AFME Releases Position Paper on Principles for Developing a Green Securitisation Market in Europe

The position paper notes that AFME and its members strongly support the development of a green securitisation market in Europe and welcome voluntary measures to promote its development so that green securitisations can play an important role in helping to close the yearly investment gap of almost €180 billion needed to achieve EU climate and energy targets set by the European Commission Sustainable Finance Action Plan.  The position paper further notes that although demand for green securitisation bonds remains relatively low at present, AFME’s members are seeing an increasing number of queries and reverse enquiries around green securitisations and believe the market has considerable potential to grow.

The new securitisation framework introduced by the Securitisation Regulation (Regulation (EU) 2017/2402) on 1 January 2019, together with ICMA’s existing Green Bond Principles (“GBP”), set the context for the development of principles and practices for “green securitisations”.

In its paper, AFME outlines its position in relation to a number of key points:

The importance of defining green securitisation simply and clearly

A simple, clear and consistent definition of green securitisation should encourage market development at a faster pace. The position paper suggests refining the definition of “green securitised bond” in the GBP and also suggests that the definition of  “green securitisation” should be separate and distinct to that of “green bond” and should be reserved exclusively for transactions collateralised by green assets (for example, mortgages to finance energy-efficient homes, electric vehicle loans/leases, solar leases and SME loans to fund environmental projects, etc), as opposed to classifying a securitisation transaction as green simply because the proceeds were applied towards, or regulatory capital or liquidity relief achieved allocated to, green projects.  AFME also considers that the GBP requirements relating to the “process of project selection” and “specifying the use of proceeds” to be satisfied upfront on a green securitisation transaction by virtue of the proceeds being applied  to acquire collateral that complies with eligibility criteria meeting the requirements of the applicable green principles or taxonomy.

The need for political support and financial or regulatory incentives to promote the development of the green securitisation market

According to AFME’s position paper, the introduction of tax, regulatory and other initiatives could help support the growth of the green securitisation market. The introduction of preferential capital treatment for green securitisation or tax incentives by national governments for investing in green securitisations would help promote green securitisation to all securitisation investors, not only those with a green mandate.

Other potential incentives suggested include: (i) reduced hair-cuts for central bank eligibility schemes; (ii) bespoke LCR limits; (iii) ongoing governmental and regulatory support by way of guarantees and the related regulatory benefit; and (iv) subsidies for establishing new green projects.

Disclosure, ongoing reporting and underlying data

The new securitisation framework sets out the highest disclosure standards for securitisation anywhere in the world.  AFME does not consider additional impact monitoring and reporting to be necessary for many green securitisation transactions and therefore does not intend to propose additional new mandatory disclosure requirements over and above the general standard of disclosure that already applies to securitisations.

Generally, on the majority of public green securitisation transactions, AFME would expect any green requirements to be tested only on the closing date by the application of eligibility criteria for the transaction. This would be the case for any transaction where the green aspects of the deal could not change over time and therefore only need to be tested once (for example any RMBS transaction or auto loan transaction where the relevant EPC certificate or emissions standard is certified upfront).  On that basis, disclosure of the green aspects of the transaction in the prospectus would be limited to the description of the eligibility criteria in the ordinary course and no bespoke green triggers or default events would be required. However, if the underlying collateral contains ongoing green obligations (such as key deadlines for achieving a minimum energy efficiency improvement), further disclosure in the prospectus to reflect this may be required.

Originators are encouraged to record and track any green data on the underlying collateral necessary to determine whether the requirements of the GBP or relevant green taxonomy are met on a systemic basis.

Consideration of the key contractual provisions that will need to be contained in a green securitisation transaction (eg eligibility criteria and triggers)

During securitisation transactions where the green aspects of the underlying collateral are only required to be tested once on the closing date (or, for a revolving pool, each date of transfer), AFME would expect that the green elements of a securitisation transaction would be met by establishing criteria that complies with the relevant green principles or taxonomy.  The repercussions of any breach of a green asset warranty would be the usual repurchase obligations of an originator and the ongoing reporting would be no different from that of a standard securitisation transaction.

AFME would expect additional green trigger or default events to occur in certain cases where the underlying collateral contains ongoing green obligations. In such cases consideration would be required regarding what the repercussions would be for any breach of an ongoing obligation by the underlying borrower and how this should be reflected in any reporting.

The need to consider and address the impact of the evolution of green technologies and standards over time on long-term programmes and the secondary market

As standards evolve a transaction originally considered to be green could cease to meet the requirement of relevant green principles or taxonomy, which could have an impact on pricing and liquidity in the secondary market.  Ongoing reporting and transparency where standards have changed on legacy transactions will therefore be required.  Furthermore, any regulatory or similar incentive introduced for green securitisations should include grandfathering for legacy transactions that have ceased to be considered green over time as a result of the evolution of technology. Grandfathering could help to mitigate any material and sudden detrimental impact on pricing and liquidity in the secondary market.

AFME also notes that it would be helpful to consider whether the appropriate green bond criteria and/or taxonomy requirements against which a portfolio is tested should be those that applied on the date the relevant receivable was originated which would ensure that where a legacy green portfolio is refinanced the new transaction could still qualify as a green securitisation.