The bundling of green loans into securities can unlock additional capital to finance the transition to a low carbon and climate-resilient economy.
Opportunities now exist across the EU to grow a significant market around green securitisation and contribute directly to 2030 energy and carbon reduction targets.
[Diary Alert: Brussels: Green Securitisation Roundtable: April 24th – Details to come.]
Securitisation and green assets-What’s it all about?
Securitisation is a financial tool for the aggregation of multiple small-scale loans. It has potential to be widely adopted as a vehicle for pooling low carbon and climate-resilient assets into green investible deals.
Loans for small-scale low carbon projects, such as energy efficiency upgrades, rooftop solar PV and electric vehicle leases, which on their own are too small to gain access to the bond market, can be aggregated and securitised into larger pools to access institutional investor capital.
This process also gives banks and other primary lenders an opportunity to refinance existing loan portfolios and recycle capital to create a fresh portfolio of green loans.
Reviving securitisation in the EU
The securitisation market in Europe performed better than the US during the crisis, but has yet to fully recover. A revitalised market could also mean more opportunity for green growth.
In a recent speech in Berlin, European Commissioner Vice President Dombrovskis pressed the importance of:
“...the European Parliament and Council to reach swift agreement on our definition of simple, transparent and standardised securitisation – and to adjust capital requirements for those who invest in them.”
As part of its efforts to develop a Capital Markets Union, the European Commission has proposed:
- A Regulation on Securitisation laying down common rules including due diligence, risk retention and transparency, and creating a framework to identify simple, transparent and standardised (STS) securitisations
- An amendment to the Regulation on Capital Requirements to make the capital treatment of securitisations more risk-sensitive and reflect STS securitisations
These issues have been tackled at the international level by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commission (IOSCO) but an agreement is still to be reached amongst the EU institutions.
Simple, Transparent, Standardised and Sustainable securitisation?
Though the simple, transparent and standardised (STS) framework does not specifically refer to green assets, the High Level Expert Group on sustainable finance (HLEG) is poised to advise on how to integrate sustainable elements into the Capital Markets Union reform process.
Its Interim Report will be published to coincide with the G20 leaders meeting in June this year.
The value of continued green finance momentum at both EU and G20 level should not be underestimated.
Greening the EU Market
Our recent policy paper, ‘Public sector agenda for stimulating private market development in green securitisation in Europe,’ published in collaboration with the Centre for Climate Change Economics and Policy at the London School of Economics, points to actions for policymakers to scale up green securitisation in Europe to help meet the EU’s 2030 energy and climate targets.
Its focus is on practical measures to improve access to capital and lower costs of capital for green projects while maintaining adequate risk and transparency frameworks.
A first step would be to develop guidelines for green assets and green tagging tools to facilitate the identification of loans eligible for green securitisation.
The European Mortgage Federation and European Covered Bond Council are already taking further steps in this direction and have launched an Energy Efficient Mortgages Initiative to develop a standardised energy efficient mortgage based on preferential rates.
The case for better treatment a preferential approach rests on the idea that energy efficiency measures give borrowers more disposable income, improving their credit profile, and make properties more valuable.
The Obvion Green RMBS Example
Along these lines Dutch-based Obvion issued the first green Residential Mortgage-Backed Security, under the Climate Bonds Standard.
The bond, issued in June 2016, for EUR 500m (USD 557m), was backed by a pool of green residential mortgages based on Dutch energy performance labels for private homes.
Green Synthetic securitisation?
A recent deal from Crédit Agricole showed the potential for synthetic securitisation to free up regulatory capital for green investments.
The evolving STS securitisation framework only covers true-sale securitisations; however, a proposed amendment of the Capital Requirements Regulation introduces the application of STS risk weights to specific balance-sheet synthetics. Could this provide another opportunity for increased green investment?
The Last Word
Asset-backed securities have been under scrutiny since the financial crisis.
In the green securitisation space, some positive signs of growth now are emerging with multiple transactions from the US, China and Australia.
Climate Bonds latest estimates, prepared in a Briefing Paper for our March Annual Conference, show around USD 5bn (6% of market share) of green securities issued in 2016 were asset-backed securities (ABS), up from USD 1.9 bn in 2015.
Green securitisation doesn’t excite the sort of attention that other parts of the climate finance agenda do.
Yet it could be one of the most effective potential means to harness small scale developments like residential rooftop solar, EV leases and small SME loans for energy storage projects.
Room to grow
The OECD estimates that annual issuance of green asset-backed securities could reach between US$280-380 billion (or between 44-52% of annual issuance) by 2035 for renewable energy, energy efficiency and low-emission vehicles financing alone (in a 2 degrees scenario).
Examples like Obvion in the EU and further afield, Toyota in the US and Flexigroup in Australia show what can be done.
Our report is one of many moving parts that could see the EU lead on the global development of green securitisation, embedding policy reforms and then supporting green securitisation initiatives in other markets as a part of global climate finance and sustainable investment directions.
We’re happy to help.
Till next time,
PS: For the Diary – Brussels Roundtable April 24th
A roundtable on green securitisation to discuss these issues will be hosted by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) in Brussels on April 24th – more details to follow!
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