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
    News

    UK Government to Set Out Rules on Wind-down of Critical Benchmarks

    HM Treasury notified that, after considering all responses, the government intends to bring forward further legislation, when the Parliamentary time allows, to address issues identified in the consultation on supporting the wind-down of critical benchmarks.

    May 07, 2021 WebPage Regulatory News
    News

    EIOPA Launches Stress Test for Insurance Sector in EU

    EIOPA launched the 2021 stress test for the insurance sector in EU.

    May 07, 2021 WebPage Regulatory News
    News

    UK Authorities Publish Third Edition of Regulatory Initiatives Grid

    UK authorities jointly published the third edition of Regulatory Initiatives Grid setting out the planned regulatory initiatives for the next 24 months.

    May 07, 2021 WebPage Regulatory News
    News

    EC Consults on Regulation on Non-Financial Sustainability Disclosures

    EC is requesting feedback on the proposed Commission Delegated Regulation on the content, methodology, and presentation of information that large financial and non-financial undertakings should disclose about their environmentally sustainable economic activities under the Taxonomy Regulation.

    May 07, 2021 WebPage Regulatory News
    News

    OSFI Outlines Prudential Policy Priorities for Coming Months

    OSFI has set out the near-term priorities for federally regulated financial institutions and federally regulated private pension plans for the coming months until March 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    BIS Announces TechSprint on Innovative Green Finance Solutions

    Under the Italian G20 Presidency, BIS Innovation Hub and the Italian central bank BDI launched the second edition of the G20 TechSprint on the lookout for innovative solutions to resolve operational problems in green and sustainable finance.

    May 06, 2021 WebPage Regulatory News
    News

    ACPR Publishes Version 1.0.0 of RUBA Taxonomy

    ACPR published Version 1.0.0 of the RUBA taxonomy, which will come into force from the decree of January 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    EBA Proposed Regulatory Standards for Central Database on AML/CFT

    EBA proposed the regulatory technical standards on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in EU.

    May 06, 2021 WebPage Regulatory News
    News

    ECB Responds to EC Consultation on Crisis Management Framework

    ECB published its response to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU.

    May 06, 2021 WebPage Regulatory News
    News

    BCBS, CPMI, and IOSCO to Survey Market Participants on Margin Calls

    BCBS, CPMI, and IOSCO (the Committees) are inviting entities that participate in market infrastructures and securities markets through an intermediary as well as non-bank intermediaries to complete voluntary surveys on the use of margin calls.

    May 05, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6942