The securitisation industry: Where there’s an ESG will, there’s a way

The securitisation industry is embracing ESG, despite challenges associated with data, a limited number of deals and disparate energy labelling across Europe. We discuss the opportunities and threats in today’s securitisation market with Boudewijn Thus, Business Development Director, Capital Markets and Arno Vink, Executive Director Capital Markets from Intertrust Group. Intertrust will join the ESG panel discussion What are the Next Steps? during the Securitisation Event.

What does the securitisation landscape look like today?

Boudewijn Thus: The macroeconomic challenges many of us feared last year materialised to a lesser extent than expected. However, there are still a lot of uncertainties, both economic and geopolitical. We have recently seen transactions returning to the securitisation market, many of which have a clear ESG focus. These deals are still based on the more conservative areas of the business, such as car loans and mortgages, although there is more interest in non-combustion engine loan securitisations, for example.

Arno Vink: At Intertrust, we are involved in all asset classes. That means we’re active in public deals, securitisations, and corporate bonds. As a corporate services provider, Intertrust has been setting up structured finance products since 1997, so we have witnessed many twists and turns in the market.

What are the current market developments?

Arno Vink: We have seen the securitisation market flip from rather dormant in Q4 last year to very wide awake in 2023. This is encouraging. Also, we see a number of public transactions being worked on. This could be a sign that we have adapted to the reality of higher interest rates and relatively high inflation. I think the very dark cloud we were all looking at in Q3 last year has become brighter.

Boudewijn Thus: This is certainly linked to the macroeconomic situation. There’s a certain amount of relief in the market right now. Hopefully this positive sentiment will continue throughout the year.

What are the main securitisation trends which you see?

Boudewijn Thus: There is still a major buzz surrounding ESG and securitisations, with use of proceeds also being high on the agenda. Use of proceeds asks: if you are involved in a green deal, will the proceeds be used for further green deals? That’s a very interesting topic.

Arno Vink: In the Netherlands we have not yet seen more innovative deals such as the securitisation of solar panel financing loans. We are still waiting for those, despite predicting them last year.

What impact has the EU Green Deal had on securitisation?

Boudewijn Thus: I think it’s still a work in progress. We have done a lot in the securitisation industry, and the sector is really making steps. However, there is much work to be done, and that simply takes time. It does help that specific parts of the Green Deal are mandatory. Also, the mindset in the securitisation industry is changing in the right direction and that is a major step forward.

Arno Vink: I also see a shift in investor focus when talking to market participants, clients, and business partners. This is not only driven by the economics and the traditional risk/reward ratio. Many participants are willing to take environmental impact into consideration in terms of the return which they want to have. So, it’s about impact as well. I think this will grow. Many pension funds, for example, are clearly seeking more environmentally sound investments, and we think securitisation can certainly play a role in moving the needle.

Do you have any examples of impact-related initiatives in securitisation?

Arno Vink: We currently actively participate in a Dutch residential mortgage market industry working group called the Dutch Energy Efficient Mortgages Hub. Together, we work on translating the EU directives into local standards and jurisdiction. The Hub is doing its best to ensure that all the Taxonomy definitions are properly translated to accommodate the Dutch market in order to establish a national standard for green mortgages.

Boudewijn Thus: The challenge is that in order to call a mortgage green it either needs to finance a new building built after a certain year, or you need to demonstrate that you have improved the energy efficiency of the house by 30%. It sounds very simple, but not only must we have the relevant data, we also have to facilitate borrowers to make those investments. I don’t think we are at the tipping point on this yet, but I feel sure that a point will soon come when we can really push and accelerate green mortgages and related securitisations.

Could the Hub’s method provide a blueprint for the European mortgage market?

Arno Vink: If we can keep up the pace we have now: setting the standards, working with the European Union, and working together, it could be a start. However, you will always have local “flavours”. The learnings and methods of this new movement might provide a backbone, rather than a blueprint, for Europe. It will certainly help to create momentum in the market.

Are the different “green” labelling systems across Europe a challenge in this regard?

Arno Vink: They are. That is partly what this working group is for. From a Dutch perspective, all the main originators, and other relevant parties involved have joined forces to make sure that we can tailor-make solutions for the Dutch context. We therefore have to develop a common understanding that we agree on the interpretation so that we can start collecting the correct data, have it verified and be transparent.

Boudewijn Thus: There is definitely a willingness for standardisation in the group. And if you look at the EU Taxonomy and how extensive it is, it is a mountain of work: but the working groups are proceeding very well. A lot has been completed regarding the data, and also the parameters of the standard. We’re moving along, we’re getting closer, but we’re not quite there yet.

Does Intertrust see any specific developments in auto ABS?

Boudewijn Thus: We continue to see car loan securitisation mixing combustion engine loans with more energy efficient vehicles such as hybrid and electric car loans. But I would anticipate and be interested to see the first public fully electrical vehicle securitisation. I would hope to see such a deal within the next 24 months. That would be a very high-profile transaction and surely open the market from an investor perspective as well.

Do you foresee that being an exclusively Dutch deal, or a European securitisation?

Boudewijn Thus: I wouldn’t be surprised if a European deal would emerge. We see a lot of interest in electrical vehicles from Germany and the rest of Europe.

Arno Vink: I would imagine full-electrical vehicle pool deals would perhaps first be limited to the private space or warehousing. But I agree, the pace of vehicle electrification in accelerating. For example, the policy here at Intertrust is that whenever employees want to renew their company car, they must choose an electric vehicle. That’s of course an isolated example, but it perhaps illustrates that this transition can take place rapidly if there is a pro-active willingness to change.