At COP28, governments around the world committed to doubling the rate of energy efficiency improvements by 2030. Achieving this goal would require significant investments in energy efficiency, including in the buildings sector, and financing instruments are key to unlocking this investment. This page is a resource for policy makers looking to support existing or to develop new financing instruments for existing buildings.
Financing instruments, in combination with incentives and information policies, can help foster home and building renovations. Among the most important are energy services companies (ESCO financing), green mortgages, green bonds, and concessional loans. De-risking instruments and sustainable financing taxonomies also play an important role in stimulating markets.
This is not an exhaustive list. On-bill repayment and Property Assessed Clean Energy (PACE), for instance, are used in some countries when permitted within national legal frameworks. Crowdfunding and community-based energy cooperative models can also be used to invest in sustainable projects.
Energy Service Companies, or ESCOs, deliver building renovation and often provide up-front financing, to be recouped through the achieved savings.
With green mortgages, customers receive a preferential interest rate for choosing a property with greener attributes, e.g. energy efficient windows or a better heating and cooling system.
Concessional loans, typically offered by development banks and multilateral funds to developing and emerging economies, are repaid at below-market rates.
De-risking tools are financing mechanisms that reduce risks, such as performance uncertainty or repayment default, so that private capital is more willing to invest in energy-saving projects.
Energy Services Companies (ESCOs) first emerged in the United States in the 1970s. The model delivered energy conservation through a contract by which the value of energy savings to the consumer exceeded that of their repayments to the provider. The ESCO market has since spread around the world and grown to nearly USD 40 billion. China, the United States, and Europe lead in total investment mobilised through this mechanism. Half of the global ESCO market is concentrated in buildings, with 21% going to industrial applications and 16% to energy supply, according the IEA. ESCOs are an important in both the private and public sectors but are not used universally due to regulatory and technical barriers.
ESCOs provide solutions to make buildings and industrial facilities more energy-efficient. These often include the design and implementation of an energy-saving project, support in arranging finance, and guarantee of savings. ESCOs operate through energy performance contracts (EPCs), which are structured to ensure that energy savings exceed repayments of the capital investment. EPCs typically have terms of five to twenty years.
ESCOs are versatile energy solutions
ESCOs can operate in the buildings, industry, and transport sectors. The distribution of ESCO projects by sector is globally uneven. In the Netherlands, for instance, ESCOs primarily operate in public buildings, while in Indonesia, the main application is in the industry sector. In China, all sectors take advantage of ESCO solutions. Typically, ESCOs engage in long-term contracts with building owners to allow time to recoup the initial investment. National policies and accounting rules guiding ESCO projects vary and may influence the use of shared savings or guaranteed savings models.
Institutional and legal barriers hinder the uptake of ESCOs
In many countries, institutional and legal barriers hinder the uptake of ESCOs. Complex public procurement rules and administrative procedures can make it difficult for public authorities to engage with ESCOs. The lack of accreditation mechanisms or quality assurance schemes for ESCOs create uncertainty about the quality of services and reliability of performance. In such environments, public authorities may be reluctant to enter performance-based contracts, perceiving them as legally or financially risky.
ESCO projects
Die Berliner Energieagentur: a public ESCO owned by the city, district heating companies, and KfW. This ESCO implemented projects in 500 properties and 1 400 public buildings since 1996, with an average energy cost savings of 26%.
Kompetenzzentrum Contracting: a center for contracting competency within the German Energy Agency, aiming to strengthen the market for energy services by providing information, setting standards for the preparation and implementation of EPC projects, and developing new solutions.
Super ESCO Tarshid: an ESCO offered by the Saudi Arabia National Energy Services Company (Tarshid) to increase energy efficiency, support renewable energy solutions, and provide infrastructur solutions.
Carbon and Energy Fund: a private organisation created to fund, facilitate, and manage complex energy infrastructure upgrades. The Carbon Energy Fund provides National Health Service hospitals with access to pre-qualified ESCOs.
Green mortgages emerged in the 1980s to promote environmentally sustainable housing. Initially supported by government-backed programmes in the United States and Europe, these products have since evolved into market-based solutions. The green mortgage market is expanding rapidly, particularly in regions with strong regulatory and environmental policies, and is estimated to surpass USD 50 billion globally. Green mortgages are typically used to finance homes that meet certain energy efficiency standards or to fund upgrades that reduce a property’s environmental impact, offering borrowers benefits like lower interest rates or higher loan amounts.
Green mortgages help finance energy-efficient home purchases or renovations. Mortgage loans are backed by the property, meaning lenders can repossess the property in case of non-payment. Green mortgages can offer long-term financing of up to 30 years. Though interest rates are low, upfront costs like taxes and legal fees can be high; registering a mortgage in Germany, for instance, can cost 0.5% to 2% of the property value. Studies show that borrowers taking green mortgages are less likely to default, allowing banks to offer better rates. Eligibility usually requires energy savings of 30% or meeting a recognised efficiency standard.
Loans for private and commercial owners
Green mortgages and loans are mainly aimed at private and commercial property owners. Green mortgages have been found to be easier to apply in countries with clear regulatory frameworks, taxonomies, and defined energy efficiency standards. A strong financial system and local expertise in energy efficiency further supports their success. Effective deployment depends on close coordination between government policy, financial sector innovation, and technical standards, especially in emerging and developing markets. Green mortgages are well-suited for financing energy efficiency upgrades.
Regulatory uncertainty can hinder adoption
A key challenge is the lack of standardised definitions and criteria for what qualifies as a “green” property in many jurisdictions, leading to uncertainty among lenders and borrowers. Countries with an existing sustainable finance taxonomy may use it to address this challenge. Weak regulatory support, underdeveloped green finance markets, and insufficient technical expertise further slow progress. The absence of reliable data linking energy efficiency to lower credit risk also makes some lenders hesitant to adjust loan conditions.
Green mortgages and loan initiatives
Energy Efficient Mortgages (EEMs) in the United States: loans backed by the Federal Housing Administration and the Department of Veterans Affairs, allowing borrowers to finance both the purchase of a home and energy-efficient upgrades, such as insulation, energy-efficient windows, or solar panels.
The Green Mortgage Program in Germany: a programme offering favourable loan conditions for energy-efficient homes or for energy-saving renovations. Borrowers benefit from lower interest rates if their homes meet energy efficiency standards.
Green Mortgages by banks (e.g. ING or BNP Paribas): mortgages offered by many banks in Europe providing lower interest rates or higher loan limits for energy-efficient homes or renovations. These mortgages are often linked to green bond issuance or government incentives.
Concessional loans, first introduced in the mid-20th century by international development institutions, are designed to support economic and social development by offering below-market interest rates and flexible terms. Traditionally used in emerging and developing economies, their application has expanded to sectors like sustainable housing and clean energy. As of 2024, the global concessional finance market was valued at over USD 60 billion annually, with major contributions from multilateral banks and climate funds. These loans are widely used in blended finance to reduce investment risks and encourage private sector participation in socially-beneficial projects, such as energy-efficient buildings and infrastructure.
A loan offered on more favourable terms than market rates
Concessional loans are low-interest loans with flexible terms, often provided by governments or development banks to support sustainable building projects, especially in developing countries. They may include delayed payments, grace periods, or even partial forgiveness. These loans are commonly used alongside conventional loans or grants to help fund energy-efficient buildings or green mortgages. By lowering financial risk, they aim to attract private investment.
Bridging the gap where traditional financing might fall short
Concessional loans can play a vital role in constructing or retrofitting buildings to meet energy efficiency standards or integrate renewable energy generation, regardless of sector. In affordable housing, they help reduce upfront costs, making it easier to build or retrofit homes for underserved communities. In regions vulnerable to natural disasters, concessional financing enables the construction of resilient infrastructure and buildings designed to withstand climate-related events like floods or earthquakes. These loans are ideal for sectors where upfront costs are high, returns are long-term, and social or environmental benefits outweigh immediate financial gains, such as public-good investments.
Complex procedures and strict eligibility
Despite their benefits, concessional loans face several barriers. Complex application processes and strict eligibility criteria can make access difficult, especially for small developers or local governments. Limited awareness or understanding of such financing options further reduces uptake. Donor funding constraints and lengthy approval timelines can delay project implementation. Additionally, concessional loans often require co-financing, which may be hard to secure. Currency risks and policy instability in recipient countries can also deter investors. Finally, measuring and verifying the long-term social or environmental impact of projects can be challenging, limiting the ability to assess effectiveness and attract continued concessional support.
Government loans
KfW Energy-Efficient Construction and Renovation Program in Germany: a programme offered by Germany’s development bank KfW that provides low-interest loans for new construction and energy-efficient retrofits for residential and non-residential buildings. Loans are combined with repayment bonuses depending on the efficiency level achieved.
Clean Technology Fund (CTF) of the World Bank: concessional loans provided by CTF through partner banks for energy-efficient building projects in developing countries, such as retrofitting public buildings or improving insulation and heating systems in urban housing.
Green Climate Fund (GCF) projects: projects providing concessional financing for low-carbon building developments in vulnerable regions. It has funded energy-efficient housing to reduce climate impacts in the Caribbean and South Asia with favourable loan terms.
Green bonds, first introduced in 2007 by the European Investment Bank and the World Bank, are fixed-income instruments designed to finance projects with clear environmental benefits. Initially focused on renewable energy and clean transport, their scope has expanded to include energy efficiency, sustainable buildings, and climate adaptation. According to the Climate Bonds Initiative, the global green bond market surpassed USD 5.7 trillion in cumulative issuance by early 2025. Buildings and energy efficiency account for roughly 30% of total green bond financing, making it one of the largest sectors supported by this instrument.
Green bonds offer a transparent and scalable way to mobilise capital for low-carbon infrastructure while appealing to investors seeking both financial returns and environmental impact.
A green bond is a type of loan that governments, companies, or organisations use to raise money specifically for environmentally friendly projects, like renewable energy, clean transport, or energy-efficient buildings. It works like a regular bond: investors lend money and get paid back with interest. The key difference is that the money raised must go toward projects that help the planet. Green bonds give investors a way to support climate action while earning a return.
Financing large-scale energy efficiency projects
Green bonds are increasingly used to finance energy efficiency upgrades in buildings, helping cities and companies reduce energy use and emissions without increasing public subsidies. They unlock large-scale capital, often in the billions, making them ideal for funding deep retrofit programmes in housing, commercial buildings, and public infrastructure. With lower interest rates and strong appeal to long-term investors like pension funds and insurers, green bonds reduce financing costs and improve project bankability. They also offer governments a way to meet climate and energy targets while preserving fiscal space, aligning private investment with public policy goals.
Lack of standards and market readiness
Green bond adoption faces several systemic barriers, especially in developing countries. One obstacle is the lack of standardised definitions and frameworks for what qualifies as a “green” project, which creates confusion and limits investor confidence. Many countries struggle with limited institutional capacity, lacking the expertise and technical know-how to structure, certify, and monitor green bond issuance. Access to international capital markets remains a challenge, as weaker financial infrastructure and credit ratings restrict borrowing options. Furthermore, higher perceived investment risks – stemming from policy uncertainty, currency volatility, or limited project pipelines – often lead to higher borrowing costs, discouraging both issuers and investors.
Green bond issuances around the world
European Union’s Green Bond Programme: a programme dedicating around 40% of funds to energy-efficient building retrofits across Member states, supporting the European Union’s broader climate and renovation goals. It has issued a total of EUR 250 billion in funds.
China’s Green Building Bonds: a programme issuing green bonds specifically for green building development and retrofitting. China established it as part of its carbon-neutral cities initiative and has issued over USD 30 billion in green bonds.
Singapore’s Green Bond Framework: a sovereign green bond programme financing energy efficiency upgrades in public infrastructure and buildings. Under this programme, Singapore has issued SGD 2.4 billion (Singapore dollars) to finance projects aligned with its Green Plan 2030, supporting its net zero ambitions and regional leadership in green finance.
De-risking tools have advanced significantly since the early 2000s, emerging in response to persistent barriers in green finance. Designed to reduce investment risk in energy efficiency projects, these instruments have broadened market participation by improving project bankability. With the global energy efficiency market exceeding USD 300 billion in 2023, and with buildings making up a substantial share, de-risking mechanisms such as guarantees, credit enhancements, and blended finance have become essential to achieving scale. They are now widely used to mitigate uncertainty in building retrofits, renewable energy integration, and new green construction, helping to mobilise private capital and accelerate the decarbonisation of the built environment.
De-risking investments in energy efficiency for buildings make these projects safer and more appealing for investors. It involves using tools and strategies – such as guarantees, insurance, or clear savings estimates – to reduce the chance of losing money. This helps building owners and investors feel more confident that energy upgrades, like better insulation or efficient heating systems, will deliver the expected savings and benefits. By lowering financial uncertainty, more people are willing to invest in making buildings greener and more cost-effective.
De-risking tools can support investment in energy-efficient buildings
De-risking tools are increasingly applied across sectors to unlock private investment by reducing financial uncertainty and improving project viability. In the building sector, these tools can address technical performance risk (e.g. poor insulation or HVAC inefficiencies), occupant behaviour changes that reduce projected energy savings, regulatory shifts that affect building codes or incentive programmes, and market risk (such as falling property values or low rental demand in green-certified buildings). By addressing these challenges through instruments like guarantees, insurance, and concessional finance, de-risking tools enhance investor confidence and help scale climate-aligned building investments.
Market and policy barriers can hinder adoption
A key barrier to deploying de-risking tools is the lack of standardised, high-quality data on energy performance, which makes it difficult to accurately forecast savings and assess investment risks. Low awareness and limited technical capacity among building owners, developers, and financiers further hinder uptake, especially in markets without strong green finance ecosystems. High upfront costs and complex financing arrangements – such as blended finance structures – can deter participation, particularly for smaller projects or fragmented portfolios. Moreover, dispersed building ownership and inconsistent policy support across jurisdictions create challenges in scaling solutions. Without transparent, measurable outcomes, it becomes harder to build investor trust and demonstrate the effectiveness of de-risking tools.
Various tools implemented globally
Loan Loss Reserve (LLR) Programmes: programmes designed to de-risk clean energy lending, including for energy efficiency upgrades in buildings. A successful example is operated by the New York State Energy Research and Development Authority (NYSERDA).
Energy Savings Insurance (ESI): a programme piloted by the Inter-American Development Bank in Latin America. Specialised insurance programmes can cover the risk that energy savings do not meet projections, helping small and medium-sized enterprises retrofit buildings without worrying about underperformance.
European Investment Bank (EIB) – Private Finance for Energy Efficiency (PF4EE): a European facility offering partial credit risk protection to commercial banks lending for energy efficiency in buildings. It combines EU funds with EIB financing and has been used in countries including Spain, Italy, and the Czech Republic, to unlock private capital for retrofits.
Partial Risk Guarantee Fund for Energy Efficiency (PRGFEE): an Indian government-backed scheme that de-risks loans for energy efficiency projects in government buildings, municipalities, SMEs, and industries by offering credit guarantees to participating financial institutions. It is managed by the Indian Bureau of Energy Efficiency.
To support the rollout of financing instruments used to channel funds to energy efficiency, governments developed frameworks that define what is considered “sustainable” or “green” investment. These frameworks, called taxonomies, help guide capital deployment.
Taxonomies are tools that classify which activities are considered environmentally sustainable, like setting rules for energy-efficient buildings or clean power. They have become more important as global finance and reporting standards have evolved. Today, taxonomies help investors and governments direct money toward projects that support climate, environmental, and social goals. There are now around 50 such systems used around the world.
Two examples of taxonomies can be found in Europe and Asia. The EU taxonomy was designed to support the European Green Deal, a set of policies launched in 2019 to support the green transition. In Asia, the ASEAN taxonomy was developed by Indonesia, Malaysia, Philippines, Singapore, and Thailand in an effort to classify sustainable economic activities across the region. Other useful resources include:
About the Hub’s Energy Efficiency in Buildings Task Group
The Energy Efficiency in Buildings (EEB) is a Task Group of the Energy Efficiency Hub, which is a platform for intergovernmental exchanges about improving energy efficiency in existing buildings. To address the topic of financing building retrofits, the EEB held a series of webinars on key financing instruments.
