Over the last decades, ESG debt issuance, through green, social or sustainability-linked loans and bonds has become increasingly common. Financial markets have hailed the adoption of ESG indicators as a tool to align capital investments with environmental and social goals, such as the decarbonisation of the social housing stock. According to the Climate Bonds Initiative (CBI), the green debt market has experienced a 50% growth over the last five years (CBI, 2021). However, the lack of clearly established indicators and objectives has tainted the growth of green finance with a series of high-level scandals and accusations of green-washing, unjustified claims of a company’s green credentials. For example, a fraud investigation by German prosecutors into Deutsche Bank’s asset manager, DWS, has found that ESG factors were not taken into account in a large number of investments despite this being stated in the fund’s prospectus (Reuters, 2022). To curb greenwashing and improve transparency and accountability in green investments, the EU has embarked on an ambitious legislative agenda. This includes the first classification of environmentally sustainable economic activities: the EU Green Taxonomy (Regulation 2020/852). The Taxonomy is directly linked to the European Commission’s decarbonisation strategy, the Renovation Wave (COM (2020) 662), which relies on a combination of private and public finance to secure the investment needed for the decarbonisation of social housing. Energy efficiency targets have become increasingly stringent as the Energy Performance of Buildings Directive (EPBD) and its successive recasts (COM(2021)) have been incorporated into national legislation; see for example the French Loi Climate et Resilience (2021-1104, 2021). Consequently, capital expenses for SHOs are set to increase considerably. For example, in the Netherlands, according to a Housing Europe (2020) report, attaining the 2035 energy efficiency targets set by the Dutch government will cost €116bn. Sustainable finance legislation constitutes an expansion of the financial measures implemented by the EU in recent decades to incentivise energy efficiency standards as well as renovations in the built environment. For more detail on prior EU policies, see Economidou et al. (2020) and Bertoldi et al. (2021). The increased connections between finance and energy performance raise specific questions regarding SHOs’ access to capital markets in light of the shift toward ESG. The rapidly expanding finance literature on green bonds draws from econometric models to explore the links between investors’ preferences and yields (Fama & French, 2007). This body of literature on asset pricing relies on the introduction of non-pecuniary preferences in investors’ utility functions together with returns and risks to explain fluctuations in the equilibrium price of capital. Drawing from a comparison between green and conventional bonds, Hachenberg and Schiereck (2018) find evidence of the former being priced at a premium. Similarly, Zerbib (2019) also shows a low but significant negative yield premium for green bonds resulting from both investors’ environmental preferences and lower risk levels. The European Commission’s Joint Research Centre (Fatica & Panzica, 2021) documents the dependency of premiums on the issuer with significant estimates for supranational institutions and corporations, but not for financial institutions. While these econometric approaches offer relevant insight into the pricing of green bonds and the incentives for issuers and investors, they do not account for the institutional particularities of social housing, a highly regulated sector usually covered by varying forms of state guarantees and subsidisation (Lawson, 2013). ESG-labelled debt instruments & Related Legislation Throughout the last two decades, the term ESG finance has evolved to include a large number of financial vehicles of which green bonds have become the most popular (Cortellini & Panetta, 2021). In the social housing sector, ESG comprises a broad array of tools from sustainability-linked loans to less conventional forms of finance such as carbon credits. When it comes to bonds, there is a wide variation in the sustainability credentials among the different types. Broadly speaking, green and social bonds are issued under specific ‘use of proceeds’, which means the funds raised must be used to finance projects producing clear environmental or social benefits. The issuance of these types of bonds requires a sustainable finance framework, which is usually assessed by a third party emitting an opinion on its robustness. Sustainability-linked bonds (SLBs) are an alternative to ‘use of proceeds’. Funds raised in this manner are not earmarked for sustainable projects, but can be used for general purposes. SLBs are linked to the attainment of certain company-wide Key Performance Indicators (KPIs), for example an average Energy Performance Certificate (EPC) rating of “C” in an SHO’s housing stock. These indicators and objectives usually result in a price premium for Sustainable Bonds, or a rebate in interest rates in the case of SLBs or sustainability-linked loans (SLLs) (Cortellini & Panetta, 2021). While there are international standards for the categorisation of green projects such as the Green Bond Principle or the Climate Bonds Strategy, strict adherence is optional and there are few legally-binding requirements resulting in a large divergence in reporting practices and external auditing. To solve these issues and prevent greenwashing, the EU has been the first regulator to embark on the formulation of a legal framework for green finance through a series of acts targeting the labelling of economic activities, investors, corporations and financial vehicles. First, the EU Green Taxonomy (Regulation (EU) 2020/852) is the cornerstone of this new legislation since it classifies economic activities attending to their alignment with the objectives set in the European Green Deal (EGD). When it comes to housing, the EU Taxonomy requires specific energy efficiency levels for a project to be deemed ‘taxonomy aligned’. Second, the Sustainable Finance Disclosure Regulation (SFDR) (Regulation (EU) 2019/2088) mandates ESG reporting on funds, which tend to consist of exchange-traded collections of real assets, bonds or stocks. Funds are required to self-classify under article 6 with no sustainability scope, ‘light green’ article 8 which incorporates some sustainability elements, and article 9 ‘dark green’ for funds only investing in sustainability objectives. Under the SFDR, which came into effect in January 2023, fund managers are required to report the proportion of energy inefficient real estate assets as calculated by a specific formula taking into account the proportion of ‘nearly zero-energy building’, ‘primary energy demand’ and ‘energy performance certificate’ (Conrads, 2022). Third, the Corporate Sustainability Reporting Directive (CSRD)(COM(2021) 189) increases disclosure requirements for corporations along Taxonomy lines. This legislation, which came into effect in 2023, will be progressively rolled out starting from larger and listed companies and expanding to a majority of companies this decade. Provisions have been made for charities and non-profits to be exempt. However, one of the key consequences of disclosure requirements over funds through the SFDR is its waterfall effect; that is the imposition of indirect reporting requirements as investors pass-on their reporting responsibilities to their borrowers. Fourth, the proposed EU Green Bonds Standards (EU-GBS) COM(2021) 391 aims to gear bond proceedings toward Taxonomy-aligned projects and increase transparency through detailed reporting and external reviewing by auditors certified by the European Security Markets Authorities (ESMA). The main objectives of these legislative changes is to create additionality, that is, steer new finance into green activities (see Figure 1).   While this new legislation is poised to increase accountability and transparency, it also aims to encourage a better management of environmental risks. According to a recent report on banking supervision by the European Central Bank (ECB), real estate is one of the major sources of risk exposure for the financial sector (ECB, 2022). This includes both physical risks, those resulting from flooding or drought and, more relevant in this case, transitional risks, that is those derived from changes in legislation such as the EPBD and transposing national legislation. The ECB points to the need for a better understanding of risk transmission channels from real estate portfolios into the financial sector through enhanced data collection and better assessments of energy efficiency, renovation costs and investing capacity. At its most extreme, non-compliance with EU regulations could result in premature devaluation and stranded assets (ECB, 2022). In short, the introduction of reporting and oversight mechanisms connects legislation on housing’s built fabric, namely the EPBD, to financial circuits. On the one hand, the EU has been strengthening its requirements vis-à-vis energy efficiency over the last decades. The Energy Efficiency Directive (EED) suggested the introduction of Minimum Energy Performance Standards (MEPS) by Member States (Economidou et al., 2020), a rationale followed by France and the Netherlands for certain segments of the housing stock. Currently, policy-makers are debating on whether the EPBD’s recast (COM/2021/802) should incorporate MEPS and make decarbonisation an obligation for SHOs across the EU. On the other hand, legislation on green finance aims to produce incentives and oversight over investments in energy efficient renovation and new build, mobilising the private sector to cater to green projects (Renovation Wave (COM(2020) 662)). 

In Europe, the push for energy-efficient housing has led to widespread use of financial incentives such as grants, loans, and tax rebates to encourage homeowners to undertake retrofits. These measures aim to reduce energy consumption and improve the environmental performance of residential buildings. Governments across the continent have adopted various programs to support these efforts, offering significant financial aid to make energy-saving improvements more accessible to homeowners. In addition to subsidies, some countries implement energy taxes to further promote efficiency and fund sustainability initiatives. At the European Union level, comprehensive strategies are being developed to enhance the energy efficiency of buildings, including proposals for new regulatory frameworks and financial incentives. This multi-faceted approach reflects a growing recognition of the importance of sustainable housing in achieving broader environmental and economic goals. Subsidisation of housing retrofit, through grants and loans, as well as tax rebates are commonly used across Europe to incentivise the energy-efficient retrofit of the housing stock (Castellazzi et al., 2019). Following this trend, the Dutch government has put in place a series of grants and subsidised loans to incentivise retrofit. First, the “Subsidie Energiebesparing Eigen Huis” is a grant programme covering up to 50% of retrofit costs when at least two energy-saving measures improving EPC levels have been implemented. Dutch homeowners can also apply for the Investment Grant for Sustainable Energy Savings (ISDE) in the case of single measures such as solar boilers or heat pumps (Ministry of Economic Affairs and Climate Policy, 2019). Since 2022, 0% interest loans are also available to low-income households from the National Heat Fund. On the stick side of retrofit incentivation, the Netherlands implements a regressive form of carbon taxation on individual households (Maier & Ricci, 2024). Research by the Dutch National Bank has also alluded to the strong impact of energy taxation on lower incomes and the inelasticity of energy consumption. Havlinova et al. (2022) have found that the introduction of stronger forms of energy taxation in heated energy markets can impinge on lower incomes resulting in regressive distributional impacts. At the EU level, the Renovation Wave is actively promoting this approach to housing retrofit through its proposal to include buildings in the Emissions Trading Scheme (ETS) together with the implementation of retrofit subsidies(2003/87/EC). As a result, while owner-occupied housing is undertaxed, the tax burden on energy consumption at the household level is poised to increase. Retrofit subsidies usually come to join fiscal systems favouring owner occupation. These forms of direct subsidisation of housing retrofit coalesce with increases in the fiscal burden on energy consumption. According to Haffner & Heylen (2011), the housing taxation structure favours owner-occupation with a mortgage through large deductions in income tax. In the Netherlands, imputed rent, the main form of housing taxation is calculated on the basis of a notional rent value and then added onto box 1 which comprises labour income. All other income from investments is taxed under box 3 at a different rate. Haffner & Heylen (2011) have analysed the lack of tax neutrality in this system and propose to include the taxation of housing assets under box 3 as a tax-neutral benchmark. In the context of housing retrofit, the favourable fiscal treatment of homeownership comes to join generous subsidies for owner-occupied housing retrofit with no maximum income threshold offered by the Dutch government. A green tax  is a viable alternative to incentivise retrofit in a more progressive manner. The Dutch approach to incentivising housing retrofits exemplifies a broader European commitment to enhancing energy efficiency through a combination of financial incentives and regulatory measures. While generous subsidies and tax incentives significantly benefit homeowners, particularly those with mortgages, the regressive nature of energy taxation presents challenges for lower-income households. Research indicates that increased energy taxation disproportionately impacts these households, underscoring the need for more progressive solutions. The EU’s Retrofit Wave, along with the proposed inclusion of buildings in the ETS, reflects an ongoing effort to balance these measures. In the context of housing retrofits, a shift towards green taxes could provide a more equitable framework, ensuring that the financial burden and benefits of energy-efficient improvements are more evenly distributed across different income groups.   (This text is an excerpt from : Fernández, A., Haffner, M. & Elsinga, M. Subsidies or green taxes? Evaluating the distributional effects of housing renovation policies among Dutch households. J Hous and the Built Environ (2024). https://doi.org/10.1007/s10901-024-10118-5 )