Everybody’s talking about ESG, but who is acting?
The securitisation sector has been talking about sustainability for a while now, and when the European Banking Authority (EBA) report entitled Developing a Framework for Sustainable Securitisation was published in March 2022 it certainly got everyone’s attention. At the same time, investors, issuers, data providers and rating agencies are all seeking answers to the increasing demand for deeper knowledge and standardisation on sustainable and Environmental, Social and Governance (ESG) categorised investments. We talked to Antonio Tena, Vice President Senior Credit Officer, Moody’s Investors Service on his company’s approach to this dynamic subject.
Sustainable securitisation products are in high demand from institutional investors, many of whom have committed to invest in sustainable assets. The EBA report readily admits that the “application of sustainability requirements in securitisation appears to require further clarification”. The report outlines a potential way forward to create a dedicated framework for sustainable securitisation. This is just one example illustrating that Responsible Investing is clearly here to stay, and this latest EBA report puts the securitisation sector in the sustainability spotlight.
“At Moody’s we welcome the EBA’s recommendation on a green bond framework for securitisation,” says Antonio Tena. “In particular the inclusion of sustainability-related disclosure requirements for issuers and originators which will improve transparency and ease the credit analysis and investor due diligence.”
At the same time, Moody’s is devising its own methodology and general principles for specifically assessing Environmental, Social and Governance (ESG) credit risks. “We acknowledge that market participants are focussing more and more on the potential for ESG considerations and how they affect credit risk and investment decisions,” says Tena. “At Moody’s Investors Services we are meeting this challenge. It is still early days, and this is complex material, but we believe transparency is highly important. We published two documents that we regularly update as part of the foundation of our approach to ESG and credit risk.”
The two documents are risk assessment “heat maps” — one for environmental risks and one for social risks — which provide a qualitative assessment of the overall credit materiality of environmental risks. “We regard environmental risks as material if they result in visible pressure on the credit profiles of a broad set of issuers, either today or in the foreseeable future,” says Tena. “These Environmental and Social heat maps provide more transparency to the market about how ES(G) is impacting our ratings. They answer the question: How is ESG impacting credit risk?”
Issuer Profile and Credit Impact scores
Both heat maps adhere to Moody’s General Principles for Assessing Environmental, Social and Governance Risks. This analysis results in two different scores. The Moody’s ESG Credit Impact Score, which is an output of the rating process that more transparently communicates the impact of ESG considerations on the rating of an issuer or transaction. And the Issuer Profile Score IPS, which reflects Moody’s opinion of an issuer’s, obligor’s or transaction’s exposure to E, S and G risks and benefits.
“We have started to publish these scores for countries, banks and corporates,” says Tena. “We are currently in the process of implementing this same process for structured finance. The next step will be to provide these types of ESG scores for securitisations as well.” These scores are a method of providing transparency into the ESG risk which is already included in our existing ratings, he adds.
While there are no scores for securitisations at this point in time, the heat maps do include global risk assessments for a wide variety of Asset Backed Securities from Residential Mortgage Backed Securities, auto loans, consumer loans, student loans and utility cost recovery charges, for example. “It’s a single heat map for different asset classes,” explains Tena. “The importance of data cannot be understated in this process. We already have much better and deeper data than in the past, and it is getting better, but still a long path ahead.”
Touching base in Amsterdam
Tena and his colleagues will attend the Amsterdam Securitisation Event, and see the occasion as a way to touch base with colleagues. “For us this Amsterdam conference is an important touchpoint for the sector and all the relevant market participants for the Netherlands,” he says. “This conference focuses on key trends which we see in the securitisation sector space. I am very happy to be returning to the Amsterdam Securitisation Event and to be able to discuss all the developments in the securitisation market. Also, it will be great to see people in person again, after a long break. Hopefully we will also hear from investors what they are interested in. The feedback from investors is extremely valuable for us.”
For more information or tickets, visit the eventpage of the Securitisation Event 2022.