Carbon Efficiency: A Lender’s Imperative in an ESG-Driven World

Investment portfolio carbon measurement has become a critical focus for lenders aiming to de-risk and align with global sustainability goals. 

By making smarter, greener investments, lenders can better protect their money and support the shift to a low-carbon economy. 

As the financial landscape evolves, reducing carbon emissions has become a vital priority for lenders managing profits, risks, and regulatory expectations. With Environmental, Social, and Governance (ESG) considerations no longer a peripheral concern but a core expectation, the lending industry stands at a crossroads. Investors, regulators, and borrowers alike are amplifying the call for sustainability, and carbon efficiency - measuring and minimising emissions tied to financed activities - has become a critical metric. When viewed through the lens of Basel III.1 standards, this shift takes on added urgency, offering a roadmap for integrating climate-related risks into banking practices. This isn’t just about compliance; it’s about redefining lending for a low-carbon future.

Why carbon efficiency matters

At its core, carbon efficiency reflects how effectively a borrower mitigates emissions across operations, from direct outputs (Scope 1) to energy use (Scope 2) and the broader value chain (Scope 3). For lenders, this isn’t an abstract environmental concern—it’s a financial one. Every loan carries a carbon footprint, and that footprint increasingly influences risk profiles and portfolio resilience. Data underscores the stakes: Morgan Stanley reports that 77% of investors now prioritise funds blending financial returns with environmental impact. Lenders who overlook carbon efficiency risk alienating this growing capital pool while exposing themselves to borrowers vulnerable to climate-driven disruptions - be it regulatory shifts, physical risks like extreme weather, or transition risks as industries pivot to renewables.

The ESG imperative

ESG compliance amplifies this dynamic, placing carbon efficiency at the heart of the “E” pillar. Lenders face mounting pressure to disclose the emissions tied to their financing activities, spurred by frameworks like the Corporate Sustainability Reporting Directive (CSRD) and the IFRS S1 and S2 standards. Yet, it’s the banking-specific lens of Basel III.1 that bridges this global push to actionable practice. While not explicitly mandating carbon efficiency metrics, Basel III.1’s focus on capital adequacy, risk management, and transparency aligns seamlessly with the need to address climate risks. The Basel Committee’s 2022 principles on climate risk management and supervision signal a clear direction: financial institutions must weave environmental factors into their governance and decision-making processes.

The risks of overlooking ESG factors

Lenders need to ensure their mortgage portfolios are not only financially sound but also resilient to climate risks. Properties with high carbon footprints, energy inefficiencies, and exposure to climate-related hazards pose significant risks to mortgage security and long-term asset values. 

Failing to assess and mitigate these risks can lead to: 

• Falling Property Values – Homes with poor energy efficiency (e.g., low EPC ratings) may become harder to sell or mortgage as buyers and regulators prioritise greener properties. 

• Regulatory Fines & Costs – Governments are tightening energy efficiency laws, meaning lenders could be penalised for financing inefficient homes. 

• Higher Default Risks – Owners of high-emission homes may struggle with rising energy costs, increasing the risk of missed mortgage payments. 

• Reputational Damage – Investors and customers expect sustainable finance; failing to act could harm a lender’s brand and ESG commitments. 

Some of the lenders are actively integrating EPC ratings into their mortgage affordability assessments. For example: 

• Halifax offers larger loans for properties with high EPC ratings (A or B), reflecting lower energy costs for borrowers. 

• Green mortgages provide incentives like lower interest rates or cashback for purchasing or retrofitting energy-efficient homes. 

Conversely, properties with poor EPC ratings (F or G) may face reduced borrowing limits or higher costs. 

Given that much of the UK housing stock is older and less energy-efficient, lenders are focusing on retrofitting initiatives: 

• Virgin Money’s Retrofit Boost Mortgage specifically targets older homes by offering significant cashback incentives for upgrades like solar panels and insulation. 

• Santander provides tailored EnergyFact reports to help homeowners identify cost-effective improvements and reduce carbon emissions. 

According to the Royal Institution of Chartered Surveyors, 60% of estate agents in the UK believe that homes with higher EPC ratings are holding their value in the current housing market.

According to our analysis, energy-efficient properties (rated A-C) are: 

• 4.7% less likely to have their asking prices reduced than non-energy efficient properties 

• have prices that are rising by 2.6% per annum, whereas non-energy efficient properties have falling prices. The delta is 3.2%. 

• achieve more of their initial asking price; using averages, this equates to just over £1,000.
  

How TwentyCi’s EcoVal360™ Reports Help Lenders Improve Portfolio Carbon Efficiency

Our reports offer an innovative way for lenders to assess and manage climate-related risks while improving the carbon efficiency of their investment portfolios. 

1. Climate Risk Exposure AnalysisEcoVal360™ provides insights into:

• Flooding, heat stress, and subsidence risks, which can impact long-term mortgage security. 

• Energy performance concerns, identifying properties that may need efficiency upgrades to comply with green lending standards. 

• Projected risks up to 2090, enabling proactive decision-making for long-term portfolio resilience. 

2. Data-Driven Decision-Making 

Unlike traditional postcode-based risk assessments, EcoVal360™ uses polygon search technology to deliver property-specific climate risk insights. This high level of accuracy allows lenders to: 

• Differentiate between high-risk and low-risk assets. 

• Adjust lending terms based on precise property risk exposure. 

• Encourage energy-efficient property investments to improve carbon efficiency. 

3. Regulatory Compliance & ESG Alignment

With growing regulatory pressure on financial institutions to disclose and mitigate climate-related risks, EcoVal360™ supports compliance with: 

• TCFD (Task Force on Climate-Related Financial Disclosures) 

• Green lending frameworks 

• UK government sustainability targets 

By integrating EcoVal360™ Reports into portfolio risk assessment strategies, lenders can ensure they are aligned with evolving regulations while positioning themselves as responsible, forward-thinking financial institutions. 

As climate risks intensify, proactive carbon efficiency management is no longer optional - it’s essential. EcoVal360™ Reports provide the clarity and foresight lenders need to mitigate risks, protect asset values, and comply with sustainability mandates. 

Find out more here.