The recent floods that have caused such devastation across parts of Northern and Western England have been just one of the latest demonstra­tions of how climate change is starting to impact upon daily life.

Against such a background, and the increasing interest of both consumers and politicians in how to prevent climate change, it is not surprising that the mortgage industry has itself come under pressure to offer ‘green’ products. As a consequence, green mortgages have become all the rage, with a variety of lenders either starting to offer such products or planning to in the near future. However, are ‘green mortgages’ commercially viable for lenders, and will there be any real impact upon the environment?

Following on from Gordon Brown’s last Budget speech as Chancellor earlier this year, a number of lenders announced their plans to join those already offering green mortgages. The new Prime Minister’s interest in environmental issues was further demonstrated in the housing Green Paper when he announced the creation of a number of new ‘eco towns’ that do not just contain environmentally friendly houses, but their infrastructure and other services will be planned to minimise their impact on the environment.

With housing accounting for some 27% of CO2 emissions, it is easy to see why the Government views the housing sector increasingly as critical to its ambition of reducing carbon emissions by 20% by 2010 and 60% by 2050. While the Government has focused most of its attention so far on new homes ­- with all new homes required to be carbon neutral by 2016, and two thirds of the target being met by 2050 – it is obvious that sooner or later owners of older properties will have to ensure that their homes make their contribution to carbon emission reduction as well.

The sceptics of green mortgages point out that there is very little demand for such products at the moment, not least because they tend to be more expensive than conventional mortgages.

However, with the Government taking an interest in this agenda, and with consumers becoming increasingly aware of their impact upon the environment, this is starting to change. While demand is still very low, it is increasing. The Ecology Building Society, which specialises in green products, for example, sold as many mortgages in the first half of 2007 as in the whole of 2006.

If the Government decides to introduce some sort of tax benefits for those who invest in reducing the environmental impact of their home, then demand could well increase further. Hanging over this whole debate is the issue of rising energy prices. As they continue to increase and become a more important part of family expenditure, they will be of greater importance to homeowners.

This is particularly true with the introduction of energy performance certificates (EPCs). Love them or loathe them, EPCs will provide home-buyers with an understanding of the relative costs involved in heating and running different properties.

As these costs start to increase – as is already happening in the commercial sector – the values of environmentally friendly properties that have low running costs are starting to increase ahead of those that are not.

So the current low levels of consumer interest in green issues may be about to change. But, will the current crop of green mortgage products fit the bill?

Green label

Most, but not all, of the current ‘green’ mortgages that are on offer involve the lender making some sort of contribution to an environmental charity or programme that seeks to offset the environmental impact of the property that is being purchased. It may involve the planting of a number of trees for each property that is financed, or it may involve a financial contribution being made to either an environmental charity or some other organisation that seeks to help environmental causes.

However, critics of such products have accused them of being merely an exercise in public relations and that in practice they achieve very little in terms of actually improving the environment or minimising the effects of housing.

Some have even argued that this ‘green-washing’ of products merely serves to give the environmentally concerned an opportunity to assuage their guilt over their activities while achieving only a minimal environmental benefit.

So are the traditional green mortgages on offer the answer? Maybe not – after all, with house prices at a historically high level, people who are in a position to buy need their housing finance to be as cheap as possible. And even if consumers are not looking to buy a new property but are seeking to reduce the environmental impact of their home, then they are again going to be looking to secure finance at rates that are as advantageous as possible.

So maybe the answer is not the traditional green mortgage at all. Perhaps if the Government is serious about reducing the environmental impact of housing, the solution is to give consumers access to the cheapest lending possible. For the majority, this will be achieved by a conventional mortgage deal which, due to the economies of scale that such products attract, will be cheaper than a specialist green product.

If the Government is also serious about encouraging home­owners to minimise the environmental impact of their properties, it should also reflect the costs that home­owners incur in doing so. It could do this by offering tax reductions – whether through a national scheme or via Council Tax – that give homeowners a financial incentive to invest in environmental improvements. Such action would encourage homeowners to reduce the environmental impact of their homes in a way that lenders never could, and would show that the Government recognises the financial implications that taking such action poses for homeowners.

Cause for concern

This, however, does not mean that lenders can retire from the environmental debate. There will always be a market out there for products that have a specific environmental benefit, and as awareness of these issues develop further and become more widespread, this is a market that can only grow.

And as awareness grows further, this will create further pressure on lenders and how they conduct their business. Home-buyers looking for a mortgage to improve the environmental performance of their home may be looking for as cheap a deal as they can find, but they will also be looking to put their business with a lender who shares their high level of environmental awareness.

Lenders will find themselves under high levels of environmental scrutiny by their customers. Already, some financial services organisations have found a market advantage by stressing the ethical nature of their business, and ensuring that they minimise their impact on the environment.

As customers become more environmentally concerned, lenders can expect more and more of them to come asking questions. And while they may be looking for a cheap deal, they will also expect their lender to match their level of environmental commitment. If firms do not demonstrate that they are taking their environmental responsibilities seriously, they will find that those customers will take their business elsewhere.

Some may scoff, and comment that with the market being driven so strongly by interest rates, that this is unlikely. But this is a fast moving area. After all, the idea that there was a market for diesel cars or fair trade products a few years ago would have been ridiculed.

However, the Government and politicians of all political persuasions are taking an increasing interest in finding ways for homeowners to improve the environmental performance of their properties, and rising energy prices will start to affect homeowners and encourage them to reduce their energy consumption.

A market for finance that allows homeowners to reduce the environmental impact of their properties will emerge in the future. Savvy lenders and brokers will need to make sure that they have products in place to meet this demand. n

Neil Johnson is PR and policy manager at the Building Societies Association