Dentons - Green Securitisations under the EuGBS

 The demand for ESG products has exponentially increased in the last years. However, the offer of ESG securitisation has been limited also due to the absence of guidelines or consolidated market standards identifying when a securitisation could be labeled as “ESG”.  

The European market practice has mainly proposed structures which focus on either:

(i)            green collateral: whether the assets backing the transaction comprise, in full or in part, a collateral, which has a positive impact on ESG factors; and/or

(ii)           use of proceeds: whether the use of the proceeds shall be used to (re)finance in full or in part assets that have a positive impact.

The international market practice, where the ESG securitisation market appears to be more developed, has also adopted more complex structures envisaging, by way of example, a combination of “green” and “grey” tranches or including margin rachets granting a lower interest rate to originators that comply with certain ESG criteria.

In this scenario of uncertainly, the request for the creation of an ESG label to boost investors’ confidence and allow the ESG securitisation market to develop appears widespread among the market participants.

The new draft proposal of “Regulation of the European Parliament and of the Council on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and sustainability-linked bonds” published on 10 May 2023 (the EuGB Regulation) moves a step in such direction at least for “green” securitisations.

Drawing from the conclusions set out un the European Banking Authority report on “Developing a Framework for Sustainable Securitisations”, published on 2 March 2022, the EuGB Regulation embraces for securitisations a “use of proceeds” assessment to be made at the originator level.

Specifically, according to Article 13a of the EuGB Regulation, in order for a securitisation to benefit of the “EuGB” label, the proceeds obtained by the originator from selling the securitised assets to the securitisation vehicle (the SSPE), would need to be employed in accordance with the EuGB Regulation and accordingly, towards taxonomy aligned assets as identified under in accordance with Article 3 of Regulation (EU) 2020/852.

While the use of proceeds approach has the benefit to allow the generation of new green assets, it opens the risk to an adverse selection of assets, which would allow originators to transfer “brown” assets to the SSPE, while retaining green assets on the balance sheet. In order to overcome this risk, the EuGB Regulation provides that the securitisation exposures shall not comprise exposures financing the exploration, mining, extraction, production, processing, storage, refining or distribution, including transportation, and trade of fossil fuels, provided that securitised exposures financing electricity generation from fossil fuels, co-generation of heat/cool and power from fossil fuels, or production of heat/cool from fossil fuels, where the activity meets the Do No Significant Harm criteria referred to in Annex II to the Commission Delegated Regulation (EU) 2021/2139, may be included in the pool of securitised exposures.

The EuGB Regulation, accordingly, introduced safeguards with respect to the underlying asset pool avoiding, by way of adverse selection, assets that would be incompatible with a green investment.

While the assessment at the SSPE level by reference to the securitised assets might have been more in line with the ring-fenced and non-recourse nature of the securitisations, the EuGB Regulation should be anyway welcomed as a positive first step to the development of a green securitisation market at a time at which imposing a securitisation market where all of the underlying exposures should be taxonomy-aligned would face considerable growth constraints due to the absence of sufficient eligible assets.

The “use of proceeds” approach provided by the EuGB for “green securitisation” should therefore represent an efficient and pragmatic approach in a transition phase, until the EU economy has generated adequate volume of taxonomy-aligned assets which can be then securitised.