ESG data holds the key for the renaissance of Europe’s ABS market

For almost 15 years after the great financial crisis, the European Asset Backed Securities market had remained sluggish. Today, ABS is all the more relevant to financing Europe’s energy transition and to gather additional investments required for the real economy. At the same time, investors are undeniably seeking opportunities for green investments. Yet they struggle to acquire standardised and comparable ESG-related data.

This is a major challenge for all parties in the investment world. The availability of comparable and more clearly structured data is one of the answers, according to Dr Christian Thun, data scientist and CEO at European DataWarehouse (EDW). He will speak at the Amsterdam Securitisation Event during the ESG panel discussion entitled: What are the next Steps? Thun believes that the European securitisation market is on the brink of a major revival, and it should be seen as a key player in financing the upgrade of Europe’s aging housing stock.

What are investors looking for in terms of ESG data?

Investors are looking for a growing number of new data points. Everyone is seeking the greenest possible investments. However, there is a struggle currently to validate and verify the ESG and sustainability claims of various parties in order to establish whether or not the good things which are being promised will actually take place or have taken place.

What is causing this information fog?

The lack of EU standardisation when it comes to sustainability-related measures makes the comparability of ‘greenness’ difficult for all parties. This is the case with Energy Performance Certificates — for example the A++ label on your fridge or house. These ratings differ wildly per country.

Do you have an example?

If you take cars: a Land Rover can be labelled ‘green’ in Germany, because weight and engine efficiency is taken into account. A Fiat 500 can be ‘brown’ in Germany because its engine is deemed less efficient compared to the size of the car. In France these labels are completely the opposite. For example, if you went to the Volkswagen websites in France and Germany, you could configure exactly the same car and get two different EPCs.

What about mortgage related data?

When it comes to housing EPCs, there are similar anomalies across European countries. A house with a low EPC rating of ‘F’ in the UK or Portugal is graded ‘D’ in France or even ‘B’ in Romania. In fact, EDW is involved in a new project called ENGAGE for ESG Activation Investments, co-funded by the European Union, which aims to iron out these types of data inconsistencies and provide deeper and harmonised ESG-relevant data coupled with credit information. Our main goal is to create a Green Investment Portal (GIP) to stimulate the financing of sustainable mortgages and home renovation loans.

Why focus on housing with the ENGAGE project?

The European Commission recently estimated that 40% of the EU’s energy consumption and 36% of its CO2 emissions come from buildings. The Energy Performance of Buildings Directive (EPBD) legislation is currently under review. We want to develop a data framework to guarantee high-quality energy efficiency information. Reducing the energy consumption of European housing would greatly help the planet in the long run. Securitisation can play a critical role in the funding of this housing market transformation which in turn could contribute to a revival of the market as the flywheel effect of green ABS creates a potential win-win scenario for investors and, ultimately, the environment.

What is ENGAGE?

ENGAGE is a project comprising a pan-European consortium of six parties, coordinated by EDW. The consortium includes two “disruptive” sustainable mortgage financiers, an IT company, a university, and consultancy. Our aim is to integrate the requirements of the EU Taxonomy into the portal to help financial institutions check the alignment of their mortgages and home renovation loans with the Taxonomy.

We want to bring more clarification and standardisation to the European mortgage market via the development of a standardised data template that also aligns the ESMA RMBS reporting template with the EPBD. We’re very proud that Woonnu, a Dutch sustainable mortgage loan originator, will pilot and evaluate the usability and performance of the GIP. In Spain, the pilot mortgage loan originator is UCI. Dutch financial software company, Hypoport, will also play a key role in developing and deploying the GIP. The project has a roll-out target of 2025: we are currently initiating pilot projects in Spain and the Netherlands.

How will investors use the Green Investment Portal?

Investors are increasingly seeking more ESG-related data than they currently receive through the ESMA templates, which limit ESG information to EPC ratings. ENGAGE aims to provide the housing-related data which the market wants. This could include energy performance indicators such as CO2 emissions, building renovation data, and so on. This information is generally not yet available.

Have you considered a similar initiative for auto loans?

EDW currently has loan-level data on more than 15 million cars, and we are very keen to facilitate the use of the relevant datasets for ESG-related initiatives. We were recently very happy to be awarded a grant by the German Federal Ministry of Education and Research, working together with the Leibniz Institute for Financial Research SAFE on a study called “Green Auto Securitisation” or GAS.

What is that?

We are investigating how a green finance mechanism could support the financing of low-emission vehicles (LEVs) through bank lending. We will support GAS by enhancing the availability of auto loan and lease data, allowing for the development of relevant credit risk models. This research is admittedly still in the early stages, but both ENGAGE and GAS ultimately aim to enhance data transparency for investors of all types, from those interested in having a sustainable impact to investors more interested in risk profiles. These can range from households wanting to lease an LEV on favourable terms, to major financial institutions issuing pan-European green auto and leasing securitisations.

How does the future of ESG data look from where you are sitting?

I believe that whoever succeeds in setting the standards for the collection of comparable and relevant ESG-related data will eventually be among the frontrunners. And to be honest, the Dutch are way ahead of the curve at this point in time.