Featured Product

    AFME Advises on Standardization of ESG Disclosures for Securitizations

    March 15, 2021

    The Association for Financial Markets in Europe (AFME) published a paper that discusses the potential role of securitization, including the Asset Backed Commercial Paper (ABCP) programs, in developing sustainable finance, particularly in a post-pandemic economic recovery. The paper discusses the regulatory status of the disclosures and due diligence requirements for securitization in EU and identifies the environmental, social, and governance (ESG) factors that are important in the context of securitization, especially given the absence of the Social Taxonomy in EU. Finally, the paper makes recommendations to ensure consistency in the ESG disclosures and due diligence of market participants, with respect to the securitization transactions.

    The paper notes that, although the market for ESG securitization is still relatively small, strong investor demand exists in addition to a growing supply of ESG securitization bonds. To flourish, this market requires availability of a sufficiently large pool of assets for ESG securitization and a common ESG standard for disclosure and due diligence. As originators transition to more sustainable business models, pools of suitable assets will increase naturally over time. As for ESG disclosures and due diligence, the already very high standards required under EU Securitization Regulation provide a strong starting base from which to develop, where necessary, further relevant ESG data. The EU Securitization Regulation is expected to undergo a review by January 01, 2022, which is likely to introduce further ESG related disclosures into the framework. The paper also notes that a future sustainable securitization framework is, therefore, expected to draw on the EU Taxonomy and the EU Sustainable Finance Disclosure Regulation, which in the EU policy context, together provide a framework for defining legally sustainable activities and establishing sustainability-related disclosures in financial services. The EU Taxonomy will be particularly important in providing a standardized approach to the measurement of the environmental impact of the economic activity supported by the investment being sought. However, its criteria are difficult to satisfy today, narrowing down the potential pool of assets compliant with the EU Taxonomy which can be securitized.

    The paper also highlights that there is general agreement among most standard-setters that the pillars of sustainability are environmental objectives, social objectives, and good governance. However, while the EU Taxonomy Regulation provides a definition for what “environmentally sustainable” means for certain economic activities, there is to date no single universal definition of those three factors. The paper identifies and outlines examples of ESG factors that are common across various definitions and practices for financial and non-financial firms include climate change factors in the area of environment (including greenhouse gas emissions, biodiversity, and water use and consumption); human rights, labor, and workforce considerations in the area of social; and rights and responsibilities of senior staff members and remuneration in the area of governance. When assessing ESG factors for securitizations investors typically consider both the securitization portfolio (for example, green mortgages, SME loans to energy-efficient projects) and the key transaction counterparties (particularly the originator and servicer). It is, therefore, how the performance of the assets aligns to environmental and/or social objectives and how these are underpinned by good governance, that is most relevant for consideration when evaluating a securitization transaction. To ensure consistency of ESG disclosure and due diligence, AFME encourages parties to consider the following recommendations (on an “if available” basis) and ensure that:

    • references to the ESG aspects of the securitization are clear and understandable and that relevant ESG factors are addressed in the prospectus/offering documentation.
    • any material ESG-related risks that have impact on credit performance of the assets underlying the securitization transaction are reflected in the risk factors section.
    • any relevant definitions (for example, for "Eligible Green Projects") are provided and that information on how the issuer identifies and selects appropriate ESG assets or projects is available.
    • details of any third-party opinion obtained to verify the securitization complies with ESG factors is provided and that any details on parties providing verification for any post-issuance reporting are included, where applicable.
    • all the information related to how performance of the underlying assets aligns to environmental and/or social objectives and how these are underpinned by good governance is provided.
    • there is a reporting standard for originators across an asset class, for example via investor reports, to ensure a level of homogeneity in ongoing disclosure provided to investors and to lessen the reporting burden on originators.
    • information relevant to transitioning assets is provided, if applicable.

    Keywords: Europe, EU, Banking, Securities, Securitization, Sustainable Finance, ESG, Securitization Regulation, Disclosures, Taxonomy Regulation, SFDR Regulation, Climate Change Risk, AFME

    Featured Experts
    Related Articles

    APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness

    APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).

    December 02, 2021 WebPage Regulatory News

    EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance

    The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).

    December 01, 2021 WebPage Regulatory News

    FSB Sets Out Good Practices for Crisis Management Groups

    The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.

    November 30, 2021 WebPage Regulatory News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News

    OSFI Updates Timeline for Implementation of Certain Basel Rules

    Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.

    November 29, 2021 WebPage Regulatory News

    EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR

    EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.

    November 29, 2021 WebPage Regulatory News

    FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR

    The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.

    November 29, 2021 WebPage Regulatory News

    APRA Finalizes Capital Adequacy Standards for Banks

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.

    November 29, 2021 WebPage Regulatory News

    CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.

    November 29, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7751