Collaboration key to ESG progress

Comparison may be the thief of all ESG-joy for the securitisation market, as attendees at SCI’s 2^nd Annual ESG Securitisation Seminar this week reflected on how far the industry has come since the inaugural ESG issuance seven years ago. Different financial sectors adopt different definitions for ESG and thus also face different challenges. However, given such differences, more praise could be due for the pursuit of progress across the securitisation industry – assessing not where a sector or company is, for instance, but how far it has come in its ESG journey.

At present, the ESG debate within the structured finance space revolves around the issue of data and reporting, as amid complexities of major data proliferation comes calls for standardisation. With volumes of ESG securitisations down last year, market participants agree that increasing standardisation would support the provision of the correct data and reporting necessary for truly sustainable issuance.

In fact, the seminar kicked off with a call for more collaborative efforts from ELFA ceo Sabrina Fox. Widely seen as driving the ESG agenda across different markets and asset classes, most prominently with its CLO questionnaire, ELFA’s efforts were praised throughout the day.

Fox noted that the key to making ESG definable for firms is unlocking data. Indeed, panellists - including Deutsche Bank’s Sanhita Athalye – not only noted the missing, irrelevant or outdated data for ESG in traditional ABS, they also pointed to the absence of efforts similar to ELFA’s within the ABS market.

Fidelity International’s Oliver Newman was clear that ESG factors should have long been a key consideration in decision-making.

‘Governance’ was the word at the seminar, as the day’s panellists shared the same expectation to see a rise in consideration of the ‘G’ in ESG, with ESG deals coming to dominate over non-ESG deals in the coming years.

Although critiqued for lagging behind other financial markets in respect to adopting ESG, Federated Hermes’ Andrew Lennox argued that the securitisation industry may not need to be judged so harshly for holding such high standards for data collection and reporting that many blame for holding the sector’s sustainability efforts back. Since the GFC, the securitisation market has kept the bar extremely high for analysis of risk, alongside the need to understand data on a granular level.

In fact, Lennox suggested that current data-intensive approaches to ESG securitisation could protect participants from the sort of risk-taking seen pre-GFC.

Kensington Mortgages’ Alex Maddox added that this high bar could even help prevent greenwashing. He emphasised the need for a balance between increasing the pace in which to reach global environmental targets and creating a space for greenwashing, in order to secure a true lift-off in issuance and effectiveness of the ESG securitisation market.

However, Lennox warned that without regulation and standardisation, data and transparency pressures may be pushed onto investors from the issuers themselves.

Attendees stressed the ‘real’ cost of failing to improve sustainability efforts, including chairperson Naomi Prasad from Pemberton Capital Advisors and panellists Luca Bertalot from the European Mortgage Foundation and Prime Collateralised Securities’ Max Bronzwaer. They all stressed the importance of securitisation - as a proven tool for funding the real economy - in the battle against climate change.

Unlike other sectors with ratchet and target-based approaches to ESG, the need to establish realistic timelines for transition was mentioned by Marco Angheben from the European DataWarehouse.

Meanwhile, the EIF’s Daniela Francovicchio recommended that others should adopt a similar model to her organisation’s for offering a pricing benefit, as it would facilitate the move from the use of brown assets to green. Although no quantifiable green-premium is currently evident in the market, Bronzwaer shared his expectations for a ‘reversal’ in greenium trends - as green assets become the standard, brown assets would no longer be accepted by investors.

Panellists agreed that if there was a performance difference between ESG and non-ESG transactions, then a difference in pricing would emerge – and therefore with a provable advantage for ESG deals, interest in them would be heightened.

Overall, while the energy crisis may have renewed the focus on sustainability across Europe, more still needs to be done. Angheben and Bertalot both shared fears regarding EPC ratings across the continent due to gaps in data, expressing the need for EPC standardisation both within and between different countries. Nonetheless, ESG developments in the UK and Europe are still considered to be far ahead of those in the US, as US-based attendees praised the momentum seen on this side of the Atlantic.

Claudia Lewis