The Taxonomy Regulation also applies to the finance industry. Its purpose is to condense all information regarding Turnover, CapEX and OpEx into a single key performance indicator, namely the Green Asset Ratio (GAR). Since 2022, the finance industry must report the GAR for taxonomy-eligible risk positions relative to all other assets. Taxonomy-aligned risk positions must be reported from 2024.
However, other important transparency regulations for the finance industry already became legally effective before the Taxonomy Regulation was issued:
- The climate-related Benchmark Regulation (BMR), which has been legally effective since April 2020 and
- the Sustainability Financial Disclosure Regulation (SFDR), which has been legally effective since March 2021, as a central component of the transparency regulations for the financial sector.
Still in the process of being enacted are
- A draft for an extension of the transparency regulations for STS securitisations in the form of an RTS on sustainability disclosures of April 2023 and
- a European Green Bond Regulation (EuGB) of October 2023.
To what extent do structured investment products, which also include securitisations, for example, contribute to achieving climate-related sustainability goals? In this regard, the amended Benchmark Regulation (BMR), which has been in force since April 2020, focuses on climate-related indices and benchmarks that are to be used for pricing climate-related investment products including securities in the form of securitisations. However, the requirements apply only to investment products and securities including securitisations that actively promote climate-related sustainability goals.
The BMR aims to harmonise the standards for determining benchmarks for GHG emissions across Europe. The motivation of the regulator is to counteract a possible fragmentation of the capital markets and greenwashing.
The climate-related BMR provides for standards in the form of an EU Climate Transition Benchmark as well as an EU Paris-aligned Benchmark.
- The EU Climate Transition Benchmark is intended to make the declarations on the climate action path comparable, especially for investment products such as funds invested in securitisation.
- The EU Paris-aligned Benchmark is intended to show the extent to which a respective investment product contributes to the goal of the Paris Climate Agreement to limit the global temperature increase to 1.5°C above pre-industrial levels.
The standards relate in particular to the determination of direct and indirect GHG emissions over a complete product life cycle.
The European Commission published the Sustainability Financial Disclosure Regulation (SFDR) in November 2019. It has been legally effective since the beginning of March 2021. The aim of the SFDR is to strengthen market transparency for investment products through uniform terminology and reporting. This is designed to help investors identify sustainable investment products more easily.
The SFDR creates obligations for a broad range of market participants in the finance industry, in particular fund providers and managers as well as asset managers. Unlike the Taxonomy Regulation, the SFDR is not concerned with economic activities and corresponding individual positions of an investment product, but instead focuses primarily on the investment strategy of providers of an investment product. For all investment products, they must report in quantitative and qualitative form whether and to what extent they take sustainability objectives into account in the design of the investment product. This reporting obligation also applies to statements in pre-contractual documents, on the website and regular disclosures.
Regular disclosure includes reports on the asset allocation of investment products, on progress towards greater sustainability and on quantitative information on significant adverse impacts on sustainability objectives. The latter information on so-called Principal Adverse Impacts (PAIs) must be disclosed at the level of the investment product as well as for the fund provider and manager and the asset manager. The PAIs are similar to the DNSH principle of the Taxonomy Regulation. However, in the case of the SFDR, the DNSH principle is not only to be applied to the six environmental objectives, but also to further objectives in the ‘Social’ area. However, simplifications in disclosure are foreseen for investment products that meet the conditions of the Climate-related Benchmark Regulation.
In principle, the finance industry is required to disclose PAIs at product and company level, taking into account investments in securitisation positions, by the end of June 2023 for the reporting year 2022 in accordance with Article 17 of the Delegated Regulation supplementing the SFDR of April 2022, which has been legally effective since January 2023.
As securitisations are not investment products in the strict sense of the Sustainable Finance Disclosure Regulation, the ESAs published a final draft RTS on sustainability disclosures for STS securitisations in April 2023. At present, the rule for selected STS securitisations is that originators should report ESG information where possible. The final draft RTS on sustainability disclosures for STS securitisations creates an alternative to this. This optional standard is intended to help investors meet their disclosure obligations under the SFDR with regard to securitisations as well. However, the RTS, which was expected to take legal effect in 2024, will apply only to selected STS securitisations whose underlying risk exposures are loans for residential real estate or loans for vehicle purchases or vehicle leasing transactions. It does not provide for a corresponding disclosure option for other asset classes as well as ABCP securitisations.
The European Commission's proposal includes four key requirements for green bonds under the EuGB:
- The funds raised by the bond should be allocated fully to projects that are aligned with or help align them with the Taxonomy Regulation;
- There must be full transparency on how bond proceeds are allocated through detailed reporting requirements;
- All such green bonds must be checked by an external reviewer to ensure compliance with the regulation and that funded projects are aligned with the Taxonomy;
External reviewers providing services to issuers of European Green Bonds must be registered with and supervised by the ESMA. This will ensure the quality and reliability of their services and reviews to protect investors and ensure market integrity.
Different rules will apply to public sector issuers. Furthermore, the label ‘EuGB’ should also be available to issuers of securitisations.
The EU legislators’ European Green Bond Regulation from October 2023 explicitly includes securitisations. However, securitisations in the EuGB are subject to additional transparency requirements. The following must be disclosed:
- Proportion of taxonomy-eligible assets in the securitised pool,
- the share of taxonomy-aligned assets in the securitised pool and
- the proportion of assets in the securitised pool that violate the Do-No-Significant-Harm (DNSH) criterion
The legislation does not specify thresholds for these disclosures. The use of the proceeds of a securitisation under the EuGB must be taxonomy-aligned, the securitised pool does not have to be ‘green’. It is therefore left to market participants to decide how many ‘green’ assets a securitisation under the EuGB contains in the pool. Only market transparency should be guaranteed.
However, the EuGB only covers public securitisation transactions without substantial restrictions on asset classes.
In the course of its proposal for an EuGB of July 2021, the European Commission asked the EBA to assess whether a separate regulatory framework for sustainable securitisations should be created. The EBA published its proposal for the development of a sustainable securitisation framework in early March 2022. It does not consider such a framework to be necessary for the time being. The EBA came to the conclusion that, for the purposes of uniform implementation for all capital market segments, the originator's UoP approach should also be decisive for securitisations.
In this context, it makes the following arguments:
- The early stage of development of the green securitisation market in Europe and the lack of market consensus could lead to requirements from originators and investors not being met;
- For a more asset-based approach, there are not yet enough green underlyings that can be securitised;
- The standard for securitisation should be in line with the upcoming implementation of the EuGB. No parallel, competing standard is to be created.
The EU legislators are complying with the EBA's recommendation under the EuGB (see Treatment of securitisations in the final draft for the EuGB).
Numerous legislative processes in the context of Sustainable Finance are running in parallel. There does not always appear to be a clear coordination of the regulations. The respective transparency regulations regarding ESG information are not coherent, especially in the case of securitisations. Sustainable securitisations are directly regulated both in the context of the Securitisation Regulation (SECR), the Sustainable Finance Disclosure Regulation (SFDR) and the European Green Bond Regulation (EuGB). The uniform ESG disclosure framework envisaged by the EU legislators also for securitisations still seems a long way off.