Investing in mortgages - now also with a focus on sustainability

The integration of sustainability aspects into investment decisions is an integral part when managing equity and bond funds. Corresponding concepts do not only focus on climate but also integrate ESG criteria in a broader sense, engage in investment stewardship and exclude controversial business practices. The data and models required for a holistic sustainability approach are provided by specialised vendors.

However, for mortgage investments the case is more complex: existing sustainability concepts, for example from fixed income or real estate, cannot be directly adopted for mortgage investments. So far, data availability has been the biggest hurdle in the development of systematic sustainability concepts going beyond purely ecological aspects.

Comprehensive ESG valuations finally available

With regard to ecology, a model-based evaluation of the so-called CO₂e intensity of a mortgage portfolio has also been possible since the PACTA Climate Test 2020 at the latest. The evaluation requires relatively little data; the exact address is sufficient. By now, various providers have developed and refined comparable models that utilise various data sources.

Sustainability is not limited to greenhouse gas emissions. Recently, extended ESG ratings were developed which can be applied to a mortgage portfolio. This development was sparked by the banks and their need for realising their ESG-related goals. The basis for the ESG ratings are hedonic property valuation models, which estimate the value of a property based on attributes such as location, usable space or structural quality.

These extensive data collections can be used to assess a property in terms of its ESG characteristics. Environmental indicators include for example data on the availability of green areas, resource utilisation and mobility infrastructure. Amon other things, social indicators measure noise pollution, availability of recreational areas and the socio-economic structure. Governance indicators quantify topics relating to spatial planning.

Prominent providers of such ESG ratings in Switzerland are Wüest Partner and REMMS (Real Estate Rating and Monitoring on Sustainability). Although the two methods differ in their approach, they both require only data that is typically available to a mortgage lender. This provides an important tool that supports the consideration of sustainability aspects in mortgage investments.

Comprehensive sustainability approach for mortgage investments

This offers opportunities: Since July 2024, the 'Swisscanto AST Hypotheken Responsible Schweiz', investment group of the Swisscanto Investment Foundation, has been applying the "Responsible" approach of Zürcher Kantonalbank's Asset Management. In addition to environmental sustainability, furter criteria are considered. Specifically, the four pillars "climate", "ESG integration", "stewardship" and "avoidance of controversy" are taken into account.

In terms of climate, the aim is for the CO₂e intensity of the financed properties to be lower than the average value of the Swiss building stock. This can be controlled, for example, via the promotion of energy-efficient refurbishments, the pricing and credit policy of mortgage lending or by excluding certain energy sources. As can be seen in the Figure below, the CO₂e intensity is fortunately well below the average for the Swiss building stock.

ESG integration takes into account the aforementioned ESG ratings. Filter criteria are used to focus on financings with comparatively high ESG ratings without categor­ically excluding individual transactions on the basis of their ESG rating. The following table shows the ESG ratings of the mortgage portfolio of the Swisscanto AST Mortgages Responsible Switzerland investment group.

As part of the engagement activity, borrowers for whom an increase in the mortgage is justifiable and an energy-efficient refurbishment could make sense are made an offer to finance energy-efficient refurbishments . This is done selectively and in compliance with the credit guidelines. Controversial business activities such as the coal mining sector are avoided when granting mortgages to legal entities. The measured sustainability indicators of the portfolio are reported transparently.

Broad sustainability approach favoured

This broad sustainability approach has one major advantage: it is not explicitly and solely based on common energy certificates. Their market share is small - the proportion of Minergie- or GEAK A/B/C-certified buildings is currently only in the single-digit percentage range of the entire Swiss building stock - and is already served by many mortgage lenders with favourable interest rate conditions. Instead, our approach is based on the broader mortgage market where the major providers will not apply price differentiation on ESG factors for the foreseeable future. Under these premises, there should be no reduction in yield.

The explicit inclusion of sustainability provides investors with additional benefits: risks that could have an impact on performance in the long term are taken into account and highlighted.