The European Banking Authority (EBA) has today published its report on a Framework for Sustainable Securitisation. The EBA was mandated by the EU legislator as part of the Capital Markets Recovery Package in April 2021 to assess whether a stand-alone framework for sustainable securitisation should be created to achieve the sustainability objectives of the European Sustainable Finance Agenda and to make proposals on its design.
Use-of-proceeds approach remains decisive
The starting point of the report is a market survey on the status of green and sustainable securitisations conducted by the EBA as of 30 June 2021. The results of the comprehensive survey show a low level of issuing activity for sustainable securitisations in Europe. This is true both in comparison to other asset classes such as covered bonds and corporate bonds in Europe. But it can also be seen with regard to the jurisdiction and here the securitisation markets in the USA and even China. The EBA cites lack of availability of sustainable exposures and lack of standards and data as the main reasons.
The EU Green Bond (EuGB) standard presented by the European Commission in July 2021 deserves special attention (see TSI compact article of 6 July 2021). The question of interest here is how this standard can be applied to securitisations. The EBA comes to the conclusion that in the sense of a uniform implementation for all capital market segments, the use-of-proceeds approach at the issuer is also decisive for securitisations. Issue proceeds should primarily be used in accordance with the Taxonomy Regulation and the regulation should not focus on the securitised exposures. We welcome this pragmatic solution as it supports the focus of banks, leasing companies and corporates on sustainable business activities. Moreover, the already high level of transparency from securitisation to individual loan data offers the possibility to support investors in their investment decisions very effectively.
Conclusions of the EBA's analysis
In its further analysis, the EBA concludes not to recommend a dedicated sustainable securitisation framework at this stage for several reasons:
- The early stage of development of the green securitisation market in Europe and lack of market consensus could lead to requirements from issuers and investors not being met.
- For an asset-based approach, there are not yet enough sustainable receivables that can be securitised.
- The standard for securitisations should be in line with the upcoming implementation of the EuGB standard. No parallel, competing standard should be created.
These conclusions for the true sale market apply all the more to synthetic balance sheet securitisations, as this segment is characterised by private, bilateral issues and uniform regulation would currently bring further uncertainty. Nevertheless, the EBA outlines some thoughts on what a sustainable securitisation framework could look like in the future: An asset-based approach would focus on the securitised credit exposures, which would have to fulfil sustainability criteria to be defined. In the case of a necessary definition of sustainability criteria, it becomes clear which questions the credit industry has to deal with, especially independently of securitisations: Which business activities and investments are to be classified as sustainable according to the Taxonomy Regulation and the Disclosure Regulation? How are transitional technologies to be assessed, and how can unsecured consumer loans or trade receivables be classified, for example?
EBA recognises STS standard as a value in its own right in the marketplace
Two further observations seem important to us at this point: First, the EBA recognises the stand-alone value of the STS standard and does not see it as a prerequisite for green securitisation. Conversely, ESG criteria should also not be made a prerequisite for STS. Secondly, the EBA emphasises the already very high requirements with regard to due diligence, reporting and disclosure obligations for securitisations in Europe. It links this to the expectation that the numerous transparency requirements of sustainability regulation will also have an impact on securitisations.
We expressly welcome the EBA's conclusions and recommendations, as the first priority is a uniform development and implementation of the EuGB standard. The securitisation market, which is already highly regulated, will thus be given time to develop market standards, which will depend very much on the implementation of the European Sustainable Finance Agenda across the board in the credit industry. After all, securitisation follows the regular lending of banks and leasing companies to the real economy.