On 2 March 2022, the European Banking Authority (EBA) published the long awaited report on developing a specific sustainable securitisation framework to integrate transparency requirements.

The EBA concludes in its report that the setup of a dedicated framework for green "true sale" securitisations, green synthetic securitisations or social securitisations would be premature at this juncture. Instead, it recommends:

  • amending the scope of proposal for the EU Green Bond Standard Regulation (which applies to capital market products generally) such that it also applies to securitisations;
  • imposing the requirements of the proposed EU Green Bond Standard Regulations on the originator rather than the securitisation vehicle, such that (among other things) the originator's use of the issuance proceeds must meet the "green" criteria; and
  • amending the EU Securitisation Regulation (SECR) to extend voluntary disclosures regarding the principal adverse impact (PAI) of securitisation investments on ESG factors to all securitisations, rather than only to those which qualify as simple, transparent and standardised (STS) securitisations. Mandatory PAI disclosures should be considered in the medium term once the EU sustainable securitisation market has further matured.

Background

The EU Capital Markets Recovery Package introduced amendments to the SECR which have provided the EBA with a mandate to deliver a report that aims to develop a specific EU framework for sustainable securitisation. This report is one of several regulatory works that are currently being developed in the area of sustainable securitisations, which also include the EBA Report on the prudential treatment of ESG exposure.

Over the past two years, several innovative securitisations have brought sustainability to the forefront of the EU securitisation market. However, the application of sustainability requirements in securitisation appeared to require further clarification. This is also due to the fact that neither the EU Taxonomy Regulation nor the Sustainable Finance Disclosure Regulation directly apply to securitisation transactions and financial instruments issued thereunder.

Recommendations

In its report, the EBA elaborates on (i) recent developments and challenges in introducing sustainability to the securitisation market, (ii) the application of the EU Green Bonds standard (EU GBS) for securitisations, (iii) the introduction of a potential dedicated framework for sustainable securitisation and (iv) the nature and content of sustainability-related disclosures for securitisations.

EU sustainable securitisation market

In a first step, the EBA gathered the view of stakeholders on the state of the market and on potential concerns and expectations regarding the development of a framework for sustainable securitisations.

According to the EBA, the European sustainable securitisation market appears to still be in the early stages of development: sustainable securitisations only account for around 2% of EU ESG bond issuances and for around 6% of EU securitisations. In comparison with the US and Chinese green securitisation market, the EU sustainable securitisation market is relatively small and far less developed. This is, amongst other things, caused by (i) a lack of available sustainable assets to securitise, (ii) the absence of a definition, dedicated standards (ICMAs Green Bond Principles (GBP), Social Bond Principles and Sustainability Bond Guidelines have become the leading frameworks for bonds including securitisation bonds), and data to foster transparency and credibility of sustainability-linked transactions in the market and (iii) the limited commercial attractiveness of securitisations in general.

However, the EU sustainable securitisation market is constantly growing, and is now expanding beyond the green RMBS and green auto ABS segments.

EU Green Bond Standard

Against the background of transparency and harmonisation in July 2021, the EU Commission published a legislative proposal for the EU GBS. On the basis of such proposal, only "true sale" securitisations would be within scope, leaving out synthetic securitisations.

The EBA now recommends amending the scope of proposal for the EU GBS such that the requirements should apply at level of the originator, instead of the level of the securitisation vehicle as envisaged in the currently proposed EU GBS regulation. This would allow a securitisation that is not backed by a portfolio of green assets but where the originator commits to using all the proceeds from the green bond to generate new green assets to meet the EU GBS requirements and ensure a consistent treatment of securitisation bonds and other types of green securities secured on assets that do not use SPV structures.

The EBA sees the proposed adjustments, which are aiming at facilitating the development of a sustainable securitisation market, as an intermediate step towards a greener EU economy.

Dedicated framework for sustainable securitisations

Whilst the report generally supports the idea of a dedicated framework for "true sale" securitisations, arguing that this would on the one hand help to signal to the market those institutions that are already transitioning and to further promote standardisation and consistency in the use of the ‘green securitisation’ designation, the EBA concludes that this is not (yet) appropriate given that the EU economy as a whole has not yet enough transitioned such that there are not sufficient green assets to securitise and support the development of a green securitisation framework based on a collateral-focussed approach. Additionally, the EBA states that it could be beneficial to wait for the implementation of the EU GBS to ensure consistency and complementarity between such standards and a potential green securitisation framework.

Should the European Commission decide in favour of the creation of a green securitisation framework, however, the EBA provides a list of high-level safeguards which should be considered.

Regarding green synthetic securitisations and social securitisations, which are not within scope of the EU GBS, the EBA deems it premature to establish a framework given that both markets are not yet established. The EBA is of the opinion that more time would be needed to assess whether synthetic securitisation and social securitisation should be reflected in a green framework. The EBA suggests that it be mandated separately to monitor the developments and, if appropriate, further investigate the relevance and potential content of a framework for both green synthetic and social securitisation.

Sustainability-related disclosures

The EBA also recommends that the SECR should be amended in order to extend voluntary ‘principal adverse impact disclosures’ (PAI) to non-STS securitisations, i.e. securitisations which do not meet the criteria for a simple, transparent and standardised securitisation. In the medium term, once the EU sustainable securitisation market has further grown, it recommends that mandatory PAI disclosures should also be considered.

Next steps

This Report has been developed in accordance with Article 45a(1) of the SECR. Based on the outcome of this Report, the European Commission will submit a report to the European Parliament and the Council on the creation of a sustainable securitisation framework, together with a legislative proposal if deemed appropriate. It is expected that the Commission will publish its report by the end of Q2/2022.