ESG and STS securitizations: the ESAs consult each other on the optional information provided by the initiators
The Sustainable Finance Disclosure Regulation (SFDR), among other things, imposes disclosure requirements on financial market participants and financial advisers about how sustainability risks are incorporated into decisions and advice, and how adverse sustainability impacts are taken into account at the entity and product level. However, securitization is not a ‘financial product” for the purposes of the SFDR and, fearing that sustainability information is insufficiently developed in the securitization market, the European Commission has successfully proposed sustainability-related changes to the Securitization Regulation as part of the recovery plan capital markets (CMRP) and together with other amendments related to non-performing exposures and synthetic securitisations. These changes came into effect in April 2021.
Proponents may choose to disclose impacts on sustainability factors
As of June 1, 2021, originators of non-ABCP traditional STS securitisations and on-balance sheet STS securitisations, whose underlying exposures are residential loans, or automobile loans or leases, may choose to publish the information available on the main adverse impacts (IAP) of the assets financed by these underlying exposures on ‘sustainability factors’. “Sustainability factors” is defined by reference to the SFDR (ie “environmental, social and social issues, respect for human rights, the fight against corruption and bribery”).
The European Supervisory Authorities (AES) were tasked with developing regulatory technical standards (RTS) on the content, methodologies and presentation of this information, and published these draft RTS for consultation on May 2, 2022. As required by the 2021 amendments to the Securitization Regulation, the ESAs relied on the RTS that they have developed within the framework of the SFDR to as many people as possible. to the extent possible (subject to certain securitization-specific differences).
Objectives of the RTS project
In developing the RTS, the ESAs aimed to:
- standardize the type and presentation of information that an originator may choose to disclose about the PAIs of the assets funded by the underlying sustainability factor exposures;
- help investors measure and compare the negative impacts on sustainability factors caused by the assets funded by the underlying exposures; and
- help financial market participants by providing a framework to measure these negative impacts.
The RTS project has do not was designed as a framework for ‘sustainable securitization’. For more information on the European Banking Authority’s work on sustainable securitisation, read our recent update: Securitisations and the European Green Bond Standard: New EBA proposals shift issuer focus to the initiator (March 8, 2022).
The ESAs propose that the disclosure take the form of a stand-alone document “Major Adverse Impact Statement”on the basis of the form appended to the RTS SFDR which will enter into force on January 1, 2023. As for the methods of publication of this information by the initiators, the draft RTS envisages disclosure via securitization repositories (to allow a point of central access and allow the validation and comparison of disclosed information) rather than via websites (as is the case with the SFDR).
Other underlying exposures
Many of the 19 consultation questions are specific to the asset classes covered (home loans, or auto loans or leases). In accordance with the SFDR RTS, only environmental indicators are included in the RTS project for real estate, and not social or governance indicators.
However, the view of the ESAs is that originators of securitisations backed by other types of underlying exposures should also be able to choose to provide PAI information regarding sustainability factors. In light of this, the ESAs are also seeking information on potential indicators for other types of securitisations, in particular those with underlying exposures to commercial real estate, corporate debt, SME debt and trade receivables. They are also seeking industry input on the feasibility and advisability of developing metrics for securitizations where the underlying exposures relate to credit card debt and consumer loans.