The situation: The implications of the evolution of European legislation on sustainable finance are very important for the EU securitization market. Although today the volume of EU durable securitizations is still limited, the EU durable securitization market is growing and expanding. There is a growing demand for sustainable securitization products from many institutional investors, who have increased their commitment to investing in sustainable assets in accordance with their internal policies. Interest in sustainable securitization is also coming from originators, who are now more committed than in the past to achieving sustainability, environmental and social goals.
The action: The European Banking Authority (“EBA”) recently published a report on developing a framework for sustainable securitisations (the “EBA Report”), providing an overview of recent developments and challenges related to the introducing sustainability into the securitization market and exploring (i) how the European Green Bond Standard (“EU GBS”) could be integrated into securitization transactions and (ii) whether a possible framework dedicated to sustainable securitizations should be introduced. Regarding this last point, the EBA report concludes that it would be premature to establish a dedicated framework for sustainable securitizations in Europe. Rather, the EBA considers that the EU GBS should also apply, with some adaptations, to securitization transactions.
Look forward: In parallel with the revision of Regulation (EU) 2017/2402 (the “Securitization Regulation”) and based on the results of the EBA report, the European Commission will submit a report to the European Parliament and the European Council on the creation a specific sustainable securitization framework, accompanied by a legislative proposal if deemed appropriate. A precise timetable for these additional actions cannot be foreseen at this stage.
EBA report on developing a framework for sustainable securitization
The EBA report examines how sustainability could be introduced in the specific context of the securitization market in order to support its proper development.
Assuming that comprehensive European regulations on sustainable finance are still in the making and that the EU sustainable market is still at an early stage of development, the EBA explores the following three fundamental aspects in its report :
- The application of the EU GBS to securitisations;
- The relevance, policy implications and possible design of a dedicated framework for sustainable securitization products; and
- The nature and content of sustainability information for securitization products.
Application of the EU GBS to securitization
The EBA report assesses the application of EU GBS to securitisations and considers that, to ensure the consistency and effectiveness of the application of EU GBS to a securitisation, adjustments should be made to the EU GBS so that EU GBS requirements apply. at the level of the originator (rather than at the level of the issuer/special purpose securitization vehicle (“SSPE”)).
This would allow a securitization not backed by a portfolio of green assets to meet EU GBS requirements, provided that the originator commits to using all proceeds from the green bond to generate new green assets.
In this regard, the EBA sees the above adjustments as an interim step to help the sustainable securitization market develop.
In addition, following the move of product use requirements from the SSPE to the originator level, additional EU GBS disclosure requirements would be needed to ensure that investors are made aware of the green features of the underlying portfolio and to limit the risk of “unfavorable green selection of assets”. In particular, it is important that the statement of the EU GBS disclosure framework is adjusted in a way that is consistent with the disclosure requirements under Article 7 of the Securitization Regulation.
No need to set up a dedicated framework for long-term securitizations
Assessing the relevance of establishing a framework dedicated to sustainable securitisations, the EBA report is of the opinion that:
- With regard to securitisations with actual transfer, it would be too early at this stage to establish a dedicated framework in addition to that of the EU GBS. More particularly, according to the EBA, since the specificities of securitization transactions would already be taken into account in the EU GBS regulatory framework by simply moving the relevant reporting obligations from the SSPE level to the originator level, an additional label does not appear necessary at this point. Moreover, in the current situation where the priority is mainly to finance new green assets rather than (re)finance existing green assets, a parallel framework based on a collateral-based approach does not seem necessary. However, it cannot be excluded that once the EU economy continues its transition, more green assets will become available and that the use of a product-based approach – which currently prevails in the EU GBS Regulation – will become less relevant, a dedicated framework for sustainable securitisations may become relevant; and
- With regard to synthetic securitisations, it also seems too early at this stage to establish a dedicated framework. In particular, according to the EBA, further assessment would be needed to determine if and how the specificities of synthetic securitisations should be reflected in a green framework, especially since no green standard has yet been considered for other forms of credit protection instruments such as as synthetic securitization.
In terms of the relationship between STS securitisations and durable securitisations, in the view of the EBA, they are completely independent. Therefore, being an STS securitization need not be a prerequisite for a securitization to be considered green, and vice versa because the two labels can be obtained independently.
Nature and content of sustainability information for securitization products
In this regard, the EBA also recommends that the Securitization Regulation be amended to extend voluntary “main adverse impact disclosures” to non-STS (simple, transparent and standardized) securitisations.
- In accordance with the EBA report, it is not necessary at this stage to set up a framework dedicated to sustainable securitisations.
- On the contrary, the EBA report considers that the EU GBS should also apply, with some adaptations, to securitization transactions. In particular, the EU GBS requirements apply at the level of the initiator (and not at the level of the SSPE). Therefore, a securitization that is not backed by a portfolio of green assets could meet the EU GBS requirements, provided that the relevant originator of the securitization commits to use all the proceeds of the green bond to generate new green assets.
- The EBA report recommends amending the Securitization Regulation to extend the voluntary “disclosure of the main adverse effects” to non-STS (simple, transparent and standardized) securitisations.