Dentons - ESG Securitisations: work in progress

Securitisations started to incorporate environmental, social and governance (ESG) elements by providing general undertakings to invest in receivables that were not owed by entities whose activities were in violation of the UN Global Compact ten principles or otherwise operating in the oil, tobacco or weapons sectors.

The absence of a standardised approach as to the requirements to qualify as ESG securitisation and the applicable disclosures has certainly had an impact in the slow growth of a proactive ESG-related investments securitisation market in Europe. 

This article aims at providing a brief overview on where we are from a regulatory standpoint.

1. ESG disclosures in securitisations

While securitisations fall outside of the scope of reporting obligations under Regulation (EU) 2019/2088 (the SFDR), Regulation (EU) 2017/2402 (the Securitisation Regulation), as amended by Regulation (EU) 2021/557, now provides optional disclosures for STS securitisations.

Specifically, from 1 June 2021, originators of STS securitisations having as underlying assets residential loans, auto loans or leases, instead of publishing information as to the environmental performance of the assets financed by such underlying exposures, may decide to publish the available information related to the principal adverse impacts of such assets on certain sustainability factors (i.e. environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters).

To implement such provisions, on 2 May 2022, ESMA, EBA and EIOPA, published a joint consultation paper (the Consultation Paper) on STS securitisation-related sustainability disclosures (the Draft Sustainability RTS). Aiming at reaching a high degree of consistency with the SFDR, the Draft Sustainability RTS provides a “principal adverse impact” (PAI) disclosure, which includes:

• (i) a “non-green asset ratio” common indicator, which looks at the non-alignment of the pool of assets financed by the underlying exposures with Regulation (EU) 2020/852 (the Taxonomy Regulation);
  
  
• (ii) indicators for residential real estate loans, which include energy efficiency and non-green exposures as mandatory indicators, and additional indicators relating to emissions, energy consumption, waste, resource consumption and biodiversity; and
  
  
• (iii) indicators relating to auto loans and leases, which include greenhouse gas, air pollution, water, waste and material emissions, green exposures and social and employees matters as mandatory indicators and at least one additional indicator to be chosen in relation to social, employee, respect for human rights, anti-corruption and anti-bribery matters.

The Consultation Paper also proposes PAI indicators for securitisations of commercial real estate loans and of corporates (including SMEs) and trade receivables, to assess whether disclosures should be extended also to such assets. In this respect, EBA has raised the importance of extending the sustainability related PAI voluntary disclosures to non-STS securitisations in the report on “Developing a Framework for Sustainable Securitisations”, published on 2 March 2022 (the EBA Report).

2. ESG label in securitisations

The amendments to the Securitisation Regulation also mandated EBA to develop a specific EU framework for sustainable securitisations, which brought to the publication of the EBA Report.

In the EBA Report, EBA encouraged the application of the European green bond standard (EU GBS), subject to certain adjustment, also to securitisation, as it deemed premature to develop a dedicated framework. 

Specifically, EBA believes that the “use of proceeds” assessment should be made at the originator level rather than at the SPV level. Indeed, although the assessment at the SPV level might appear more in line with the ring-fenced and non-recourse nature of the securitisations, EBA has evidenced that such assessment would not trigger any obligation on the originators to generate new green assets, which conversely is the ultimate goal of EU GBS.

The European Parliament appears to have embraced such proposal, as a draft European Parliament legislative resolution (A9-0156/2022), published in May 2022, proposed to include a new article 6a in the EU GBS, providing that in case of securitisations the requirements under article 6 of the EU GBS shall apply to the entity from which the issuance economically originates.

At this time, however, the legislative procedure is still ongoing.