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How the securitisation sector is answering calls for ESG compliance

8 June 2022

Boudewijn Thus

Business Development Director, Capital Markets

Boudewijn Thus

Business Development Director, Capital Markets

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Sustainability was a trending topic at the first in-person Amsterdam Securitisation Event since 2019

Prospects for the securitisation market in the Netherlands and wider Europe are positive, despite the prevailing economic headwinds. That was one clear take-away from the first in-person Securitisation Event since 2019.

The Amsterdam conference was full of energy and enthusiasm. The consensus was that recession will be avoided, even if macroeconomic challenges in the second half of 2022 and into 2023 slow growth as interest rates rise.

In the securitisation space, the buy-to-let market still has room to grow, especially with more average-income couples priced out of buying their own homes. There was also enthusiasm for synthetic securitisation.

Inevitably, the other trending topic was environmental, social and governance (ESG) compliance. Although applying ESG is in its infancy in securitised finance, momentum is growing.

Three phases of ESG compliance in securitisation

The opportunities ESG compliance creates for investors in securities are likely to coalesce around sustainable mortgages, “green” car loans (mostly for electric vehicles) and – further down the line – solar energy.

Sustainable mortgages will see most activity in the short term, because industry standards have already been created and applied.

In the Netherlands, for instance, Intertrust Group is currently the only service provider to belong to the national energy efficient mortgages hub. Its role is to translate legislation in the EU taxonomy into a local framework.

Mortgages will provide the model for how ESG opportunities filter into the wider securitisation market. ESG compliance is adopted in three phases:

  1. Setting standards: The EU taxonomy sets Europe-wide sustainability standards, with legislation adapted for local use. (Global ESG standards, by contrast, seem a long way off.)
  2. Securitisation: Using those standards, green securities are created and offered to the market.
  3. Verification: Green securities must show ongoing ESG compliance.

While there is clearly enthusiasm for ESG-compliant securities, so far there are few fully green deals. This is not down to lack of intent or ambition. Rather, it’s due to the complexity of the third phase of that process. Verifying ESG compliance around securitised assets can be highly complicated.

An extra layer of ESG compliance

In the corporate credit world, it’s easy to prove that finance is ESG-compliant because the end results are clear. Either a business has converted its vehicle fleet to electric models or it hasn’t, for example.

Similarly, in project finance, it isn’t difficult to tick an ESG box because the outcome of an investment is usually obvious.

Securitisation is harder. A fully compliant ESG deal must take account of the issuing firm’s green credentials and the underlying collateral, as well as what happens to the proceeds of the investment.

This extra layer of validation makes sustainable investing in the securitisation space harder to verify.

On top of that, it’s easy to focus on the “E” in ESG – forgetting the “S” and ‘G’, regardless of asset class. One compliant piece of finance was recently downgraded despite impeccable sustainability criteria after a whistleblower revealed sweatshop conditions in one of the target business’s factories.

ESG will become standard – in time

These are complications on securitisation’s green journey, but not blocks in the road. The sector can and will find solutions, and the number of green deals will accelerate.

It certainly won’t be long before a large number of portfolios are fully compliant with regard to their collateral element.

Verifying the sustainable use of proceeds requires more effort and will take longer to become mainstream. But it will, because investors and regulators want ESG-compliant securitisation. Investment firms will look to outsourced service providers to help them oversee these complex financial vehicles.

Third-party providers have a significant part to play in all three phases of ESG adoption. As we’ve seen, Intertrust Group is already involved in conversations around mortgage industry standardisation in the Netherlands.

How outsourcing can aid ESG compliance

Service providers can also help funds ensure that green securities meet the relevant criteria and will take a lead role in identifying and collecting the data that proves end-to-end compliance.

This is a time-consuming process that many stretched fund administrators will be happy to outsource. ESG-focused investors are also likely to appreciate the presence of third-party oversight.

Discussions on ESG were among the liveliest and best attended at the Amsterdam event, suggesting that the securitisation sector is well aware of the direction of travel. The next two or three years are likely to see sustainable securitisation take off.

Why Intertrust Group?

  • Intertrust Group is a publicly listed company with 70 years’ experience in providing world-class trust and corporate services to clients around the world.
  • We can provide expert solutions for all your needs in the fields of ESG, data and outsourcing.