The Blackfinch Property team recently updated its lending policy, with new sustainability performance incentives for developers that commit to improving their EPC rating. David Higson, Head of Blackfinch Property, explains the reasons behind the change. 

At Blackfinch Property, we want to put our funding to good use, helping to revive local areas and regional economies and encouraging the development of sustainable property. Our environmental, social and governance (ESG) principles are core to our lending process and integral to how we work.  

We also look to work with like-minded, forward-thinking developers willing to improve the UK’s current building stock, given the impact that existing buildings will have on the UK’s decarbonising requirements. We want to work with developers who believe in using sustainable materials and are interested in investing in the future, rather than simply replicating the past.  

Tying EPC ratings to sustainability criteria

Our new sustainability performance targets (SPTs) are based on the Energy Performance Certificate (EPC) rating of the building. Where investors commit to delivering improvements to their underlying properties that realise an improved EPC rating, they also benefit from incremental rate reductions of 0.25% per band. As well as this, for new construction we can offer discounted rates if A-rated EPCs are achieved. In other words, the better the EPC rating, the greater the financial incentive borrowers have for choosing to partner with us

Here’s an example. For a residential property with a C or D EPC rating where we plan to lend at 6% interest, the interest rate would be reduced by 0.25% for each improved rating. In other words, getting to a B rating would reduce the interest rate to 5.75%, while getting buildings up to an A rating would mean an improved interest rate of 5.5%.

While we recognise EPC ratings are a relatively simple measure of energy efficiency – and that sustainability encompasses much more besides – EPCs are widely understood, ever-present in the market, and are produced by independent consultants.  

Also, and importantly from a value creation perspective, offering developers incentives to achieve higher energy-efficiency standards feeds into our risk/reward considerations when underwriting loans. In other words, better EPC ratings have an increasingly positive impact on the value of a property all-round, with developers benefitting from lower lending rates – as well as coping with possible future costs of complying with energy efficiency standards – and also as property occupiers benefitting by seeing their energy bills fall.

At the moment, our lending incentives focus on EPCs, but we want to do more to properly reflect the impact property can have on the Social and Governance elements of ESG, and the wider sustainability picture. As more tools are developed that accurately measure the impact of other initiatives – either in property construction or operation – we hope to extend our policy to incorporate these new measures, providing clarity and consistency where it’s needed.

We want more developers to take appropriate measures to reduce the carbon footprint of their buildings. It’s one of the best ways to help the UK get closer to achieving its net zero carbon goal by 2050. But we all have a part to play. So, if our new sustainability-linked policy offers a strong financial incentive to make those decisions, we think this is a practical and effective way of showing we’re all 100% aligned on that commitment.