The Challenges and Opportunities of ESG Data in Securitization and Reporting
ESG is becoming increasingly prominent across the financial markets, including in the securitization space. However, there is currently no straightforward solution on how to apply ESG to securitizations.
According to the Climate Bonds Initiative, securitizations so far only account for a tiny fraction of the sustainable debt market. The Institute of International Finance’s Sustainable Debt Monitor shows the ESG debt universe is growing rapidly, reaching near $4.5tr in Q3 2022. However, the securitization market remains at a nascent stage in its evolution.
In our latest European Capital Markets webinar, co-hosted with NPL Markets, a panel of financial industry experts discussed the current challenges and opportunities of collecting, reporting and analysing ESG Data in securitizations:
- Atiyah Curmally – Principal Environmental Specialist, IFC
- Sanhita Athalye – Director, ABS Structuring and Sustainability Champion, GFCT, Deutsche Bank
- Burkhard Heppe – Chief Technology Officer, NPL Markets
- Andy Pitts-Tucker – Global Head of ESG, Apex Group
- Cornelia Wallner (Moderator) – Global Head of Capital Markets Sales, Apex Group
A Small European Market
“The European market is still at an early stage,” says Burkhard Heppe, Chief Technology Officer at NPL Markets. “There were EUR 8 billion of green securitizations in 2021. Up until October 2022, there has only been one transaction, so it’s a small market.”
Heppe says the sustainable securitization markets in US and China are much larger. The European market is lagging behind due to a “lack of standard definitions for sustainable securitizations, scarcity of sustainable assets, and yet developing approaches to tracking sustainable assets”.
The Regulatory Landscape
NPL Markets is following the ESG regulatory landscape closely, and Heppe notes some good first steps have been made since the introduction of the European Green Bond Standard ("EU GBS") in 2021. In March 2022, the European Banking Authority (“EBA”) clarified how the EU GBS applies to securitizations. Like other green financing, the green bond requirement applies at the originator level, not the issuer level.
Heppe thinks clarification is helpful, since sustainable securitizations can now take place without an underlying portfolio of green assets, if the originator commits to invest the money to generate new green assets going forward.
Key Regulatory Challenges
There is very little structured ESG data and information available in the securitization market at the issuer level. The exception in today’s market is Energy Performance Certificate (“EPC”) information in residential mortgage and equivalents for auto loan transactions. However, NPL Markets expects regulation to be more definitive and widely adopted going forward. This will support greater levels of quality and granularity for the data available to investors in future.
Investor Attitudes and Approaches towards ESG
“The good news is that many investors are moving towards having an approach for ESG-related integration in their portfolios” says Sanhita Athalye, Director, ABS Structuring and Sustainability Champion, GFCT, Deutsche Bank.
Athalye argues “while the overall proportion of green or social securitizations specifically backed by such assets is lower, more investors are getting interested in the ESG aspects of underlying portfolios”.
However, the market is still very fragmented. ESG transactions are yet to be qualified by regulations or ESMA templates yet, so many investors still focus only on credit, rather than ESG parameters. As there is no one size fits all approach for looking at ESG, investors are left to their own devices.
Another challenge is that large portfolios magnify the complexity of all data collection exercises. If this is coupled with data that is out-of-date and has frequent gaps, it can pose significant problems for investors looking to implement their ESG approach. Some data providers are using technology-based solutions to model for data gaps and solve these issues, but efforts are still at an early stage.
Data Transparency and Collaboration is Crucial
Atiyah Curmally, Principal Environmental Specialist, IFC says “there are unique challenges to collecting ESG data sets, on topics such as climate change, gender-based violence, impacts to indigenous communities and biodiversity issues, and then benchmarking the collected data against sustainability standards, particularly in emerging markets”.
The IFC uses a risk-based approach to benchmark clients over time using its own sustainability standards to overcome this problem. She says: “A number of other institutions also use IFC’s standards and we all adopt the same approach, so there is an amplification effect. As our clients stay with us on average for about seven years, we are able to collect a rich data history”.
Collecting Data in Private Markets
Beyond securitization, the panel examined the ESG data challenges in other private market areas.
Andy Pitts-Tucker, Global Head of ESG, Apex Group, said: “The public market space is getting better at collecting data. However, there is still a huge issue in the private market space, which makes up 90% of the companies all around the world”.
Pitts-Tucker highlights that “private market investors need products to help them do something positive with their data. We provide expert advice to define which data is important and how it should be collected. Best-in-class data collection is about promoting positive impact and making a real difference – and that’s something that’s very important to our business”.
He concludes that “as a first line of lender, the capital markets divisions of banks have an excellent opportunity to start building in ESG data collection during initial due diligence. Making this available to participants further up the financial supply chain, such as investors in securitizations, would ultimately broaden the scope for analysis and drive that positive change in the market”.
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