Applying Energy Efficiency First in financial institutions

The EC has published the Energy Efficiency Financial Institutions Group’s (EEFIG) report on applying the Energy Efficiency First principle in sustainable finance, for which I was the lead alongside Peter Sweatman of Climate Strategy. I think this is one of the most important, if not the most important report, to come out of EEFIG’s work – which over ten years was extensive, very influential and covered many aspects of energy efficiency finance.

The Energy Efficiency First principle is EC policy and is defined as:

‘energy efficiency first’ means taking utmost account in energy planning, and in policy and investment decisions, of alternative cost-efficient energy efficiency measures to make energy demand and energy supply more efficient, in particular by means of cost-effective end-use energy savings, demand response initiatives and more efficient conversion, transmission and distribution of energy, whilst still achieving the objectives of those decisions.’

So why is applying it in financial institutions, and this report, so important? Every day, and every hour, even as you read this, decisions are being made in investment committees and credit committees to invest or lend money for all kinds of energy using assets. The level of energy efficiency of those assets determines our future energy demand, and of course emissions, for years and even decades to come. This is particularly true for long lived assets such as buildings and industrial facilities but is equally true for shorter lived, smaller assets and equipment.

Financial institutions can influence these decisions by setting investment and lending policies and procedures that ensure energy efficiency performance is at least considered in the investment or lending processes, and options evaluated. If the money says you need to reach a certain level of energy efficiency for the project or asset you will do what is needed to get the money. Why should financial institutions do that? Surely this is just another level of bureaucracy that will upset customers who have to leap through seemingly ever more hoops. Other than the fact that it is the right thing to do, financial institutions have real motivations to do this. They are increasingly being driven to decarbonise their portfolios by reporting standards such as the EU Taxonomy and TCFD. Furthermore, improving energy efficiency reduces financial and physical risks, and in some asset classes like houses higher levels of energy efficiency have been shown to be linked to higher value. Energy efficiency can reduce risks and increase value.

Applying the Energy Efficiency First principle in financial institutions can help accelerate energy efficiency and decarbonisation within their portfolios compared to being passive and relying on customers (of all sorts), who themselves may not know what is possible in terms of cost-effective energy efficiency, or the multiple benefits of energy efficiency measures can bring. This does mean a more proactive approach from the financial institutions and does bring them further forward in the process of planning, designing and financing an asset or project, (the earlier a high level of energy efficiency is incorporated the easier and cheaper it is to implement).

In order to apply the Energy Efficiency First principle financial institutions need to set policies, understand the potentials within relevant sectors they operate in, build their own capacities, and have tools to assess energy efficiency of underlying assets as well as portfolios. Energy efficiency also needs to be integrated into wider sustainability principles and policies rather than just be bolted on. Perhaps surprisingly energy efficiency is often not mentioned in sustainability policies and systems, even though it is the most cost-effective way of addressing emissions reduction. This is another example of how invisible energy efficiency is.

A financial institution wanting to implement Energy Efficiency First needs tools at policy, portfolio and project levels. Leading public and private financial institutions, including amongst others, the EBRD, the EIB, the World Bank, ING, Aviva, and Allianz, are putting these kinds of tools into action. Technology has a big role to play in evaluating projects and portfolios and a number of providers are offering or developing tools.

The EEFIG Energy Efficiency First report sets the scene for applying the principle in financial institutions, makes the arguments why they should apply it, provides showcase exemplars, sets out processes, and gives examples of tools in use at policy, portfolio and project level. It also makes recommendations for policy makers and financial institutions. Energy Efficiency First does not mean that in every case all possible energy efficiency measures will be implemented, there are often technical and financial cases that prevent this. What it does mean that at some point in the process of financing an asset you have to stop and assess the energy efficiency performance of the underlying asset and see if more can be done. That would stop many of the missed opportunities that are happening every day and every hour and ensure more of the cost-effective energy efficiency potential is implemented.

If we can scale the use of the Energy Efficiency First principle within financial institutions it will accelerate improvements in energy efficiency and reduced emissions, and avoid ‘lock in’. It will also help shift energy efficiency financing from a niche and still very small ‘add on’ to everyday normal practice. The next step in the process of scaling the Energy Efficiency First principle in financial institutions is to translate the general guidelines into specific guidelines for each sub-sector. Real estate is different to private equity for instance and needs specific guidelines. This is best done through the sector associations to ensure buy-in and dissemination.

Scaling the use of the Energy Efficiency First principle within financial institutions is the next important task. At ep group we continue to work with financial institutions and others to accelerate investment into energy efficiency and can assist in applying the Energy Efficiency First principle.

The report can be found here:

https://tinyurl.com/kzmpj7vp

Thanks to all the Working Group members and the consortium team for their work in this project.