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The potential for green equity release was a key focus of a plenary session at  the UK’s Equity Release Summit held on 16 May, which explored how this concept can present innovative solutions to critical social challenges.

The panel consisted of expert speakers such as Hansen Lu, Senior Economist, Aviva; Jack Wilkinson Dix, Policy Manager, Energy Saving Trust; Thomas Kenny, Pricing and Underwriting Director, Just Group plc; and Karl Reilly, Heat in Buildings Future Finance Team Leader, Heat & Energy Efficient Scotland. 

The chair of the panel, Emma Harvey, Programme Director at the Green Finance Institute (GFI), introduced Zelda Bentham to deliver the keynote address.

Zelda Bentham, Group Head of Sustainability at Aviva as the main sponsor of the event, remarked: “The phrase ‘An Englishman’s home is his castle’ suggests that our homes are a place of comfort and refuge. During the pandemic, people have again fallen in love with the security and utilitarian aspects that a home provides. Like businesses, retirement offerings are in a unique place in the economy, providing a social service for people as they retire, die, get sick or even in the event of a float. There isn’t another industry that does that – banks are restricted in their focus and governments are increasingly looking to the private sector to own responsibilities in these areas. At Aviva, we have always taken our responsibility to society seriously, but the reality of the threat of climate change has mandated that this become a strategic issue for us as a company, as it should do for all companies.” 

She noted that Aviva announced its ambition to become carbon net zero by 2040 two years ago – not only for their direct emissions but also those contributed by their suppliers, investees, shareholders and customers, and emissions attributed to Aviva as a general insurance underwriter, insuring homes and businesses. 

“Our focus is to help support the transition to a zero carbon future. Success will depend on new technologies and innovations. It will require partnerships and new ways of working. It will take science and technology, government, industry and society, all pulling in the same direction. We currently insure 1 in 12 homes whilst also providing cover for a good proportion of home builders and housing developers,” she emphasised, adding that Aviva currently does not charge an additional premium for insuring residential onsite renewable generation technology such as solar power and ground and solar heat pumps. 

“We don’t want insurance to be a barrier to climate transition so we are working with the construction sector to ensure that we can provide cover for projects that employ mass timber construction, net zero concrete and further sustainable technologies. To help our customers further we have recently kicked off a pilot project incentivising sustainable living to help people become more confident in transitioning to a more sustainable lifestyle,” she elaborated.

She further stressed that through the investment arm of Aviva Investors, they invest in the construction and maintenance of social housing, including investing £ 360 million in social housing providers in 2022 while in 2023 they made a £ 170 million investment in the UK smart meters sector. 

A pioneering investment she brought to light was TopHat, a modular housing company where Aviva’s April funding would go towards building Europe’s largest modular housing factor in Corby and creating 1,000 jobs with the factory that is anticipated to be up and running by next summer and will be capable of manufacturing 4,000 ultra low homes a year. She averred that a TopHat home emits 88% less carbon than a traditional home of the same size, meaning that, with this investment, Aviva is not only building homes but building the future. 

“As a provider of equity release contracts we see a huge value in enhancing the value of equity release propositions while providing sustainability and helping customers live well in their homes for longer,” she concluded.

Emma Harvey, Programme Director at the Green Finance Institute, noted as chair of the panel that the climate crisis is unfolding around us, with all of the research coming out of the UK Climate Change Committee (CCC) and the IPCC and other scientific bodies, indicating that the world is headed towards a 1.5° plus scenario.

“Housing and our buildings in the UK are one of the largest contributors towards greenhouse gas emissions. Our buildings are responsible for 25% of the total emissions and homes contribute to three-quarters of that, and that is mostly because of heating and powering them. The UK CCC has estimated that £360 bn investment is needed to decarbonise all of our buildings till 2050, £ 250 bn of which is needed to decarbonise our homes. Some have estimated that the investment could be three times higher,” she cautioned. She also mentioned the many barriers to decarbonising homes – the technology can be expensive with long payback periods, and it can doubtless be a real hassle to have tradespeople coming in to undertake all of these measures. “I would take this as a £ 250 bn opportunity. Today we are here to explore how green equity release can help to explore that challenge.” 

First up was Hansen Lu, Senior Economist, Aviva, who explained that “a green equity release mortgage is one that incentives the customer to make some kind of green or energy efficiency upgrades to their homes. One example can be a product with a part discount or favourable rate to put in new windows or insulation. It is important to mention that the scale of the issue in the UK residential housing stock is very large as it contributes roughly 17% of all emissions and is expected to be very expensive to deal with.” 

He soberingly remarked that these cost estimates vary from around £ 300 bn to fully green the housing stock, to those that are north of this figure. Looking at the housing stock itself, a third of houses are owner occupied and owned by people over 55, their primary target market. “Within that as well, there is £4-5 tn of potential. The industry is lending £23 bn over the last 5 years. A lot of the uses for the £23 bn are home upgrades, installing a new boiler or kitchen. It does not really take that big a leap of imagination to think they could perform green upgrades.”

He concluded on two points indicating why equity release might be a good source of green finance:

1 Equity release lends to people who have less cash availability – hence green equity release helps those wishing to make green upgrades but unable to do so;

2 Equity Release has access to customers, distribution networks, financial advisers – and as a result, the potential to tell them more about what is available. 

Next, Jack Wilkinson-Dix, Policy Manager at the Energy Saving Trust stated: “We were involved recently in a 5 year pilot with the Scottish Government, where we discovered that customers found green equity release really beneficial as it improved their well-being and lowered their energy costs. It has been published today in new research by Nester that looks at green finance products overall that there is a lot of interest in green equity. A third of the respondents in that study felt they would be interested in green equity release. Very crucially, a key finding of that research and our onsite pilot is that pairing it with a support network is really important. Having impartial expert advice and schemes that offer home assessment and quality controls on work, is a key enabler to move people towards accepting these products and making a real success of the retrofit afterwards.”

In terms of the gaps that equity release can plug, he noted that the target market is typically older home owners who have been living mortgage free, but the two areas they are really interested in are as follows:

1. Can it be used to unlock deeper and more expensive retrofit that other products with monthly repayments might fall short of?
2. What role can green equity release have in the priority home sector? 

Next on challenges, Thomas Kenny, Pricing and Underwriting Director, Just Group plc, noted: “The challenge is, since this is an advice proposition, to provide the tools that advisors need and the information tools to customers to actually help them understand the benefits to providing a green equity release mortgage. More importantly, we must make sure there is a process that helps customers with making challenging changes like hiring contractors to carry out the work and to validate the contributions these changes are making to the carbon emissions.”

He rued that consistency of approach is still not a feature that characterises the equity release market, as there are not many lenders requiring Energy Performance Certificates (EPCs) – only 40% of homes have EPCs – hence it is difficult to assess the impact being achieved. He emphasised the need for a consistent approach across the market on measuring the impact of equity release, and to see how far customers and advisors identify with that approach.

Here, Emma mentioned the GFI’s Green Finance Principles as a series of principles that financial products aiming to be green can base themselves on, with the fourth pillar of the principles being the need for reporting between the customer and the lender. She cautioned that the retail sector faces the challenge of not having the luxury of environmental advisors stepping in to assess the impact, and the measurement needs to be a lot more streamlined.

Hansen reflected on the challenges consumers face when trying to make green upgrades to their homes. “A green equity release upgrade needs to make it easy for the customer – it needs to have a very customer-focused view to the issues they face and to lower the barriers to them wanting to make these changes. A lot of obstacles are very challenging to tackle but are quite obvious. Customers are unsure about the impact green upgrades will have on their property, they don’t necessarily always trust the supplier or what they are saying about what the upgrade will do, and these challenges are making it difficult for customers to arrive at that decision. A lot of making a good, green equity release proposition is about putting in place measures that will remove these barriers,” he emphasised. 

The final speaker was Karl Reilly, Heat in Buildings Future Finance Team Leader, Heat & Energy Efficient Scotland, who noted: “In terms of the role of the Scottish government, the target is to get to net zero by 2045 and to make a significant impact over the next decade. In terms of domestic properties in Scotland, the cost to decarbonise is £ 27 bn and there are 1.2 mn homes where the homeowner has significant equity. Owner occupiers of older homes are 94% mortgage free so there is significant scope for equity release products to form part of the overall mix allowing people to invest in decarbonising their homes.”  

He next elaborated on lessons from a pilot exercise run across 8 council areas, that offered homeowners upto £40,000 pounds to invest in energy efficiency measures and renovations. The positive feedback was that people felt it was very successful in making their homes warmer, more comfortable and reducing dampness & mouldiness towards increasing well-being as well as achieving poverty reduction from more energy efficient homes. The negative feedback was that people are a bit daunted by both how to access equity release and whether it is right for them and what work is required to make their homes energy efficient – so having that clear support and guidance throughout the journey was one of the key lessons picked up on from the study.  

Emma thanked the speakers and opened the floor to audience questions. A key question came around guidance to resolve the conundrum that clients face when they pour money into energy efficient homes but lenders baulk at re-mortgaging these homes based on adverse survey reports of home improvements aspects such as spray painting in particular. Jack noted that we need to have strong redress in place, not on the mortgage lender side, but on the practitioner side if they are selling a product which means that the home cannot be re-mortgaged. 

Thomas added a note on the importance of reminding consumers that while there are opportunities to improve the energy efficiency of their homes they must approach lenders for advice and information around it, so lenders can signpost if certain home improvements might make their homes less attractive. 

On a query around how advisors can be expected to embrace the opportunity to support customers in greening their homes, Jack noted that it is interesting to ask a broader policy question as to where these advisors are going to be situated – in the banking, mortgage and insurance sectors, or in a more impartial, independent place? Karl added that advisors who currently advise on equity release are financial advisors but might not be equipped to give advice on green equity release in terms of installation. There isn’t a really clear direction for customers who wish to find out more, and as of now, it isn’t entirely appropriate for financial advisors to give such guidance, he rued.

Emma advised the audience that in partnership with the Equity Release Council, Energy Savings Trust, Mortgage Climate Action Group and Building Societies Association, among others, the GFI launched the Brokers Handbook on Green Home Technologies that provides information to equity release and mortgage advisors on green energy technologies – so when customers signal they wish to undertake green improvements in their homes, advisors are fully equipped.

On whether the EPC is fit for purpose, Jack echoed the industry view that there are significant issues with EPCs, with changes due to come in policy towards the end of summer. However, he posited that, more fundamentally, we need to think of alternative measures proposed by the climate change committee – Scotland is using kilowatt per metre square per year to measure the rate of energy loss from homes. “On EPC, the challenge is that we are trying to use a blunt instrument to do a lot of things and we need to properly transition to a suite of measures.” For his part, Thomas added that we need to separate energy consumption from carbon emissions because they are not necessarily the same. “I think if we really want to get the most impact from green finance we need to focus on solutions that have the biggest impact on carbon emissions rather than energy efficiency.”

On lessons or examples of international initiatives that we can draw from, Thomas noted interest rates as a major lever and illustrated this with an example of how the mainstream mortgage market is putting out green mortgages over the last couple of years and leading players such as Nationwide recently offered green mortgages where they are not charging interest over a limited tenure. 

Karl added that, in the business lending space, there are examples of companies that have been able to receive finance and get rebates for achieving certain ESG targets and goals – and that this could be replicated in the retail lending space. 

Emma noted that even apart from interest rates, it is possible to offer other incentives such as high borrower capacity. For borrowers almost at the limit of their borrowing capacity, some green mortgages take account of the fact they will have lower energy bills so they can borrow more. “On international examples, a great one is PACE – Property Assessed to Clean Energy finance – in the US which links the repayment obligation to the property rather than to the property owner. So there are some really exciting mechanisms in the market!”

Emma finally asked each panellist one parting question on what key piece of advice would they give to unlock the opportunity of green equity release.

Jack noted that it would be a mistake to underestimate that surrounding support of the structure that drives uptake and in wider cohorts, such as impartial advice and quality assurance from tradespeople. “We have done a lot of work with the climate change committee that looks at the one-stop-shop approach to offer an end-to-end wraparound service and if people are interested to see what looks good at international level, keep your eyes peeled for that one!,” he concluded.

Karl noted that people must be able to understand the products and get that information from trusted sources. He underscored that the Scottish government are keen to work with the ERC, UK government and others on how they could develop a consistent and coordinated framework to help customers.

Hansen added that it is crucial to think about the challenges that customers have and make the journey easy for them. He echoed that the prospect of an end-to-end approach sounds enticing and that it is well worth thinking about how to make that customer journey as seamless as possible.

Thomas added that, as an industry, there is a need to collaborate and come up with a common approach to some of these solutions so it can be easy for them in terms of consistency of approach in greening of homes. A number of discussions are already happening in the Equity Release Council to build a consensus and he requested those interested to volunteer their time and attention to these talks.

The Chair concluded that “we need to acknowledge the role of collaboration, put the customer at the centre and put support infrastructure around them – that way, green equity release can really achieve the heights it has the potential to.”