The International Capital Market Association’s Asset Management and Investors Council (“AMIC”) published a statement in March 2021 highlighting the “paucity of relevant and standardised ESG information” for investors in asset-backed securities (“ABS”). AMIC explained that the absence of such information can make it difficult for ABS investors to accurately and effectively appraise ESG risks for their investments and may also risk penalties for such investors as their regulators and clients introduce more sustainability-related requirements, such as the regulatory requirements set out in Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector. AMIC expressed the view that ABS investors will be able to increase their investments in sustainable ABS assets if they have better access to relevant and standardised ESG information.
In this context, AMIC believes that key performance indicators (“KPIs”) are essential to allow asset managers to compare originators’ ESG-related performance. AMIC recommended the adoption of KPIs for different ABS sub-asset classes to facilitate ABS investors’ sustainability-related reporting obligations.
Discussion paper on ESG KPIs for Auto ABS
AMIC published a discussion paper in May 2021 identifying KPIs for securities backed by auto loans and leases (“Auto ABS”).
AMIC noted that the transparency requirements for “STS” securitisations set out in the EU Securitisation Regulation (Regulation (EU) 2017/2402) require originators to publish the available information related to the environmental performance of the vehicles being financed by Auto ABS transactions. However, the European Banking Authority (“EBA”), in its guidelines on the STS criteria for non-ABCP securitisation, clarified that this requirement should be applicable only if the information on the energy performance certificates for the vehicles being financed by the relevant Auto ABS transaction is available to the relevant originator for the transaction and captured in its internal database or IT systems. AMIC noted that this information is inconsistent from one deal to another and, in our experience, UK and Irish originators of auto loans and leases securitised in Auto ABS transactions typically disclose in the relevant transaction prospectus that such information is not available.
AMIC’s list of the most needed KPIs for Auto ABS include:
1. Environmental aspects
- the average carbon dioxide emissions of vehicles in the underlying portfolio;
- the average “well-to-wheel” carbon dioxide emissions of vehicles in the underlying portfolio;
- a breakdown of the number of vehicles in the underlying portfolio powered by petrol, diesel, hybrid, fuel cell, other zero-emission or electricity;
- whether the auto loans and leases and the vehicles in the underlying portfolio are aligned with the EU’s Taxonomy principles for sustainable activities set out in Regulation (EU) 2020/852;
- where there are electric vehicles in the underlying portfolio, the average recyclability of such vehicles and their batteries;
2. Social aspects
- the average safety score of the vehicles in the underlying portfolio;
3. Governance aspects
- the originator’s compliance and process to control compliance with principles 1 to 10 of the United Nations Global Compact or the OECD Guidelines for Multinational Enterprises;
- certain gender pay gap related disclosures in respect of the originator’s business; and
- the originator’s board gender diversity.
AMIC also recommended that unlisted originators / servicers of auto loans and leases should provide disclosure in respect of the Association for Financial Markets in Europe’s Securitisation ESG Due Diligence Questionnaire published in March 2021. Relevant issues for unlisted originators / servicers covered by this questionnaire include:
- data privacy and security policies and related issues;
- material complaints and / or any litigation regarding how the company conducts its business;
- composition of the board of directors (number of women, independent and / or ethnic minority directors);
- active charity initiatives;
- policies on lending to underserved communities;
- borrower affordability strategies;
- level of direct board responsibilities for ESG matters;
- adequate policies to safeguard against illegal practices (including, but not limited to, corruption and fraud) and any history related to such incidents;
- corporate governance and / or ethical related enforcement / litigation or employee claims or breaches related to issues such as anti-bribery, corruption, unfair labour practices, human rights abuses, and other malpractices; and
- relevant information on the originator’s auditor, including any material disputes between the company and its auditor, and / or any material restatement of the company’s financial statements.
AMIC recommended that the information to be disclosed should be made available pre-issuance to inform the investment decision-making process and should be updated on a quarterly basis to consider potential portfolio replenishment.
ESG-related disclosure for future Auto ABS transactions
In light of the initiatives mentioned in this article and the wider focus on ESG-related issues in the financial services sector, it is likely that originators and servicers will be required by both regulators and investors to significantly increase the level of ESG-related disclosures provided for future Auto ABS transactions. Originators and servicers will be encouraged to keep up-to-date with developments in this area so that they are in a position to attract the broadest possible investor base to future securitisations of their loan books.
Other securitisation sub-asset classes
It is understood that AMIC will be publishing discussion papers identifying KPIs for another two ABS sub-asset classes: residential mortgages (“RMBS”) and collateralised loan obligations (“CLOs”).
Sustainable Securitisation Framework
In accordance with recent amendments to the EU Securitisation Regulation, which we have previously written about, the EBA is required to publish a report by 1 November 2021 on developing a specific sustainable securitisation framework for the purpose of integrating sustainability-related transparency requirements into the EU Securitisation Regulation. AMIC’s KPIs for Auto ABS, RMBS and CLOs may be incorporated as part of the EBA’s report and may also be adopted by other market participants.
This article is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute or comprise, legal or any other advice on any particular matter.