EBA Sets Out Views on Developing Sustainable Securitization Framework
The European Banking Authority (EBA) published a report that explores the need for development of a framework for sustainable securitization. In the report, EBA recommends amendment of the Securitization Regulation as well as adjustments, in context of the securitization transactions, to the proposed European Union Green Bond Standard. However, the analysis shows that it would be premature to establish a dedicated framework for sustainable securitizations. EBA also recommends that mandatory principal adverse impact disclosures should be considered in the medium term once more experience has been gained on the implementation of sustainability-related disclosures for securitization.
The report offers an overview of the recent developments and challenges of introducing sustainability to the securitization market. It explores how the Green Bond Standard in European Union could be implemented for securitization and whether a potential dedicated framework for sustainable securitization should be introduced. The report includes policy recommendations addressed to the European Commission, with a focus on these three areas:
- Application of the European Union Green Bond Standard standard to securitization;
- Relevance, policy implications, and possible design of a dedicated framework for sustainable securitization products
- Nature and content of sustainability-related disclosures for securitization products
In the report, EBA recommends that requirements of the Green Bond Standard should apply at the originator level, instead of at the issuer or securitization special purpose entity (SSPE) level. This would allow a securitization that is not backed by a portfolio of green assets to meet the Green Bond Standard's requirements, provided that the originator commits to using all the proceeds from the green bond to generate new green assets. The proposed adjustments will allow the sustainable securitization market to develop and play a role in financing the transition toward a greener economy, in addition to ensuring that the treatment of securitizations is consistent with that of the other types of asset-backed securities. Further EBA work on green synthetic securitizations and social securitizations is also called for.
EBA also recommends amendment of the Securitization Regulation to extend voluntary "principal adverse impact disclosures" to non-STS (simple, transparent and standardized) securitizations. Improved availability of more standardized data on the principal adverse impact, or PAI, of securitization investments on environmental, social, and governance (ESG) factors would be key to supporting the transition of the European Union securitization market toward sustainability. Mandatory principal adverse impact disclosures should also be considered in the medium term once the European Union sustainable securitization market has further matured and more experience has been gained on the implementation of sustainability-related disclosures for securitization. This report was developed in accordance with Article 45a(1) of the Securitization Regulation. Based on the outcome of this report, the European Commission could submit a report to the European Parliament and the Council on the creation of a sustainable securitization framework, along with a legislative proposal, if deemed appropriate.
Keywords: Europe, EU, Banking, Securitization Framework, STS Securitization, Sustainable Finance, Disclosures, EBA, Green Bonds, ESG, Green Bond Standard, Securitization Regulation, Basel, EC, Headline
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Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
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