In this article we discuss the European Banking Authority’s recommendations to facilitate the development of the sustainable securitisation market.
In our briefing on the regulatory outlook regulatory outlook for 2022 published late last year, we noted that the European Banking Authority (the EBA) was expected to publish a report (the EBA Report) on developing a specific framework for the purpose of integrating sustainability-related transparency requirements into the Securitisation Regulation. The EBA Report has been eagerly awaited by the securitisation industry, as there does not currently exist a directly relevant regulatory framework for ESG securitisations (neither the EU Taxonomy Regulation nor the Sustainable Finance Disclosure Regulation (SFDR) directly apply to securitisation transactions). Many would have welcomed the establishment of such a framework based on SFDR. However, as we discuss below, the EBA is of the view that it is not the right time to establish such a framework and has instead recommended some amendments to the EU Green Bond Standard (EU GBS) and the Securitisation Regulation to facilitate the development of the sustainable securitisation market.
The EBA Report has now been published, exploring the following aspects:
- whether and how EU regulations on sustainable finance, including the EU GBS, the EU Taxonomy and the SFDR could be applied to securitisations;
- the relevance of a dedicated regulatory framework for sustainable securitisation; and
- the nature and content of sustainability-related disclosures for securitisation products.
The EBA’s Recommendations
According to the EBA’s analysis, the European sustainable securitisation market is still in the early stages compared to the green securitisation markets in the US and China. The EU securitisation market is also less developed than the EU sustainable covered bond market. According to the EBA this is due to, among other things:
- a lack of available sustainable assets;
- a lack of dedicated sustainable securitisation standards and data; and
- the limited attractiveness of securitisation products in general.
The EBA therefore concludes that it would be premature to establish a dedicated framework for green securitisation at this stage. Rather, the EBA is of the view that the forthcoming EU GBS regulation should also apply to securitisation, provided that some adjustments are made. In this regard, the EBA recommends that the EU GBS requirements should apply at originator level (instead of at the issuer/securitisation special purpose entity (SSPE) level). This would allow the EU GBS requirements to be imposed on entities with broader economic substance and ensure that originators are not able use the proceeds of green securitisations to generate non-green assets.
The EBA sees the proposed adjustments as an intermediate step to allow the sustainable securitisation market to develop and to play a role in financing the transition towards a greener EU economy. They are also meant to ensure that securitisation is treated in a consistent manner with other types of asset-backed securities. The EBA Report contemplates that a specific framework for sustainable securitisations may become more relevant in the medium term.
The EBA also recommends that the Securitisation Regulation be amended in order to extend voluntary ‘principal adverse impact disclosures’ to non-STS (simple, transparent and standardised) securitisations, so that all securitisations are covered, noting that the availability of more standardised data on principal adverse impacts is key to supporting the transition of the EU securitisation market towards sustainability. It also calls for further EBA work on green synthetic securitisation and social securitisation.
Response and Next Steps
The Association for Financial Markets in Europe (AFME) welcomed the EBA Report, while requesting proportionality and well-calibrated disclosures that are meaningful to investors.
As anticipated in our regulatory outlook for 2022, the European Commission will now submit a report to the Parliament and Council on the creation of a sustainable securitisation framework, perhaps together with a legislative proposal. It is expected that the Commission will publish its report by the end of Q2/2022.
Given the influence that SFDR has had on ESG investing generally – with some CLO managers, for example, voluntarily adhering to SFDR-equivalent disclosure and reporting regimes for their securitisations – many in the industry would likely have welcomed the creation of a securitisation-specific regulatory framework similar to SFDR. Choosing instead to focus on the development of the EU GBS in the context of securitisations has the advantage that it avoids multiple overlapping standards in the market, which could lead to confusion and fragmentation. Furthermore, the EU GBS is a voluntary standard, so allowing sustainable securitisations to voluntarily apply it leaves more flexibility than would an SFDR-like legislative requirement. However, it remains to be seen whether the EU GBS can be made fit for purpose for all securitisations, or whether market participants in certain sectors will continue to look to “SFDR equivalence” as the standard for ESG securitisations.