Is green the new normal? Understanding current sustainability practices in European residential property lending
Maria Holopainen, Anniina Saari, Seppo JunnilaPurpose
The article studies how environmental sustainability impacts lending processes and conditions in the European residential credit markets, shaping the current green lending (GL) practices.
Design/methodology/approach
This study adopts an abductive research process with five steps. First, preliminary data are collected through industry workshops and interviews. In the second phase, the initial findings are developed, with the help of supporting literature, into seven preliminary propositions. These are evaluated in the third phase by interviewing 25 representatives from European banks and real estate advisories. The fourth phase entails data analysis. The fifth phase consolidates the findings into four GL propositions.
Findings
The GL propositions suggest that sustainability is already integrated into property lending in Europe. However, only energy performance certificates (EPCs) and transition risks directly impact borrowers' creditworthiness. For green property loans, the criteria are mainly based on the EU Taxonomy mandated EPCs, with market-specific flexibility and varying effects on “green discounts”. Furthermore, banks tend to favour lending to new assets as they can more easily be included in their green loan books.
Practical implications
The study examines European banks' practices and motivations for “greenness”, revealing regulatory and financial misalignments. It also highlights cross-market differences in climate risk perceptions and green property loan criteria, offering valuable insights for practitioners and policymakers.
Originality/value
This study significantly contributes to real estate finance literature by qualitatively examining how sustainability shapes European residential property lending processes and conditions.