and the Danish Forum for Sustainable Finance. This report will be followed by frequent

disclosure on the green aspects of our mortgage book.


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EU to define what green looks like

Defining what green looks like is the first step of the EU action plan on sustainable finance. With the

action plan EU aims at mobilising more private capital for green investments, manage risks to the finan-

cial system from climate change, resource depletion and environmental, and fostering transparency

and long-termism in financial and economic activities. For the action plan to work across the EU a com-

mon definition of what green looks like is necessary as a baseline.

In June 2018, EU tasked the Technical Expert Group on

Sustainable Finance (TEG) with the definition of green and

in March 2020, TEG delivered on the task with detailed re-

commendations for a green taxonomy in a final version1.

Meanwhile, in December 2019, the European Commission

and the European Parliament agreed on regulations to

create a legal basis for the taxonomy. What now remains

is for the EU Commission to transcribe the TEG recommen-

dations into delegated acts whereby the taxonomy be-

comes binding EU law. At time of writing, expectations are

for a narrow transcription.

The definition of green spans different industries and areas of economic activity.

Agriculture and

forestry

Manufacturing Utilities Water, sewage

and waste

Transportation Information and

technology

Construction and

real estate

In this report, we zoom in on construction and real estate and utilities as these assets are eligible for

covered bond funding also. Screening criteria for construction and real estate and utilities, respectively,

are:

1 See Taxonomy Final report of the Technical Expert Group on sustainable finance, March 2020 (TEG report)


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Construction of new properties is green if the primary energy need is at

least 20 percent lower than needs resulting from local net zero emis-

sion building (NZEB) requirements

Renovations are green if compliant with energy performance stand-

ards2 or if they achieve energy savings of at least 30 percent when

compared to baseline energy consumption or if property within top 15

percent/NZEB minus 20 percent after renovation

Installation of renewable energy and energy-saving equipment, insula-

tion and replacement of windows, doors etc. to higher energy-savings

standards are green

For buildings constructed before year-end 2020, acquisition and own-

ership are green if the energy performance of the property belongs to

the top 15 percent of the local building stock

Acquisition of property constructed before end 2020 if belonging to the

top 15 percent

Acquisitions of property are green if the property meets the criteria for

new properties for building constructed before end 2020

For buildings constructed after year-end 2020, acquisition and ownership

are green if the primary energy need is at least 20 percent lower than

needs resulting from local net zero emission building (NZEB) requirements

TEG anchors the screening criterion for new construction after year-end 2020 in national NZEBs which

by no means are uniform across the EU. At the one end of the scale, the NZEB for Denmark is at 20

kWh/m2 reflecting energy standards for new construction are high. At the other end of the scale, the

NZEB for Austria is 160 kWh/m2 eight times higher that of Denmark3. With the screening criteria for new

construction, TEG is at risk of labelling more Austrian than Danish assets green going forward.

TEG takes a proven path when it comes to construction before year-end 2020. In alignment with green

bond frameworks already in operation, green is defined by the asset belonging to the top 15 percent in

terms of energy efficiency. In a Danish context, the criterion is the equivalent of an energy performance

certificate (EPC) A2020, A2015, A2010 or B whereas the criterion for new construction is the equivalent of the

best part of EPC A2020 only. Consequently, the needles eye is much bigger for construction before year-

end 2020 than for construction after year-end 2020 which is by no means unjustified. From a life-cycle

perspective, new construction emits far more greenhouse gasses than old construction renovated to

new standards which we will look further into later on. Constructing new is not the best answer in all

scenarios to climate change.

TEG also takes a proven path when it comes to building renovations. The 30 percent threshold for

energy renovations is also found in green bond frameworks operated by issuers today. At a first glance,

the needles eye for energy renovations seems larger than for new construction which reflects the above

observation well. In practice, the 30 percent threshold will require documentation which may prove dif-

ficult and costly to provide.

2 See the Energy Performance Building Directive (EPBD) 3 Source BPIE, as of 2015


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TEG recommends to tighten criteria over time. For new construction, TEG recommends review of NZEBs

from 2020 to 2030. For buildings constructed before year end-2020, TEG recommends maximum emis-

sions per m2 per annum commensurate with the criterion that the building belongs to the top 15 percent

be scaled down by one sixth every five years to arrive at a zero emission standard by year-end 2050.

Criteria for green will be applied at time of origination only. Once green, a mortgage will remain green

until maturity or prepayment even though the property which secures the property fail to meet future

criteria for green as they are tightened. That said, TEG contemplates to introduce a renovation criterion

for green financial instruments with a tenure of 10 years or more.

Energy supplies and utilities are at the core of plans to fight climate-change as both the transition to-

wards renewable energy and the better distribution of energy, irrespective of source, are important

steps on the path towards green. For energy, green is:

Renewable energy facilities including solar, wind, ocean and hydro, geo-

thermal, gas combustion operating at life-cycle emissions lower the

100gCO2e/kwh declining to 0gCO2e/kwh by 2050 are green,

Bioenergy facilities operating at less than 80 percent of greenhouse

gas emissions to the fossil fuel comparator increasing to 100 percent

by 2050 are green

Facilities to transmit and distribute energy if in systems on the trajec-

tory to full decarbonisation or if meeting other criteria4 are green

Investments in electricity storage are green

Production of biomass, biogas and biofuels is green

Retrofit of gas transmission and distribution networks whose main pur-

pose is the integration of hydrogen and other low-carbon gases is green

District heating and cooling systems if using at least 50 percent renewa-

ble energy or 50 percent waste heat or 75 percent cogenerated heat or

50 percent of such energy and heat are green

The TEG tags the green label to most sources of renewable energy and a wide range of facilities to trans-

mit, distribute, or store energy.

The energy sector is in need of investments. Generation of electricity is the source of a quarter of

greenhouse gas emissions across the EU. Reductions call for investments in both transition to renew-

able energy sources and better transmission and distribution of energy whether the source.

4 See the TEG report chapter 22


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With the screening criteria for green in the making, an EU green bond standard is viable.

An EU green bond standard will operate on a look-through basis. A mortgage is green if the property

pledged as collateral is green following the screening criteria for green as outlined in the above. Further,

a bond is green if collateralised by green mortgages and so forth.

Following TEG proposal5, application of the EU green bond standard will be voluntary. While the label

EU Green Bond will be reserved to those green bond programmes wholly compliant with the screening

criteria for green adopted by the EU, issuers have the option to issue green bonds in a non-compliant

format. At the end of day, it will be the call of the investor community if non-compliant formats remain

viable.

TEG recognises the variety of green bonds already in issue. TEG proposes a grand-fathering whereby

programmes can earn the EU Green Bond label though funded by non-conforming assets provided all

new assets will be conforming at time of inclusion. With this proposal, the EU Green Bond standard

holds the potential to pick-up the liquidity of all green bond programmes already in issue.

5 See Usability Guide TEG proposal for an EU green bond standard, March 2020


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TCFD says risks are more imminent than we think

The Task force on Climate-related Financial Disclosure (TCFD) reported to the Financial Stability Board

(FSB) back in June 2017. The report is available at fsb-tcfd.org.

The TCFD found one of the most significant, and perhaps

most misunderstood, risks that organizations face today

relates to climate change. While it is widely recognized that

continued emission of greenhouse gases will cause further

warming of the planet and this warming could lead to dam-

aging economic and social consequences, the exact tim-

ing and severity of physical effects are difficult to estimate.

The large-scale and long-term nature of the problem

makes it uniquely challenging, especially in the context of

economic decision making. Accordingly, many organiza-

tions incorrectly perceive the implications of climate

change to be long term and, therefore, not necessarily rel-

evant to decisions made today.

The TCFD has a fair and valid point. Risk managers often tend to focus on those risk which are obvious

and tangible leaving behind those risks which are complex and intangible. This may very well also apply

to climate-related risks. While focusing on the first-order effects of climate-change, risk managers miss

the second-order effects from societies adapting to climate-change before climate-change actually ma-

terialises.

The TCFD encouraged risk managers in financial institutions to broaden their view on which climate-

related risks they face and will be facing in the future. To this end, the TCFD worked out a risk matrix

distinguishing between transition risks and physical risks.

The TCFD further encouraged financial institution to invest efforts and resources in disclosure on cli-

mate-related risks to foster the transparency needed for financial markets to work efficiently in allocating

resources and capital. To this end, the TCFD worked out a disclosure model.

As part of Danske Bank Group, Realkredit Danmark remains fully committed to meeting the recommen-

dations of the TCFD.


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Tra

ns

itio

n r

isks

Po

licy

an

d le

ga

l Increased pricing of greenhouse gas emissions

Enhanced emission-reporting obligations

Mandates on and regulation of existing products and services

Exposure to litigation

Te

ch

no

log

y Substitution of existing product and services with lower emissions options

Unsuccessful investment in new technologies

Costs to transition to lower emissions technology

Ma

rke

t

Changing customer behaviour

Uncertainty in market signals

Increased cost of raw materials

Re

pu

tati

on

Shifts in consumer preferences

Stigmatisation of sector

Increased stakeholder concern or negative stakeholder feedback

Ph

ysic

al r

isks

Ac

ute

Increased severity of extreme weather events such as cyclones and floods

Ch

ron

ic Changes in precipitation patterns and extreme variability in weather patterns

Rising mean temperatures

Rising sea levels

Source: Final report, Recommendations of the Task Force on Climate-related Financial Disclosures (extract)


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UN codifies responsible banking

Danske Bank Group signed up to the UN principles for re-

sponsible banking in September 2019. In doing so,

Danske Bank Group joined 129 other banks from 49 coun-

tries across the in supporting UN on promoting responsible

banking across the world.

UNEPFI motivates the principles by As society’s expecta-

tions change, banks must be transparent and clear about

how their products and services create value for their cus-

tomers, clients, investors, as well as society. The Princi-

ples for Responsible Banking help any bank – whatever its

starting point – to align its business strategy with society’s

goals.

The principles of responsible banking are:

1. Alignment 2. Impact and target setting 3. Clients and customers

We align our business strategy to

be consistent with and contribute

to individual’s needs and society’s

goals as expressed in the Sustain-

able Development Goals, the Paris

Climate Agreement and relevant

national and regional frameworks

We will continuously increase our

positive impacts while reducing

the negative impacts on, and man-

aging the risks to, people and envi-

ronment from our activities, prod-

ucts, and services. To this end, we

will set and publish targets where

we can have the most significant

impacts

We will work responsibly with our

clients and our customers to en-

courage sustainable practices

and enable economic activities

that create shared prosperity for

current and future generations

4. Stakeholders 5. Governance and culture 6. Transparency & accountability

We will proactively and responsi-

bly consult, engage and partner

with relevant stakeholders to

achieve society’s goals

We will implement our commit-

ment to these Principles through

effective governance and a culture

of responsible banking

We will periodically review our in-

dividual and collective implemen-

tation of these Principles and be

transparent about and accounta-

ble for our positive and negative

impacts and our contribution to

society’s goals

Source: unepfi.org

By signing up to the principles Danske Bank Group is committed to conducting analysis into where the

bank has significant positive and negative impacts on society, the environment and the economy, set-

ting and implementing ambitious targets to address the significant impacts identified, and report pro-

gress to the public.

As part of Danske Bank Group, Realkredit Danmark remains fully committed to these obligations.


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Twenty recommendations to deliver on

Industry organisation Finance Denmark established the Forum for Sustainable Finance to recommend

on how the financial industry may contribute to the transitions towards a sustainable economy. The

Forum brought together NGOs, trade organistions, financial and non-financial corporates, and subject

matter experts on climate and greenhouse gas emissions.

Forum concluded in December 2019 offering twenty

recommendations to the financial industry as well as other

industries and regulators. Forum found (1) the transition to

a sustainable economy to be one of the most important

challenges facing society, (2) the financial industry should

take the lead, and (3) transparency is imperative. These

findings form the backdrop for the recommendations.

Finance Denmark, which represents all financial

institutions in Denmark, has accepted all twenty

recommendations with a promise to deliver. This promise

extends to Danske Bank and Realkredit Danmark.

Not all recommendations are equally important to

mortgage banking. In what follows we highlight those

recommendations we believe most relevant to our

activities.

1 Incorporate sustainability into business model

Forum recommends all members of Finance Denmark to integrate sustainability into their busi-

ness model

2 Offer more sustainable products

Forum recommends all members of Finance Denmark to offer lending and investments products

for green and sustainable economic activities

3 Operate your our business sustainably

Forum recommends all members of Finance Denmark to improve internal procedures to include

sustainability aspects

4 Disclose clear and reliable documentation on sustainability

Forum recommends to all members of Finance Denmark to provide transparency on sustainability

of both lending and investment activities and internal procedures

5 Disclose carbon footprint and set targets for future reductions


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Forum recommends to all members of Finance Denmark to measure by common definitions and

disclose the carbon footprint of lending and investment activities and to set individual targets for

reductions

6 Screen for carbon

Forum recommends to all members of Finance Denmark to screen large exposures for economic

sustainability in an environment where emissions are heavier taxed and regulated

7 Classify lending and investment activities on a sustainability scale

Forum recommends to all members of Finance Denmark to classify lending and investments on the

EU taxonomy sustainability scale

10 Focus on improving skills and knowledge on sustainability in the industry

Forum recommends investments be made in improving skills and knowledge on sustainability at all

levels of organisations

13 Advance financing green and sustainable properties

Forum recommends financial institutions to advance financing of green and sustainable properties

Source: Forum for Sustainable Finance, 20 recommendations to Finance Denmark (extract) (our translation)


13 |

Denmark at the forefront

Denmark has taken a lead on the transition towards a green and sustainable economy and is committed

to retain this position in the future. With the passing of the climate law in December 2019, Denmark has

set the ambitious targets to cut greenhouse gas emissions by 70 percent to 1990-levels by 2030 and

get to a full stop by 2050. In the 2020 Climate Change Performance Index, Denmark is ranked second

best with Sweden taking the top position.

The climate law adds to a long list of initiatives and reforms to cut greenhouse gas emissions and

accelerate the transition to a green and sustainable economy. In the 1990s, Denmark reformed the

utilities sector to promote district heating and privatise electricity markets. These initiatives were fol-

lowed by reforms to promote renewable energy sources and phase-out fossil fuels. In recent years,

ambitious targets have been set to accelerate the transition further leading up to the passing of the

climate law.

Denmark is half way on 2030 targets for cuts in emissions

Three decades of efforts to cut greenhouse gas emissions have worked their part. Emissions are now

at 68 percent of 1990-levels. The 32 percent reduction is sourced in both cuts in energy consumption

and the transition to renewable energy.

While Denmark has come far on the path to a green and sustainable economy, the target reductions of

70 percent by 2030 and 100 percent by 2050 call for the transition to accelerate. If no further measures

to cut emissions are implemented, reductions will only reach 55 percent by 2030.

Source: Statistics Denmark and Ministry of Finance

0

30

60

90

120

150

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029

Greenhouse gas emissions


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So far, cuts in greenhouse gas emissions have not harmed economic growth. The Danish economy

has become less energy intensive. While the economy has grown by 53 percent in real terms, energy

consumption is up by only two percent. For every good and service we produce, we use less energy.

Note: 1990=100


Renewable energy has become part of the Danish brand

Cuts in energy needs will not bring Denmark to the target levels for greenhouse gas emissions on their

own. The transition to renewable energy is the hallmark of Danish efforts to cut greenhouse gases.

Investments in renewable energy sources have not only cut greenhouse gas emissions. They have also

fostered fast-growing industries.

Note: 1990=100

Source: Danish Energy Agency and Ministry of Finance

In the public eye, Denmark is deeply associated with wind energy. Thanks to national treasures like

Vestas and Ørsted, wind energy has become part of the Danish brand.

Wind energy is however only part of the truth. The primary source of renewable energy is actually

biomass. In 2017, biomass was the source of 63 percent of all renewable energy, whereas wind ac-

counted for 17 percent. On a windy day, however, wind energy suffices to cover all energy needs.

0

50

100

150

200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Energy intensity

GDP Gross energy consumption Greenhouse gas emissions

0

25

50

75

100

125

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Sources of energy

Fossil fuels Renewable energy


15 |


District heating is a platform

District heating has walked hand-in-hand with renewable energy.

Since the 1990s, the expansion of district heating and natural gas has been a key priority of energy

policies. In 1990, 1,063,000 houses ran on district heating. By 2017, this number had grown into

1,826,000 houses. During the same period, the number of houses heated by an oil burner contracted

from 824,000 to 255,000. Similar trends apply to offices and retail.

Source: Danish Energy Agency

District heating is centralised and large-scale. In essence, district heating provides the platform to plug-

in new, renewable energy source faster and more efficiently. Just think of the challenge in replacing the

824,000 individual oil burners in operation in 1990 with renewable energy such as biomass or wind.

It should come as no surprise that district heating has turned to renewable energy sources ahead of the

economy at large. In 2017, 69 percent of district heating was from renewable energy sources. For elec-

tricity, the ratio was 64 percent.

0

1000

2000

3000

1990 2000 2010 2018

Heating source by number of houses (thousands)

Oil burner Natural gas burner District heating Others

0

25

50

75

100

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Renewable energy by source

Wind Biomass Other


16 |


The transition to renewable energy has cut greenhouse gas emissions from district heating and elec-

tricity markedly. In 1990, district heating and electricity were the sources of 36 percent of emissions

whereas in 2017, only 21 percent of emissions came from the sector and, bear in mind, during this

period total emissions were cut by 32 percent.


District heating is predominantly urban. Obviously, it is more costly to expand the district heating grid in

rural areas where properties are located apart. With the expansion of the district heating grid, we have

harvested the low-hanging fruits. The next steps are less accessible.

0

20

40

60

80

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Renewable energy to total

Electricity District heating Other

0

50

100

150

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Greenhouse gas emissions

Logistics Agriculture Manufactoring Non-district heating, households District heating and electricity


17 |


Households now run on 64 percent renewable energy

Zooming in on households, we find that 28 percent of energy consumed is from renewable energy

sources, directly. However, if we adjust for district heating at 36 percent of energy consumed and elec-

tricity at 18 percent of energy consumed be 69 percent renewable and 64 percent renewable, respec-

tively, we get to 64 percent of total energy consumed be from renewable sources.

Note: Numbers in PJ

Source: Danish energy agency

0

50

100

150

200

250

1990 1995 2000 2005 2010 2015

Energy consumed by households by source

Oil Natural gas Coal and coke Renewable energy Electricity District heating Gas works gas

Blue areas mark district heating

Yellow areas mark natural gas


18 |

Building energy efficiency

Next we zoom in on energy efficiency in properties. We focus on residential properties and office and

retail as these are our primary borrower segments.

Energy efficiency of properties remains important, not only from an owner’s perspective but also from

a climate change perspective. Nearly 60 percent of all energy consumed by households is for heating

purposes. Though increasingly renewable, see the above, cuts in energy consumption from improve-

ments in energy efficiency remains a viable and efficient way to cut greenhouse gas emissions.

Energy efficiency has improved. When compared to 1990, energy consumed for each square meter of

floor heated has been reduced by 15 percent. However, the reduction is countered by a 25 percent

increase in floor space heated. Consequently, energy consumed for heating of housing is up by 6 per-

cent since 1990.

Note: 1990 equals 100


We often point to new construction as the answer to the question of how to improve energy efficiency

in housing. Certainly, new construction is more energy efficient in the user phase, which is evidenced

by higher EPCs, see the below. Yet, new construction is also larger in size construction with the average

single family house climbing in size from 137m2 in 1990 to 209m2 in 2018.

50

75

100

125

150

1990 1995 2000 2005 2010 2015

Energy consumption for housing

Heated floor space Final energy consumption Final energy consumption per m2


19 |

Source: Statistics Denmark

More importantly, new construction does not come cheap in terms of greenhouse gas emissions. Emis-

sions embedded in building materials are substantial. For new construction meeting current standards

of energy efficiency, greenhouse gas emissions embedded in construction materials account for nearly

three quarters of lifetime emissions leaving only one quarter for the user phase, studies from the Danish

Association of Architectural Firms confirms. A study from Danish engineering, design and consultancy

company Rambøll compares greenhouse gas emissions from the demolition and construction of a new

house to the re-construction of the old house. The comparison reveals emissions for demolition and

construction of a new house at 56 times that for re-constructing the old house with the same end result

in terms of energy-efficiency.

Note: Examples of embedded GHG emission

Source: Rambøll and Danish Association of Architectural Firms

0

50

100

150

200

250

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Average size of new housing

New construction scenario

Demolition

Transport to re-cycling and landfill

Dismantling and re-cycling

Construction of new components

Transport to construction site

Construction

New house

1,625,000 kg

Re-cycling scenario

Transport to construction site

Re-construction

29,000 kg

Dismantling and re-cycling

Re-cycling of construction

Construction of new components

New house


20 |

In 2017, the Danish Council on Climate Change, established to independently advise the government

on climate issues, reached similar conclusions. The council pointed to energy renovations of properties

as the initiative with the greatest potential to help society in becoming green and sustainable and at the

lowest economic costs.

Co

ntr

ibu

tio

n to

20

50

tra

ns

itio

n

Hig

h

EVs

Large-scale heat

pumps

Solar energy

Energy renovation of

properties

Mid

Public transportation

Electric powered

trains

Reductions in dairy

production

Small-scale heat

pumps

Po

or

Biofuels

Highly expensive Expensive Mid Inexpensive Highly inexpensive

Implied economic costs to society

Source: Danish Council on Climate Change, 2017

EPCs provide an assessment of energy efficiency

For properties already brought into use, the Energy Performance Certificates (EPC) provides an assess-

ment of energy efficiency property-for-property. With nearly 650,000 EPCs completed since 2010, the

scheme is both wide-spread and well-known.

EPCs are assigned by a certified surveyor following a detailed review of the property. The EPC repre-

sents a baseline assessment of the energy efficiency performance of the property taking into the ac-

count all technical aspects of the property including insulation and source of heating.

EPCs do not consider energy consumed for the production of building materials nor greenhouse gas

emissions embedded in building materials. Consequently, EPCs apply only to user phase and not to the

entire lifetime of the property. In principle, a high-performing EPC property may emit more greenhouse

gases than a low-performing EPC property when adjusting for the construction phase, but we do not

know. This is a material weakness of the EPC which will probably be difficult to remedy.

The EPC report includes both a grade on a scale from A to G, with A further split into A2020, A2015, and

A2010 referencing the year of the building standards to which the property complies, and recommenda-

tions to improve energy efficiency and possibly the EPC grade.


21 |

Source: sparenergi.dk

EPC grades indicate baseline energy consumption for heating. For each grade thresholds for maximum

energy consumption are set. For EPC A2020 the threshold is 27kWh/m2, whereas for EPC F the threshold

is 286 kWh/m2 for a 140m2 dwelling, more than ten times as much.

A2020 A2015 A2010 B C D E F G

Note: Thresholds for kWh/m2

for dwellings at 140m2


The scale is relatively harsh when compared to peers. A Danish EPC C would translate into a Norwe-

gian6 EPC B and so forth. So far, the EU has not succeeded in harmonising scales which could prove

difficult taking the different climate zones into consideration.

EPCs do not only apply to housing. The scheme also encompasses offices and retail. While the scheme

is obligatory for housing when sold, sublet for more than four weeks, and for new construction, the

scheme remains voluntary for offices and retail. Coverage is therefore lower.

The nearly 650,000 EPCs completed are split on 430,000 detached houses, 150,000 terrace houses,

55,000 apartment properties, and 15,000 properties for office or retail purposes. EPCs are assigned to

apartment properties property-for-property. Each EPC may therefore apply to a number of individual

apartments. When broken down into individual apartments, the number of EPCs outstanding grows to

more than 780,000. With nearly 1.2m of detached houses and 400,000 terrace houses across Denmark,

coverage of the EPC scheme is just below 40 percent for these categories, which is far from perfect.

Unless made obligatory, complete coverage is beyond reach due to a life span of ten year for the indi-

vidual EPC.

Combining A2020, A2015, and A2010 we find 82,999 properties in the EPC A category. Further, we find

52,343 properties in the EPC B category. Adding the numbers, we find 135,342 in 783,667 properties

to meet the criteria for green as defined in our Green Bond Framework. This equals 17.3 percent.

6 https://www.energimerking.no/no/energimerking-bygg/energimerking-av-bolig/om-energiattesten/energimerkeskalaen/

27 37 64 86 133 180 227286

∞


22 |

Note: Number of properties

Source: e-nettet

The bulk of the building mass we find in the EPC C to E range at a combined 544,177 in 783,667

properties. This is the equivalent of 69.4 percent.

The energy in-efficient properties in the EPC F and G range are at a combined 104,148 in 783,667

properties. This is the equivalent of just 13.3 percent.

Construction year is a strong indicator of the EPC. In general, EPC A or B is only attainable for properties

constructed since 1999, EPC C, D or E are attainable for properties constructed from since 1973

whereas properties constructed before 1972 are found in EPC D to G range.

EPC and construction year

2009-

1999-2008

1979-1998

1973-1978

1962-1972

-1951

A B C D E F G


High EPCs are therefore found in areas of high construction activity whereas low EPCs are found in

areas where the building mass is mature at age.

Recent year construction activity has diverged across the landscape. Continued urbanisation has

fuelled demand for more building space in inner city areas. Yet, densely populated city areas have left

little room for new construction and instead construction has taken place in proximity to inner city areas

in new such as Ørestad and Nordhavn in Copenhagen, Tietgenbyen in Odense, and harbour areas in

Aarhus and Aalborg.

82.999

52.343

195.102

235.718

113.357

58.01946.129

A B C D E F G


23 |

Zooming in on housing, we find 24 percent of construction to have taken place in Eastern Jutland home

to only 15 percent of Danish households. At the other end of the scale, Copenhagen, home to 14 per-

cent of Danish households, has seen only 8.9 percent of new construction. Consequently, the building

mass is replaced much faster in some parts of Denmark than others.

Source: Statistics Denmark

Plotting EPCs on the map therefore shows a diverse picture of user-phase energy efficiency. To exem-

plify we zoom in on the municipality of Frederiksberg, located in Copenhagen, exhibiting the highest

market values per m2 across Denmark. Frederiksberg is however densely populated leaving only little

room for new housing and since 2010 only 62 new houses have been constructed within city limits. The

below map exhibits EPCs for Frederiksberg.

Frederiksberg municipality EPCs


Though one of the most treasured places to live in Denmark and certainly one of the most expensive,

Frederiksberg is painted in yellow, red, and brown when it comes to EPCs, simply because housing in

Frederiksberg is mature at age. For detached housing and terrace housing, nearly three in four EPCs

are in the range from C to D.

-10%

0%

10%

20%

30%

Ea

ste

rnJu

tla

nd

We

ste

rnJu

tla

nd

Ea

ste

rnZ

ea

lan

d

No

rth

ern

Ze

ala

nd

So

uth

ern

Jutl

an

d

No

rth

ern

Jutl

an

d

Fu

ne

n

Co

pe

nh

ag

en

su

rbu

rbs

We

ste

rn a

nd

So

uth

ern

Ze

ala

nd

Co

pe

nh

ag

en

Construction of new housing and households by geography

Construction since 2010 Households in residence Difference


24 |

Note: EPCs for detached housing and terrace housing in the municipality of Frederiksberg


Green is further far apart in rural areas where construction is far between though building lots are readily

available. In some rural areas, we find more than half of EPCs be wither F or G.

Note: EPCs for detached housing in the municipality of Lolland


At the other end of the spectrum we find the Copenhagen South Port and the Ørestaden, both newly

established parts of Copenhagen with new housing meeting modern standards and EPCs in green and

yellow, yet also much more affordable than Frederiksberg.

Copenhagen South Port EPCs Ørestad and Tårnby EPCs


2,8% 2,5%

14,7%

31,0%27,0%

14,0%8,1%

A B C D E F G

1,2% 2,2%

9,5%

21,1% 19,9% 19,3%

26,9%

A B C D E F G


25 |

Tearing down the most part of Frederiksberg and re-locating residents affected to newly established

parts of Copenhagen is not a viable solution. Moving forward, focus should be on improving energy

efficiency in the housing already established. Improving energy efficiency in a residence from EPC F to

E will save more energy than improving from EPC E to D.

We deep dived into the micro economic aspects of investments to improve energy efficiency in 2020.

In general, an improvement by two notches from e.g. EPC F to D is attainable. Overstepping the EPC C

threshold will usually require a fundamental refurbishment of the property. In general, EPC A and B is

reserved for new construction.

We noted earlier that the best way to achieve energy efficiency in properties is by means of energy

renovations rather than through demolition and new construction. This is poorly reflected in current EPC

framework giving favour to new construction without considering the construction phase. While tempt-

ing, we should be careful to pay too much tribute to high EPC new construction when assessing energy

efficiency.

In the deep dive, we further referenced studies to show high EPCs to have a positive impact on market

values, however, only by a margin to reflect the discounted savings in future heating costs. Investments

in energy efficiency is not a shortcut to economic gains. That said, higher heating costs from higher fuel

prices or from higher green taxes would imply higher savings and thus higher differences in market

values on a discounted savings basis.

So far, we see only little signs of weakening demand for low EPC housing. In 2018/2019, EPC G housing

was 2.9 percent of all traded houses albeit 5.9 percent of the housing stock which could be a sign of

weakening demand. On the other hand, the same trend applied to EPC A housing, which makes it

difficult to draw any conclusions. In the below chart, the first column marks the share of housing units

sold by EPC, the next column marks the share of housing stock by EPC, and the third column marks

the difference. Differences below zero marks properties be sold less frequently than should be ex-

pected.

Note: in percent

Source: boligsiden.dk

-10

0

10

20

30

40

A B C D E F G


26 |

The Realkredit Danmark mortgage book GHG footprint

Next we zoom in our mortgage book and its implied greenhouse gas footprint. We do not have at hand

the information needed to come up with a precise estimate of total emissions in this report. Here we

zoom in on various determinants of the greenhouse gas footprint and how they relate to the mortgage

book.

EPCs show A or B mortgages worth DKK 70bn

The Realkredit Danmark mortgage book held a total of 442,976 mortgages worth DKK 808.2bn end third

quarter 2019. Of these, 128,208 mortgages worth DKK 359.5bn had a valid EPC. EPC coverage was at

29 percent by number of mortgages and 44.5 percent by mortgage debt outstanding, respectively, at

par with Denmark.

Mortgages worth DKK 70.1bn were EPC A or B. This part of the mortgage book meet the criteria for

green applied in our green covered bond programme and the criteria for green following from the TEG

recommendations for an EU taxonomy. If not already funded, this part of the mortgage book would be

eligible for green covered bond funding in a format meeting the EU green bond standard, assuming TEG

recommendations are written into EU law as is.

EPC A or B were thus at 19.5 percent of the mortgage book for which the EPC is available in terms of

mortgaged debt outstanding.

Note: Mortgage debt outstanding by EPC in DKKbn

Source: e-nettet and Realkredit Danmark

The bulk of the mortgage book was in the EPC C, D, or E range at DKK 257.7bn combined. At 71.7

percent of mortgage debt outstanding, this is at par with the Danish market.

The low performing part of the mortgage book with an EPC F or G amounted to DKK 31.6bn at 8.8

percent of mortgage outstanding. The low performing part of the mortgage book is thus less than half

the size of the high performing part of the mortgage book.

43,5

26,6

94,5

113,8

49,4

19,911,7

A B C D E F G


27 |

Recent years show a positive trend. Coverage is up, but so is the share of mortgage debt in high EPC

segments whereas mortgage debt in low EPC segments have remained stable. We see no reason why

this trend should not continue in the near future.

Note: Mortgage debt outstanding by EPC in DKKbn


In the previous section, we referenced studies to show higher EPCs mean higher market value. At

mortgage book level, we can confirm this trend. For detached housing and terrace housing we find

market values to be positively correlated to EPCs. One obvious explanation might be EPC A and B is

new construction only, and new construction tends to be priced above market average. The homebuyer

preference for new housing is however difficult to single out to find the real market value of better EPCs.

Note: Average market value in DKKt


In the previous section we further established new housing mean spacious housing. Adjusting for dif-

ferences in size, we still find market values be positively correlated to EPCs.

Note: Average market value per m2 in DKK


0

30

60

90

120

A B C D E F G

2015 I

2019 I

27.045 27.322 25.906 27.08924.851

22.21020.214

A B C D E F G

5.2044.748 5.014 5.240

4.386

3.395 3.549

A B C D E F G


28 |

Finally, higher EPCs mean higher mortgage debt outstanding. Higher EPCs meaning both new housing

and valuable housing, this should come as no surprise. Differences are however substantial with out-

standing debt for each EPC A at 2.35 times the size of outstanding debt for each EPC G for detached

and terrace housing.

Note: Average mortgage debt outstanding in DKKt


Next we zoom in on each end of the EPC spectre; A and G, respectively.

In the previous section we showed maps of Frederiksberg and Copenhagen South Port and Ørestad,

respectively pinpointing EPCs in each area. We saw Frederiksberg coloured in yellow, red, and brown

from properties mature at age and we saw new parts of Copenhagen in green colours from new con-

struction.

In the below, we map all EPC A and G properties which we have mortgaged across Denmark to see

how the mortgage book fits.

EPCs A and B EPCs F and G

Source: Realkredit Danmark

3.912

2.8042.472 2.397 2.088 1.796 1.662

A B C D E F G

• EPC A

• EPC B

• EPC F

• EPC G


29 |

The map confirms EPC A is predominantly urban. EPC A is new housing which is needed in urban rather

than rural areas, if not in inner city areas such as Frederiksberg where building lots are scarce, then in

proximity to inner city areas.

We have already established EPC A housing to be expensive on average from being new. Being urban

does not make EPC A housing less expensive. On the contrary, EPC A housing is predominantly found

at prices of more than DKK 2m. Notably, very few EPC A houses are available at prices less than 1m.

This is not a surprise as construction costs of a new house are typically around DKK 2m or more. EPC

A is simply not affordable to everyone.

Note: Number of EPC A properties by market value range


The map confirms some EPC Gs are found in inner city areas where the building mass is mature at age.

Yet, the map points to rural areas as the primary location for EPC G housing.

Some rural areas suffer from the effects of urbanisation causing jobs and inhabitants to leave. Against

this backdrop, construction activity is low and the building mass ages every day. Market values for

housing come under pressure.

This is contrasted by EPC G properties in inner city areas such as Frederiksberg remaining in strong

demand and attaining high market prices when put up for sale. EPC G is therefore found at both ends

of the market value spectre.

Note: Number of EPC A properties by market value range


EPC G housing located in rural areas attaining low market prices if put up for sale is a real challenge.

Most likely, improvements in energy efficiency will not be near fully rewarded by higher market prices,

74 467

5909

1718

280 526

-1m 1m-2m 2m-5m 5m-8- 8m-10- 10m-

1321

1800 1837

454

88 151

-1m 1m-2m 2m-5m 5m-8- 8m-10- 10m-


30 |

simply because the local market cannot carry such a high price, and will pay-off only long-term in terms

on savings on heating costs. When not rewarded by higher market prices, improvements in energy

efficiency are difficult to finance as no collateral is available.

Heating the mortgage book

Next we turn to the heating of our mortgage book properties. For this section of the report, we consider

residential property only for which information on the EPC is available.

Source of heating is a key determinant of greenhouse gas emission levels. For an averaged sized

dwelling rated at C or D on the EPC scale, emissions vary from 0kg to 5,600kg of greenhouse gas

emissions per annum (CO2 equivalents) by source of heating

Note: Emissions in kg per annum for heating

Source: Bolius

Our mortgage book properties are heated by district heating predominantly at 67.3 percent by debt

outstanding. Earlier we mapped the district heating across Denmark to show high coverage in urban

areas where the great part of mortgage book properties are situated.

Renewable at 1.1 percent of debt outstanding includes heating sourced directly in renewables only. In

addition, nearly 70 percent of district heating is sourced in renewables.

Heat pumps are at 2.9 percent of debt outstanding includes properties where heat pumps are the pri-

mary source of heat. In addition, heat pumps are often installed secondary to oil burners or other burn-

ers.

Natural gas at 7.6 percent of debt outstanding is below Denmark average.

Electricity powered radiators at 2.8 percent of debt outstanding include heating powered by electricity

other than heat pumps.

Oil burners at 1.9 percent of debt outstanding is way below Denmark average. A probable reason may

be that the next category »burners other than oil« at 16.3 percent includes a substantial number of oil

burners and natural gas burners as well as this category comes without details on fuel sources actually

applied. At the one end of the spectre, the fuel source may be biomass and at the other end, coal. At

this stage, we do not know.

0

1700 1700

3800

5300 5600

Renewable District heating Heat pump Natural gas Electricity poweredradiator

Oil burner


31 |

Note: Outstanding debt to residential in DKKbn

Source: e.nettet and Realkredit Danmark

Next we plot the source of heating against the EPC knowing well the EPC factors in the source of heating.

Consequently, we should expect low emission sources of heating to go hand-in-hand with high EPCs.

First we turn to high performing properties with an EPC A or B. For these properties, we find a greater

than average concentration on district heating, heat pumps and renewables which are all low emission

heating sources. We also find a fair share of properties heated by burners at DKK 5.9bn. We expect

these to be based on biomass or natural gas predominantly, but again we do not know. Properties

heated by oil burners, on the other hand, are far between.



Next we turn to the mid-performing category with an EPC C, D or E. For these properties, district heating

remains the preferred source of heating, yet we do also find more properties heated by fossil fuels

predominantly gas and non-oil.



3,3

204,9

8,7 23,2 8,6 5,849,7

Renewable District heating Heat pump Natural gas Electricitypoweredradiator

Oil burner Burner, otherthan oil

1,1

42,0

6,3 2,4 0,6 0,15,9



1,6

153,3

2,218,7 3,2 3,4

38,1




32 |

Finally we turn to properties with an EPC F or G. For this group of properties, we find more high emission

energy sources than the mortgage book average. These include electricity powered radiators, oil burn-

ers and other burners which are all above the mortgage book average. District heating only provides

37.8 percent of energy for this group of properties to reflect this group hosts a fair share of rural housing.

Other low emission energy sources such as renewable energy sources and heat pumps are far be-

tween. These numbers suggest one way to transition from high emission to low emission energy

sources would be to replace electricity powered radiators with heat pumps.



Numbers available confirm our expectations that energy efficient housing runs on low emission energy

sources predominantly whereas energy inefficient housing tends be heated by energy sources with a

higher emission intensity. Obviously, this is an imperfect mix.

From this we may draw the lesson that further investments in bringing low EPC housing up the EPC

scale and further investments in replacing high emission energy sources by low ones hold the potential

to significantly cut greenhouse gas emissions in particular if directed to the group of properties with poor

performance on both dimensions.

GHG footprint for specific exposures

Next we turn to exposures in industries known for greenhouse gas emissions.

Danish Central Bank Nationalbanken has indexed greenhouse gas emission for specific industries

against the energy industry singling out agriculture and logistics as high emission industries whereas

manufacturing has already transitioned to low emission production. Here, we focus on energy and ag-

riculture, omitting logistics as emissions from this industry are not linked to the property we mortgage.

Note: Greenhouse gas emissions to value of production index, energy equals 100

Source: Statistics Denmark and the Danish Central Bank

0,6

9,5

0,22,1

4,8

2,3

5,7



10069 56

4 1 1

Energy Agriculture Logistics Manufacturing Housing Service and trade


33 |

Utilities

Our mortgage book exposures to utilities and related activities stood at DKK 4.4bn end third quarter

2019. Of these, DKK 808m finance windmills and DKK 267m finance district heating based on renewable

energy, marked green in below chart. Further, DKK 2,204m finance distribution of electricity sourced in

both renewable energy and fossil fuels and DKK 61m finance district heating running on a mix of bio-

mass and fossil fuels, marked yellow. The remaining DKK 985m finance production and distribution

sourced in fossil fuels, marked red.

District heating and electricity production based on fossil fuels financed by Realkredit Danmark are

scheduled for transition to renewable energy sources by no later than 2030. Since 2018, Realkredit

Danmark has pursued policy not to underwrite companies with more than 30 percent of revenues from

coal-fired power generation and oil from tar sands.


Agriculture

Mortgage book exposures to agriculture stood at DKK 37.2bn end third quarter 2019. The mortgage

book is concentrated on crops, pork, and dairy at 46 percent, 25 percent and 19 percent of book value,

respectively.


DKK37.2bn Crops 46%

Dairy and beef 19%

Pork 25%

Poultry 1%

Mixed 5% Other 4%

DKK4.4bn

Electricity production, renewable energy19%

District heating, renewable energy6%

Electricity trading, renewable energy0%

Distribution of electriciy51%

District heating, mixed1%

District heating, fossil fuels8%

Electricity production, fossil fuels7%

Distribution of gas8%


34 |

The intensity of greenhouse gas emissions vary greatly across production branches. For each kg of

food produced, embedded emissions vary from 0.2kg to 13.9kg with potatoes and beef marking the

lower and upper limit, respectively.

Note: greenhouse gas emission in kg (CO2-equivalents) per food in kg produced

Source: University of Aarhus

The Realkredit Danmark mortgage book shows high concentration on production branches for which

greenhouse gas emissions are low. To this end, we notice the category dairy and beef is dairy predom-

inantly.

13,9

4,63,2

1,0

8,810,6

0,5 0,2 0,8 0,9

Beef Pork Poultry Milk Cheese Butter Lettuce Potatoes Bread Cereals

Meat Dairy Crops


35 |

How to assist our customers in their green transition

In this section, we discuss how we best can assist our customers in their green transition and thereby

Denmark’s transition We believe our primary role is to support our customers by providing the needed

finance and thereby enable them to invest in their green transition. As an organisation we need to

minimise our direct environmental footprint, yet our main contribution to combating climate change lies

in assisting our customers.

The first green covered bonds to see the Danish market

In April 2019, we launched the first green covered bond to see the Danish market. We launched green

covered bonds to establish a link between borrowers wanting to build green and bondholders wanting

to invest green.

We issue green covered bonds to finance green properties, green investments in energy-efficiency in

properties, green utilities, and renewable energy only.

Green properties Green utilities Renewable energy

We define green properties by an

EPC at A or B or equivalent or

otherwise determined to be top

15 percent

We define green utilities by facil-

ities to transmit and distribute

renewable energy

We define renewable energy to

include wind, solar, geothermal,

biofuel etc.

We define green investments in

energy-efficiency by improve-

ments of at least 30 percent to

baseline

Source: Danske Bank Group green bond framework available at rd.dk/investor

We apply these criteria to give investors assurance that issuing proceeds are used for green purposes

only. Having this assurance, investors are willing to pay a premium in terms of lower interest rates which

we pass on to the borrowers. Consequently, mortgages with green covered bond financing come with

a financial benefit, though minor.


36 |

Green bonds are on a growth path. Climate Bond Initiative estimates worldwide issuance at USD 165bn

for 2018. Of these, USD 52bn were issued by financial institutions, USD 47bn were issued by non-

financial corporates, whereas the remaining USD 28bn were issued by regional or local governments or

supra-nationals. Yet, green bonds remain in their infancy with volumes at only 0.1 percent of total debts

worldwide.

We issue green covered bonds to finance large exposure mortgages only. We apply strict screening

procedures to ensure only green mortgages are financed by green covered bonds which would be

difficult and prone-to-risk to implement for retail exposures. Further, green covered bonds are some-

what at odds with the Danish mortgage financing model, see next section.

Since launch, we have issued green covered bonds worth DKK 815m. Further, we have green covered

bonds ready for issuance worth an additional DKK 1,247m. We have issued green covered bonds to

finance green properties and renewable energy, in particular. We expect issuance to accelerate in 2020.

Green properties Green utilities Renewable energy

Note: Numbers in DKKm

Green certificates as a viable alternative

Green covered bond financing is not without frictions. Green covered bond financing is at odds with the

Danish mortgage financing model whereby mortgages are pass-through financed in covered bonds until

the mortgage matures or is refinanced. For green covered bond financing to work in practice, the issuing

financial institution must be able to (1) include in the green covered bond register mortgages once es-

tablished they are green and, importantly, (2) exclude mortgages which fade from green over time as

criteria are tightened. To the latter point, bear in mind standard mortgage lifetime is 30 year and even

the greenest mortgage today, we expect, will not be considered green in thirty years from now. Yet,

including and excluding mortgages from the green covered bond register is at odds with the fixed link

between mortgage assets and covered bond liabilities implied by pass-through financing.

A workable solution has been outlined by the Danish Central Bank in December 2019 proposing to

issue green certificates which when combined with public debt issued by Central Bank constitute a

green bond ISIN-by-ISIN. The principle may be outlined as:

800

Disbused Approved

155

Disbused Approved

660

447

Disbused Approved


37 |

Source: Danish Central Bank

The green certificates model further remains neutral to market liquidity. Green covered bond issuance

is at risk of a loss of market liquidity from the split of issuance into conventional and green covered

bonds. This drawback to green financing is fully mitigated with the green certificates model only a single

set of bonds being issued.

With the model and our mortgage book as is, Realkredit Danmark would be able to issue green certifi-

cates to the tune of DKK 70bn under our current Green Bond Framework which we expect will meet the

EU green bond standard. In doing so, we could potentially foster a large market for green covered bonds

on an internal scale.

We will observe investor reactions to the green certificates model carefully going forward.

Financing improvements in energy efficiency

The launch of green covered bond is a spearhead initiative to provide customers with financing for

green initiatives within housing, distribution and transmission of energy, and renewable energy extrac-

tion. In scope for green covered bond financing is the greenest of properties only. We have defined

eligibility by EPC A or B or equivalent which leaves out of scope eight in ten properties.

The eight in ten properties left out of scope, today emit far more greenhouse gases and, consequently,

these properties hold the greatest potential for reductions in emissions going forward. We find it im-

portant to broaden the scope of our efforts to assist also customers residing in EPC B and lower housing

in their green transition.

On 10 February, we launched our initiative to finance improvements in energy efficiency on favourable

terms. With this initiative, we waive all transactions costs worth DKK 7,400 when underwriting a mort-

gage for which the purpose is to finance energy improvements in housing.

Green bond

Financial obligation

Funds

Conventional bond Green certificate

Green obligation

Funds

= +

Investor Investor Investor

The Kingdom of Denmark The Kingdom of Denmark The Kingdom of Denmark

Investment


38 |

We define energy improvements by the same definitions shortlisted for tax deductibility7. These im-

provements include:

Source : Realkredit Danmark

We further define purpose by at least 50 percent of mortgage proceeds be invested in eligible improve-

ments in energy efficiency.

We extend the scope of eligible improvements beyond the definitions of the EU taxonomy. Notably, with

the initiative we finance improvements which do not reach the 30 percent thresholds for improvements

in baseline energy efficiency stipulated in the EU taxonomy. Consequently, mortgages coming out of

this initiative will not qualify as green and cannot be marketed as such.

We apply these criteria for the reasons of 30 percent improvements in baseline energy efficiency can

be difficult to get at and may extend beyond what is economically reasonable. Further, in real-life, it can

prove challenging to measure the energy effect and follow up on the investment as a mortgage lender.

With the initiative we want to assist our customers also in less than 30 percent improvements in energy

efficient. Every improvement counts.

The improvements which we support are by no means without effect. Calculations by Danish Ministry

on Climate, Energy and Utilities suggest savings in greenhouse gas emissions from insulating a house

of 120 m2 at 4,900 kilos per annum and savings in emissions from expanding insulation from 50mm to

250mm for same size house at 1,000 kilos per annum8. Further examples from the Danish Energy

Agency show a reduction in emissions at 1,100 kilos per annum from replacing an old gas boiler by a

new condensing gas boiler, a reduction at 1,000 kilos per annum from investing in a ventilation system

with heat recovery, a reduction at 400 kilos per annum from replacing old windows by new low energy

7 See https://skat.dk/skat.aspx?oid=2234759 8 See https://www.bolius.dk/saadan-nedsaetter-du-co2-udslip-fra-dit-hjem-16364

Insulation of roof

Replacement of exterior doors and windows

Repair and improvement of chimneys

Insulation of exterior walls

Insulation of floors Installation or replacement of heating facility

Work on solar panels and wind mills

Repair or replacement of gas burners

Dismantling of wood burners

Repair or replacement of district heating units, heat pumps, geothermal heat units etc.


39 |

windows and finally a reduction at 500 kilos per annum from investing in solar heating for producing hot

water9.

Note: Savings in kWh per annum for a 140m2 sized detached house

Source: https://svk.teknologisk.dk/PDF/standardværdikatalog%208.2.pdf

The initiative to finance improvements in energy efficiency will contribute to lower greenhouse gas emis-

sions from households. By how much will depend on the customer appetite for our initiative, the sort of

energy investments made, and the source of heating.

9 See https://sparenergi.dk/sites/forbruger.dk/files/contents/publication/guide-til-energirenovering/energirenovering-af-

huse-2019.pdf

0 10.000 20.000 30.000

Oil boiler from before 1978 is replaced by heat pump

Non-condensing oil boiler from 1978 or newer is replaced…

Exterior post insulation of uninsulated full wall / timber to at…

Condensing gas or oil boiler is replaced by heat pump

Post-insulation of concrete basement wall in heated…

From oil boiler before 1978 to district heating

Internal post-insulation of uninsulated full wall / timber for at…

From electric heating to district heating

Oil boiler from before 1978 is replaced by condensing gas…

From non-condensing gas or oil boiler from 1978 or newer…

Exterior post insulation of exterior walls erected before 1972

Wooden pellet boiler or solid fuel boiler from before 2010 is…

Wooden pellet boiler or solid fuel boiler from 2010 or later…

Replacement of non-condensing gas boiler with gas blower…

Post-insulation of deck over crawl cellar, from 0-20 mm to…

Exterior post insulation of concrete elements from 1972-…

Internal post insulation of insulated cavity walls, at least 45…

Post-insulation of terrain tires, from 0-20 mm to at least…

Oil boiler from 1978 or newer is replaced by condensing…

Exterior post insulation of insulated exterior walls erected…

Post-insulation of deck over unheated basement. From 0-20…

Establishment of mechanical ventilation with heat recovery,…

Condensing gas or oil boiler is replaced by district heating

Replacement of windows for A-windows, an estimated 10…

Post insulation in the ceiling, from 50-95 mm to a further at…

Solar heating system for domestic water and space heating,…

Post-insulation of basement floor in heated basement, from…

Post-insulation of terrain tires, from 25-45 mm to at least…

Solar water heating system, 4m2

Replacement of old heat pump

Replacement of district heating installation from before…

Weather compensation for radiator systems

From 1-strand radiator to 2-string

https://svk.teknologisk.dk/PDF/standardværdikatalog%208.2.pdf


40 |

The average reduction in energy consumption from moving a notch up the EPC scale is around 7,450

kWh for the poor part of EPCs below C and at an average size of 140 m2. The Danish Energy Agency

estimates cost at DKK 300,000 to 500,000 for improve an average house from energy label G to C. This

corresponds to an investment of DKK 75,000 to 125,000 per notch.

In real life, it proves difficult to improve the EPC more than two notches within what is economically

reasonable for the reasons of marginal costs going up as further improvements are made. We have not

come across a rule-of-thumb to this end, but from anecdotal evidence we estimate the first notch im-

provement to be attainable at cost of DKK 50,000 to 100,000 This is broadly in line with the assessment

from the Danish Energy Agency when taking into account the wide range of EPCs they consider for their

calculation.

A reduction of 7,450 kWh implies a reduction in greenhouse gas emissions of 1,500 kilos per annum if

heated by a natural gas burner and around 500 kilos per annum if heated by district heating. Consider-

ing the above factors, we can roughly estimate that for each DKK million underwritten for the purpose

of improving energy efficiency the result is an implied reduction in greenhouse gas emissions of around

6,5 to 30 tons per annum.

Underwriting climate-related risk

While climate-change may offer possibilities to offer new products and services, climate-change will

also pose a risk to most if not all parts of society in the medium-term to long-term.

Risks related to climate-change are complex. The TCFD recommendations distinguish between transi-

tion risk and physical risks, warning organisations not to devote all their attention to long-term physical

risks, which may prove difficult to respond to here and now, and miss out on short-term transition risks,

which may be far more imminent.

In the same line of thinking, the Network for Greening the Financial System (NGFS) has developed a

scenario matrix which may serve as an overall framework for analysis of climate-related risks.

Source: ngfs.net

Disorderly Sudden and unanticipated response is dis-ruptive but sufficient to meet climate tar-gets

Too little, too late We do not do enough to meet climate tar-gets, the presence of physical risks spurs a disorderly transition

Orderly We start reducing emissions now in a measured way to meet climate targets

Hot house world We continue to increase emissions, doing very little, if anything, to avert the physical risks

Strength of response

Climate targets are met Climate targets are not met

Tra

ns

itio

n r

isks

Physical risks

Tra

ns

ition

pa

thw

ay

Ord

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Diso

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Having the TCFD and NGFS in mind, we need a broad scope to approach and handle climate-related

risks properly. We need to think both short-term and long-term and we need to think of both direct and

indirect implications from climate change.

With the public and political attention drawn to the agenda, climate-change has grown into a major

market force with the potential to influence behaviour and demand and disrupt markets faster and more

profoundly than otherwise observed. Indirect implications from climate-change may stretch far beyond

and materialise much earlier than direct implications.

This holds true for property markets as well. Property markets will factor in the economic value of the

direct implications of climate-change such as flood risk in coastline and low lying areas and the eco-

nomic value of climate taxes, but even greater implications are likely from changes in market demand

and behaviour. Energy inefficient housing may see less demand simply because Danes, compelled to

act on climate-change, do not want to live there. The same may hold true to housing heated by an oil

burner, though average on energy efficiency, or for housing located outside the public transportation

grid whereby future owners will need to transport themselves by car to get to their workplace. The thirty

year duration of a standard mortgage only adds to the complexity. With the momentum currently ob-

served for the climate-change agenda and with the development in technology, we simply do not know

the state of property markets in thirty years.

Yet, underwriting climate-related risks is part of our everyday business. When we underwrite a mort-

gage, we also underwrite the associated climate-related risk. Our capacity to underwrite risk is limited.

Too much risk may bring us to the point where we cannot continue our operations and fulfil our role in

society. Society, our customers, and we have a joint interest in risks be managed properly and this

pertains to climate-related risks also.

Like other risks, we should respond to climate-related risks proportionately. At the one end of the scale,

it would be disproportionate to simply ignore climate-related risks. In doing so, we would fail society’s

expectations and bring our customers and ourselves at great risk from acting too late. At the other end

of the scale, it would prove equally disproportionate to shy away from all economic activities which are

not purely green. In doing so, we would fail to meet customer needs for mortgage finance on a broad

scale and help only the few in becoming green and sustainable. In essence, we have to find the middle

ground. Having the TCFD and the NGFS in mind again, the greatest risk is most likely to do too little.

Underwriting energy inefficient properties

First, we zoom in on risks from underwriting energy inefficient properties.

In due time, we expect energy inefficient properties to be in a less demand and be priced with a discount

to energy efficient properties of same size, quality, and location from higher green taxes and from mar-

ket aversion towards energy inefficiency and implied greenhouse gas emissions, in general. We further

expect the price gap to grow over time. Both contributing factors point to this direction.

A property seeing less demand and pricing at a discount is a risk to the property owner as well as to us

as a mortgage lender. The property owner suffers a capital loss if putting the property up for sale. We

suffer a loss if the property owner fails to pay the mortgage. As the effects grow over time the risk grows,

but so does the incentive to improve energy efficiency and bring the property up to market standard.


42 |

The investment need varies greatly. If available, the EPC will provide an expert assessment of invest-

ments needed to improve energy efficiency and the cost implied. Generally, on a rule of thumb basis,

improving a detached house of average size from EPC G to EPC E will cost around DKK 100,000 to

200,000. Improvements beyond two notches on the EPC scale are difficult to achieve.

Underwriting responsibly, we will further integrate energy efficiency into our customer advisory and

underwriting procedures. In general, we will encourage customers to improve the standard of below

standard energy efficient property. In some instances, we will condition our underwriting on improve-

ments in energy efficiency be made.

Source. Realkredit Danmark

In doing so, we aim to mitigate both customer and our risk and, at the same time, to reduce the green-

house gas emissions through higher energy efficiency. These aims go hand-in-hand.

We will be challenged on our approach when underwriting in areas where market values are low even

for energy efficient properties. Here, the market value will often not be able to support the cost from

improving energy efficiency in full. Consequently, we cannot encourage the customer to undertake the

improvements in energy efficiency from an economic perspective and we cannot offer to finance the

improvements as no collateral will be available. Bottom line, investments may depend on homeowner

savings or non-secured lending.

Underwriting GHG emitting industries

Greenhouse gas emitting industries are exposed to elevated risks from the risk of green disruptions,

green taxes, and market aversion towards the products or services delivered.

We do not underwrite corporates with 30 percent or more of the revenue be sourced in coal-fired power

generation and oil from tar sands.

We will continue to underwrite agriculture as the industry remains low on emissions when compared to

industries in peer nations. Emission intensity vary greatly between the different branches of agriculture

with beef production at top and crops at the bottom. Going forward, we want to support the industry in

further reductions in emission.

Having emission intensity in mind, we will continue to underwrite crop, pork, and dairy, primarily.

We have only limited exposure to greenhouse gas emitting logistics and manufacturing.

Underwriting with encouragement

Contingent underwriting

Refusal

We encourage to improve energy efficiency

We condition underwriting upon improvements in energy efficiency be made

We refuse to underwrite


43 |

Underwriting flood risk

Operating in Denmark, we are exposed to flood risk from rising sea levels and from extreme weather.

So far, we have seen local floods with little economic impact only, yet with current predictions for future

sea levels and weather conditions, the flood risk will become real for a great part of Denmark. Bear in

mind, most cities in Denmark are located in proximity to water.

Safeguarding property pledged as collateral for a mortgage from floods remains the responsibility of the

property owner. In our capacity as a mortgage lender we have a strong interest in helping the property

owner in meeting this responsibility. If the property owner fails at the responsibility to safeguard the

property from floods or other damages we may suffer losses as well.

The long-term scale of flood risk calls for climate change adaptations beyond what each property owner

can do on an individual basis. The below map plots properties pledged as collateral for a mortgage with

a financial institution operating in Denmark by risk of floods at sea levels and weather conditions pre-

dicted for the year 2100.

Source: Danish Central Bank

We have time to act to mitigate the risk of floods. Plans for climate-change adaptation to stem the risk

of floods are in the making. Likely, plans will point to the need for substantial investments at the ex-

pense, directly or indirectly, of property owners. Likely, expenses will be factored into property market

values way before flood risk actually materialises. Consequently, flood risk is something we need to

look at already when underwriting a mortgage today. Underwriting responsibly, we need to ensure the

proper headroom for future investments to stem flood risk.

Collateral prone to flood risk

Collateral safe from flood risk

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