Transition Risks and Opportunities in Residential Mortgages
26 Pages Posted: 6 Nov 2020
Date Written: October 2020
A range of studies has analysed how climate-related risks can impact financial markets, focusing on equity and corporate bond holdings. This article takes a closer look at transition risks and opportunities in residential mortgages. Mortgage loans are important from a financial perspective due to their large share in banks’ assets and their long credit lifetime, and from a climate perspective due to their large share in fossil fuel consumption. The analysis combines data on the energy-performance of buildings with financial data on mortgages for Germany and identifies two risk drivers – a carbon price and a performance standard. The scenario analysis shows that expected credit loss can be substantially higher for a “brown” portfolio compared to a “green” portfolio. Taking climate policy into account in risk management and strategy can reduce the transition risk and open up new lending opportunities. Financial regulation can promote such behaviour.
Keywords: Mortgages, residential buildings, carbon risks, transition risks, valuation, climate policy scenarios, policy and regulation
JEL Classification: G21,Q48,Q56,Q58,R38
Suggested Citation: Suggested Citation