“Supporting and encouraging diversity, equity, and inclusivity in financial services should be a commitment made by all mortgage firms”
Once a niche concept, Environmental, Social, and Governance (ESG) considerations have become something of a central pillar for responsible business practices.
Indeed, ESG has more than proven its staying power, and continues to gather momentum. The mortgage sector in particular recognises that embracing ESG principles is of key strategic importance. But how exactly are we as an industry achieving this?
How is the mortgage industry dealing with environmental demand?
Arguably, the most discussed aspects of ESG are the environmental requirements. This was particularly poignant in April 2022, when the UK established that climate-related risks and issues must be reported by more than 1,300 of the largest British institutions and companies as part of the annual disclosure process. To tackle this head on, lenders and intermediary firms have been continually pushing the agenda of ‘green’ mortgages.
Approximately 23% of the UK’s greenhouse gas emissions are generated through insufficiently energy efficient housing stock. It’s up to banks, intermediaries, and the government to help address this situation.
The incentive behind green mortgages is to encourage customers to purchase properties with high EPC (Energy Performance Certificate) ratings (in bands A to C). There is also a push to incentivise customers to retrofit their existing homes through green remortgages, as 59% of homes in the UK are below the minimum target standard of C – which significantly contributes to the UK’s annual carbon emissions.
In 2018, the Bank of England released a whitepaper that stated that green mortgages could be a contributing factor in preventing mortgage payment arrears, as customers spend less on energy bills – leading to ‘higher disposable income’. These initiatives are imperative to helping homeowners be more sustainable both financially and environmentally, increasing the desirability of a more energy efficient property through incentivisation. It also enables the mortgage sector to become more closely aligned with climate goals, such as net zero.
In Rightmove’s Greener Homes Report 2023, it shows that 36% of the houses up for sale in Britain have an EPC rating of C or above, whilst 64% of the homes for sale in Britain have a rating of between D-G. These figures show that more needs to be done, and for now, the new build industry is paving the way.
According to data from the Department for Levelling Up, Housing & Communities, 86% of new build properties were given an A or B rating between April and June, 2023 (no change from 86% in the same quarter in 2022). Despite these improvements, the mortgage industry – and housing in general – needs to push these numbers up to meet ESG goals.
Social commitments of the mortgage and lending sector
A key element of the ‘social’ aspect of ESG centres on achieving a more diverse and inclusive workplace – one that meets the needs of all staff and customers. This is especially true in the mortgage space, as we deal with an array of unique financial journeys. Supporting and encouraging diversity, equity, and inclusivity in financial services should be a commitment made by all mortgage firms, fostering a working culture where everyone feels like they are treated fairly, respected, and valued.
While ongoing improvements will need to be made in this space, there have certainly been breakthroughs. More recently, this has included ‘Working in Mortgages’ – an initiative by the Association of Mortgage Intermediaries (AMI) put forward “in response to challenges laid down in their 2021 report into ‘Diversity, Inclusion and Equality in the Mortgage industry.”
Through the site, the founders hope to propel inclusivity and equity in the mortgage industry by sharing methods of recruitment, development suggestions, videos, and podcasts. This is just one example of how brokers are striving to deliver on social commitments, and it certainly goes without saying that taking steps to create a more diverse, open, and inclusive working culture will lead to a more productive workforce, alongside the best possible customer outcomes.
Mortgage intermediaries and lenders have a social obligation to help customers protect the value of their asset (their property). An example of this is by arranging the financing of green retrofitting, which benefits customers in a number of ways. For instance, retrofitting can raise the customer’s property value, reduce their energy bills, and also minimise the impact of the property on the environment.
How the FCA oversees responsible lending
With Consumer Duty guidelines now firmly in place, the social and regulatory aspects of ESG become even more important for the mortgage industry. Firms need to ensure the best possible outcomes for customers, committing to transparency and responsibility in their operations, and governance plays a key role here. They must also prioritise customer outcomes by ensuring fair treatment, ethical behaviour, and sustainability. This involves offering products and services that are not only financially beneficial to the customer, but also socially and environmentally responsible.
The purpose of the FCA is to ensure that all brokers offer fair, regulated, and compliant mortgage advice, and governance strives to ensure the same outcomes, ensuring that all business decisions are conducted ethically, responsibly, and sustainably.
Conducting fair and transparent practices is essential for building trust, confidence and credibility among customers, investors, and stakeholders. It also allows mortgage firms to be better equipped to anticipate and mitigate environmental, social, and regulatory risks, helping to enhance their resilience, viability, and credibility in the long term.
Watch this space
ESG plays a vital role within the mortgage industry, having evolved into a fundamental aspect of responsible business practices. It now makes up the landscape upon which we work – if it doesn’t, we’re doing something wrong. While challenges persist and improvements still need to be made, there is plenty of scope and growth to indicate that firms are implementing positive change in this arena, and will continue to do so as we move from strength to strength.