Breaking Down Financed Emissions for Agency RMBS

Blog post
5 min read
Sara Shen, Joy Zhang, Michael Ridley
July 11, 2023
  • The market for agency residential mortgage-backed securities (RMBS) finances about 17% of total U.S. residential greenhouse-gas emissions, or about 954 million tons of CO2 equivalent annually.
  • The financed-emissions intensities for agency RMBS are driven by loan-to-value ratios, the state where the property is located and property size.
  • Total financed emissions and intensities vary across agencies, borrowers' states and their socioeconomic segments.
The total U.S. greenhouse-gas (GHG) emissions from residential property is about 954 million tons of CO2 equivalent annually, according to the latest reports from the Environmental Protection Agency (EPA).1 Using MSCI's methodology for total-portfolio footprinting (TPF) for financed emissions,2 we estimated that about 17% of these emissions (160 million tons) are financed by agency RMBS, which at over USD 9 trillion, is the second-largest fixed-income market after Treasurys. As issuers and investors examine their financing activities' climate risk, breaking these numbers down to a granular view of financed emissions may help all parties understand the emissions sources and drivers behind agency RMBS.
Total US residential Scope 1 and 2 emissions
This table breaks down the 954 million tons of CO2 equivalent to direct emissions at 366 million tons and indirect emissions at 588 million tons.
Estimates of financed emissions for agency RMBS pools and securities are driven mainly by three factors:
  1. Loan-to-value ratio (LTV): LTV allocates the percentage of a property's emissions to the mortgage. It is adjusted for amortization, but not for the property's appreciation/depreciation since loan origination.
  2. Location of the residential property by U.S. state: Scope 1 emissions depend on the climate, heating demands and average thermal efficiency of properties within each state. Scope 2 emissions depend on grid-emission intensity (i.e., how "dirty" the electricity grid supplying the property is) and electricity-use intensity. Both are estimated at per-square-meter of the property size.
  3. Property size: Property value per-square-meter is modeled at the state level.
Financed emissions vary across agencies
Based on this methodology, we estimated the total financed emissions for the three mortgage agencies — Fannie Mae, Freddie Mac and Ginnie Mae — as well as their financed-emissions intensity (tons per million USD).
Total financed emissions and intensities for Fannie Mae, Freddie Mac and Ginnie Mae
This exhibit shows that Fannie Mae had the highest total financed emissions among the three agencies, while Ginnie Mae had the highest finacnced-emissions intensity.
Data as of May 2023. Source: MSCI Total Portfolio Footprinting
Ginnie Mae's financed-emissions intensity for RMBS is marginally higher than those of Fannie Mae and Freddie Mac. Ginnie Mae's RMBS pools tend to have a higher LTV and a greater share of loans from higher-emission-intensity states, such as Texas, and a lower share of loans from lower-emission-intensity states, such as California. The top 10 states, in terms of outstanding RMBS balance, account for more than 50% of the total of U.S. agency RMBS.
Emissions intensity and share of each agency's total outstanding balance for US states with highest agency-RMBS outstanding balance
Together, these two show the emissions intensity and share of each agency's total outstanding balance for the 10 US states with the highest agency-RMBS outstanding balance: California, Texas, Florida, New York, Virginia, Washington, Colorado, Georgia, Illinois and New Jersey.
Data as of May 2023. Source: MSCI Total Portfolio Footprinting
Location, location, location
Drilling down to individual states, we found large differences between the top- and bottom-10 states, as ranked based on agency-RMBS emission intensities. The financed-emissions intensities are as high as four to 10 times different between these two groups. Most of the top-10 states are in regions with higher grid-emission factors, while the bottom-10 have high electric-grid efficiency.3 Ginnie Mae has a greater share than the other agencies in high-emission-intensity states.
Top- and bottom-10 US states based on financed-emissions intensities
This bar graph shows the U.S. states with the highest financed-emissions intensities, West Virginia, Kentucky, Indiana, Missouri, North Dakota, Wyoming, Nebraska, Ohio, Arizona and Wisconsin, as well as those with the lowest financed-emissions intensities, Maryland, Virginia, New Jersey, South Carolina, New York, Idaho, Oregon, Washington, California and Hawaii.
Data as of May 2023. Source: MSCI Total Portfolio Footprinting
Financed emissions vary across socio-economic segments
For socially disadvantaged borrowers (measured here as pools with a social-index score over 70), financed-emissions intensity is higher when measured in dollar terms, but substantially lower when measured in loan count. Many of the socially disadvantaged borrowers have smaller property and loan size, which lead to lower financed-emissions levels per loan. Yet many of the socially disadvantaged borrowers are concentrated in high-emission-intensity states, and therefore are associated with higher financed-emissions intensity.
Total financed emissions and emission intensities across social-index buckets
Together, these three charts use social index scores to illustrate that socially disadvantaged borrowers have lower financed emissions, but slightly higher emission intensities.
Data as of May 2023. Source: MSCI Total Portfolio Footprinting
With granular financed-emission modeling, investors and issuers can gain insight into the origins and factors influencing GHG emissions linked to agency RMBS and generate detailed and comprehensive GHG-disclosure reports. Having this view of their portfolios can serve as a vital initial stride for investors as they work toward accomplishing a net-zero transition.
Further Reading
Total Portfolio Footprinting to Transform Green-Bond Emission Accounting Green Bonds and Climate – Towards a Quantitative method Carbon-Emissions Data to Inform the MBS Market MSCI Agency MBS Model Version 2.1: Single-Family Social Index (client access only)
Joy Zhang
Joy Zhang
Managing Director, MSCI Research
Michael Ridley
Michael Ridley
Executive Director, MSCI Research
Sara Shen
Sara Shen
Senior Associate, MSCI Research

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1“Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2021.” U.S. Environmental Protection Agency, April 29, 2023.2“Total Portfolio Footprinting Methodology.” MSCI ESG Research, March 2023. (client -access only)3CO2-equivalent total output emission rate (lb/MWh) by state, for 2021.

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