ESG is challenging for the structured finance industry

Are S&P Global Ratings developing specific tools for embedding ESG into securitisation analysis or is it still too early.

Beth: It’s interesting because the ICMA principles were not written for the securitisation market but for the market in broad terms. We know there is some work being undertaken at the moment to provide additional guidance about how you might apply these to the securitisation market. So, we have been publishing some of our views on this. But there are still a lot of challenges and open questions which the whole market has to work through.

Matthew: ESG considerations in credit ratings aren’t new. We have historically always been considering these: what is changing is the taxonomy and nomenclature around it, and an increasing demand for transparency. We have released industry report cards identifying for each sector what some of the common ESG factors which would fall under the E, S and G categories across the asset classes. And we will also soon publish ESG credit indicators in a quantitative alpha-numeric format which express our view of the influence of environmental, social and governance risks on each of the five main aspects of our analysis in structured finance transactions.

Accusations of greenwashing and social washing are often lurking around the corner: how can the securitisation industry avoid the pitfalls of false representation?

Beth: The challenge for us all is to clearly define what constitutes green and social investments. When it comes to securitisation the main question is: ‘at what level is the ESG assessment done, and is that the appropriate level?’ There are many different layers which you could include in an ESG assessment. Ensuring that process is transparent, is probably one of the most important factors. Alongside simply having a common definition of what’s is green and what is social adapted for this segment of finance.

Matthew: In terms of labelled deals, we are seeing a lot of framework alignment opinions. I think that works well when you’re thinking of unsecured corporate issuance. However, a structured finance transaction with specific collateral is rather different.

Once you dig down to the level of detail of a loan-level data tape you might ask yourself additional questions on the framework in order to analyse whether or not a specific transaction would also meet the principles.

What are the principle differences in terms of ESG data between issuers and investors?

Matthew: I think it depends whether you are talking about the credit impact or sustainability impact because that’s going to naturally drive what data is relevant. When originators are underwriting and servicing loans their primary consideration is likely ‘am I going to get repaid for advancing this money?’ And while repayment is important, from an investor’s point of view they also might have a mandate for some kind of impact or sustainability objective.

Is there an increasing demand in the marketplace for some clarification on ESG and sustainability in general?

Beth: There are certainly a number of industry-led initiatives right now to come up with some standards. These include the UNPRI which has a structured products working group, the structured finance association has an ESG working group as well to try and develop reporting standards, we’ve had ICMA has been working to come up with some further clarifications for securitisations, so as a whole the industry is really trying to determine what are the relevant fields that we want to see, and it will be a mix of both from a credit quality perspective as well as from an impact perspective, but I think the starting point is for everyone to at least be speaking a common language.

What could the future look like as the securitisation industry evolves more ESG standardisation?

Matthew: One of the reasons we haven’t seen a lot of issuance of green or social labelled deals in structured finance today (even if there is sufficient ESG data) is that it is very challenging to actually get sufficient scale of green assets. We have heard recently that there have been private deals done where the cost of funding in the securitisation is dependent on ESG targets that are being set for the originator instead, so we could see that work its way into public markets. And I think that does at least address the fact that you don’t necessarily need specific collateral that’s green or social, in order to do a sustainability -linked transaction.

What are your main reasons for attending the Securitisation Event in Amsterdam?

Matthew: I’m really looking forward to hearing the feedback from investors and issuers about what they want to see from S&P Global Ratings in the ESG space I’d like to know if the so-called “greenium” exists in structured finance: meaning is that more advantageous cost of funding for a more sustainable issuer, or the counter argument: is an investor willing to accept less yield in order to purchase a green or social-labelled bond? Also, I’m very interested to hear the state of the market and to hear how important ESG considerations now becoming in their mandates.

Beth: I’ve very curious to find out if there has been any real progress in terms of people’s thinking regarding ESG, as we haven’t physically met for a while now. It will be great to get together with everyone in the industry and hear from way more people than you would do in a virtual conference setting. Getting a finger on the pulse of everything that is going on will be very interesting to find out what people’s views on this subject are today will be very worthwhile.

For more information or tickets, visit the eventpage of the Securitisation Event 2022.