The securitisation market has been slow to incorporate the ESG financing tricks that have made the green and sustainable corporate bonds so popular with investors and issuers. But with new standards and guidelines on the way from the Structured Finance Association, that pace may be about to pick up.
The securitisation market has not been without its green successes so far. The US$7.8bn of green asset-backed securities priced last year in the US, for example, is about three times the previous year’s total of US$2.5bn, according to Refinitiv data. And 2021 welcomed several first-time issuers as well as novel deal structures that will certainly set the tone for what’s to come. Yet securitisation still lags behind the corporate debt and equity markets in its adoption of ESG standards.
The SFA, with the help of its members and consultant KPMG, is setting out to help change this. The association has assembled task forces to develop ESG frameworks for each of the main securitisation products, including commercial mortgage-backed securities, residential mortgage-backed securities, collateralised loan obligations, and deals backed by autos, credit cards and unsecured consumer loans.
“There are a lot of things with ESG that present unique challenges for securitisation,” said Michael Bright, CEO of SFA. “How do you evaluate the underlying assets? How do you evaluate the issuer? What about the intersection of issuer and asset? There aren’t really frameworks for all this. We’re going to try to build them.”
Attempts to incorporate ESG principles into structured finance have suffered many of the same problems as the broader market for sustainable financing. Data used to assess an issuer’s or an asset’s ESG credentials are often of poor quality, and the prevailing methods used to make those assessments are often opaque and contradictory.
“The concept of ESG has been around in the equity market for quite some time, and there’s been a push on the corporate credit side,” said Elana Lipchak, an ABS strategist at Bank of America. “I think it’s finally making its way to the securitisation market.”
The questions of transparency and reliability of data, however, tend to be more difficult to answer in the securitisation market. The financing structures are complex – bonds comprising credit and ESG risk from many borrowers, for example – and make obtaining and vetting data that much more difficult.
“We tend to lag other markets,” Lipchak said. “It’s the nature of the product. It’s more complex and this makes it a little more challenging for issuers and investors to wrap their arms around this.”
In the new frameworks, the SFA will incorporate what it can from other asset classes, but that won’t be enough, according to Bright.
“We are trying to build frameworks asset class by asset class,” he said. “You can borrow from other industries, but you have to do a lot from scratch.”
Still, Bright is optimistic that by next year SFA frameworks will begin to be included in the documentation of new securities.
“By the end of 2023, we’d like to have securitisations issued with an SFA standard for ESG,” he said. “Once you get there, it could take off very quickly.”
Any deals would build on the existing momentum in the US structured finance market. Government-sponsored Fannie Mae and Freddie Mac have been the leading issuers of US dollar-denominated securitised social bonds. However, the private market has chalked up some important milestones too.
Angel Oak Capital Advisors last May priced the first social bond in the non-qualified RMBS sector, a US$232m financing of home loans made to self-employed workers and other borrowers who do not qualify for cheaper mortgages guaranteed by federal agencies. In August, Aligned priced the market’s first green ABS deal backed by wholesale data centres, a US$1.2bn financing.