On 28 June 2022, the International Capital Market Association (ICMA) announced a range of new and updated publications, intended to support the development of the ESG bond market. The updated publications and resources address certain gaps in the Green Bond Principles (GBP) and Social Bond Principles (SBP and, together with the GBP, the Principles) with respect to sustainable securitisation and represent a significant step forward in the development of the sustainable securitisation market, providing much needed guidance on terminology and market practice, and boosting transparency and the credibility of the market.
Of particular importance is the inclusion of a new definition of Secured Green/Social Bond, defined to mean a secured bond the net proceeds of which are applied to finance or refinance: (i) the green/social projects securing that bond (a Secured Green/Social Collateral Bond) or (ii) the green/social projects of the issuer, originator or sponsor, where such green/social projects may or may not be securing the specific bond in whole or in part (a Secured Green/Social Standard Bond). The addition of the Secured Green/Social Bond concept addresses the ambiguity around use of proceeds in securitisation structures, and the lack of green/social collateral currently available for direct investment.
The description of the Secured Green/Social Bond also clarifies that the Principles apply to a broad range of debt capital market products, including “all secured structures where the cash flows of assets are available as a source of repayment or assets serve as security for the bonds in priority to other claims”. In previous versions of the GBP and SBP, the language appeared to limit the application of the Principles to covered bonds, asset-backed securitisation and mortgage-backed securitisation, and this led to some debate in the market around the application of the Principles to other structures.
A related Q&A for sustainable securitisation has also been released. The Q&A provides clarity on:
- Sustainability criteria relating to collateral (in the absence of sustainability criteria, issuers, originators and sponsors are urged to provide sufficient disclosure to facilitate assessment by investors as to the compatibility of collateral with their investment mandate. Additional disclosure is also advised in circumstances including where a bond is only partly collateralised by green/social projects at the time of issuance; in such circumstances, issuers, originators and sponsors should disclose how proceeds will be managed including how they will be allocated to eligible projects following the issuance);
- Use of proceeds (the inclusion of “issuer”, “originator” or “sponsor” or their group affiliates, as the case may be, should allow for parties responsible for organising a secured transaction to apply the use of proceeds towards Green and/or Social Projects in line with the GBP/SBP/SBG at the appropriate entity level);
- No double counting principles (the Q&A confirms that the proceeds of a Secured Green/Social Bond should not typically qualify as use of proceeds for a green, social or sustainability bond, to avoid the impact of a project being reported by more than one issuer);
- Reporting requirements (the reporting requirements for a Secured Green/Social Bond can be satisfied by either the issuer, originator or sponsor (or the appropriate group affiliate thereof); and
- Disclosure (issuers, originators and sponsors are encouraged to disclose the nature of the instrument, including the relationship between the instrument and any underlying collateral or derivative bonds, as well as the impact of the project).
The updated publications and resources put more information in the hands of securitisation market participants. They provide increased guidance for issuers, originators and sponsors on the steps involved in launching a credible green/social securitisation bond and an alternative means of advancing their sustainable finance agendas. By encouraging greater transparency, they allow investors to make more informed decisions and increase the credibility of the market.
Despite such positive impacts however, the absence of sustainable securitisation regulation arguably remains a significant potential impediment to the market’s development. A recent report on the developments and challenges of introducing sustainability in the EU securitisation market published by the European Banking Authority (EBA) analysed the applicability of certain EU regulations, including the EU Green Bond Standard (EU GBS) and the Sustainable Finance Disclosure Regulations (SFDR), to securitisation. The EBA concluded that, while it would be premature to establish a dedicated framework for green securitisation, the upcoming EU EBS regulation should be adjusted so that it applies to securitisation to “allow the sustainable securitisation market to develop and to play a role in financing the transition towards a greener EU economy…[and] to ensure that securitisation is treated in a consistent manner as other types of asset-backed securities”.
The joint consultation paper published by the European Supervisory Authorities (ESA) regarding the draft regulatory technical standards (RTS) with respect to certain sustainability disclosures for simple, transparent and standardised (STS) securitisations represents an important development in the area. The goal of the RTS is to facilitate disclosure by originators of specific information regarding the consideration of adverse impacts on sustainability factors. They aim to draw upon and supplement the ESAs’ work in respect of sustainability-related disclosures in the financial services under the SFDR by aligning the STS regime with the SFDR which should create efficiencies in reporting for originators and assist investors with their own ESG reporting requirements. This standardisation of disclosures will be beneficial for investors, but it remains to be seen whether the proposed disclosures will be proportionate both in terms of the information to be provided and the frequency of such disclosures for originators.
It is clear that securitisation is a sound product to finance the green transition, but it remains significantly under-utilised in Europe as compared to other regions. While these publications demonstrate much needed support for the development of the European sustainable securitisation market, it remains to be seen whether these tools will invigorate the market or whether further regulatory intervention will be needed to promote the growth of this market.
Please reach out to your usual Freshfields contact if you would like to discuss these developments in more detail.