Dutch mortgages have appeal for investors in today’s market environment, bringing together an illiquidity premium, attractive yield, low risk and stable long-term cash flows. Investing in Dutch mortgages also means investing into the real economy by helping to finance the mortgage needs of consumers. However, in common with other private debt assets, they represent a challenge for ESG integration. The building sector is carbon-intensive, and it is difficult to make existing assets more sustainable. Equally, data is often incomplete or inaccessible. Nonetheless, asset man-agers together with mortgage originators have an opportunity to bring about real change in the sector, with a significant impact on emissions.
Bart Bakx, Head of the ABS & Mortgages team within the alternative credit team at NN Investment Partners, says: “Buildings represent the largest share of total global annual carbon emissions (39%). Within this, 30% come from construction, 45% from residential use, and 25% for non-residential use. Around three-quarters of building stock in Europe is not energy efficient, so the sector is ripe for improvement. Mortgage financing can play an important role in making homes more energy efficient and sustainable. Mortgage lenders can encourage households to accelerate energy efficiency renovations, leading to significant improvements in the overall carbon footprint of the sector.”
The Dutch mortgage market
In 2020, The Netherlands’ EUR 750 billion mortgage market was Continental Europe’s third-largest, after Germany and France. The amount of outstanding mortgage loans are over 90% of the country’s GDP. Institutional investors are playing a growing role financing mortgage lending; their share of the nation’s new mortgages doubled from 10% in early 2014 to 20% in 2021.
There is significant regulatory support for making the mortgage market more sustainable. The Netherlands is pushing homeowners to improve the energy efficiency of their home. Measures range from local and national subsidies for energy-saving measures to banning natural gas connections to new homes. Household energy consumption contributes to some 13% of the nation’s total energy consumption; natural gas and electricity account for 70% and 17% of residential usage respectively, and there is ample scope to reduce the carbon footprint, replacing e.g. gas by more energy-efficient energy sources.
The National Climate Agreement of 2019 contains agreements with industry sectors on what they will do to help achieve the country’s climate goals. For the buildings sector the current targets are that 7 million existing residences and 1 million buildings will stop using natural gas by 2050. In the first phase of this process, 1.5 million homes will be upgraded by 2030. New buildings will no longer be heated by natural gas; existing buildings need to be improved to accommodate fossil-free heating. Revisions to the energy tax system will offer stronger incentives for energy efficiency and CO2 reduction.
The European Union is also an engine of sustainability improvement throughout the region, including within the housing stock. Policy packages like the European Green Deal, the EU Taxonomy and the Sustainable Finance Disclosure Regulation will increase transparency for investors and stimulate them to allocate to sustainable assets. The Energy Performance of Buildings Directive reflects the European Commission’s emphasis on building renovations as a means of reducing carbon emissions and to harmonise energy-labels across countries.
There are a number of ways NN Investment Partners (NN IP) is working towards better incorporation of ESG considerations into its analysis of Dutch mortgages:
1. Improving carbon footprint calculations
There are challenges in the way carbon footprints are calculated today. NN IP’s calculation method is based on the method prescribed by PCAF (“Platform Carbon Accounting Financials”), which comprises a group of Dutch financial institutions; the preferred method for mortgages was based on assumed electricity and gas consumption per underlying property. NN IP is changing the assessment from the assumed energy consumption per residential unit to actual energy-consumption per building starting in 2022. We are also developing stress-test scenarios on the whole portfolio based on climate-change assumptions to get more clarity on how climate risk can affect the portfolio.
2. Helping homeowners to become more sustainable
NN IP invests in mortgages sold to Dutch homeowners by NN Bank and Venn Hypotheken. Many of the NN Bank loans we invest in are for newly built properties. About 74% of the residential units financed had energy labels; at the end of 2021, 44% of all loans that had an underlying residential unit with a final energy-label had a final energy-label A. Both lenders encourage their borrowers to reduce the carbon emissions by renovating their homes to make them more sustainable.
3. Modelling climate risk scenarios
A major part of the Netherlands lies below sea level and several major rivers flow through it on their way to the sea. This makes about 60% of the country susceptible to flooding. NN IP investigates the potential effects of climate change on the mortgage portfolios under management and is currently testing various methods and ways to map various climate risks in our mortgage portfolios (including “grondverzakking”: subsidence).
NN IP is active in different domestic and international bodies such as Energy Efficient Mortgage Label and Partnership for Carbon Accounting Financials. This gives it an active voice in how to make the Dutch mortgage market more sustainable and inclusive. Additionally, it has sought to align European ESG legislation with Dutch legislation, and to improve the carbon measurement of household energy-consumption. These associations offer a powerful podium to have direct conversations with the European Commission and the Dutch authorities.
An integrated approach to ESG integration
NN IP is steadily overcoming the challenges of integrating ESG in mortgage investments. Bart Bakx concludes: “NN IP applies environmental, social and governance criteria to its portfolio of more than EUR 44 billion of Dutch and European mortgages. We help our origination partners, such as NN Bank and Venn Hypotheken, to set ESG policies for lending. Both lenders are implementing features to their offering to help borrowers to use household energy more consciously and efficiently or to use green-energy. They both have developed specific mortgage loan products and services that could be of help borrowers to reduce carbon emissions and promote an inclusive society. NN IP’s mortgage portfolio managers integrate ESG factors and set eligibility criteria for future mortgage assets. It has a fully integrated ESG approach.”
“In the coming years, the financial and asset management industry will have to face important changes as a result of the new ESG regulation, applicable to mortgage lenders and asset managers. As a result of the important role of NN IP in co-operation with the lenders NN Bank and Venn, we are at the forefront driving the important transformation towards a zero-carbon economy.”
 World Green Building Council
 European Commission, Energy Efficiency in Buildings
 Cadaster, Land Registry and Mapping Agency
 Mister Mortgage, A Sustainable Mortgage in The Netherlands