ESG is the topic of the day at Structured Finance Shindig | Cadwalader, Wickersham & Taft LLP
This week, the Structured Finance Association held its 3rd annual “Environment, Social and Governance in Structured Finance” symposium, hosted at the Cadwalader offices in New York on May 3-4. This year’s one-and-a-half-day symposium covered an assortment of relevant ESG topics within the structured finance market, including the growing popularity of impact investing in structured finance, greenwashing issues and innovative ways to increase access to credit and provide affordable housing and financial products to consumers and businesses.
Participants were able to participate in various panel presentations tailored to specific areas of ESG implementation, as well as panel discussions for each asset class in structured finance. The symposium began with a discussion on the current and future ESG landscape, followed by a panel on ESG securitization programs brought to market by issuers, and ended with a cocktail reception and networking reception. . Day two featured panels on how to avoid “greenwashing” in ESG ratings and discussions on asset-level ESG data needed for unsecured consumer asset classes, CMBS, CLOs, autos and RMBS.
Panels included industry leaders, among others, Structured Finance Association, KPMG, Kestrel Verifiers, Nuveen, Angel Oak Capital Advisors, OneMain Financial, Redwood Trust, RiskSpan, BlackRock, AllianceBernstein, dv01, Income Research + Management, PGIM Fixed Income and Vanguard.
During an information panel on how to avoid so-called “greenwashing”, several asset manager panelists noted that their companies, when making investment decisions, distinguish between ESG risk (risks for the issuer resulting from environmental or social considerations) and ESG impact (the benefit that the issue has on the environment or society). A panelist added that they consider both the “positive externalities” and the “negative externalities” of any investment, and increase or decrease the weighting of those investments in their portfolios based on this analysis. The same panelist described a proprietary valuation system for labeled green and social bonds based on a shading system (light green, dark green, etc.) that tries to capture the benefits of using the benefits for people target. Another asset manager described their investment decision as being based on two factors: credibility (whether the offering credibly provides an ESG benefit) and additionality (how well the offering offers it an ESG advantage beyond a vanilla offer from the same issuer). A third asset manager explained that he had an ESG score for each security and a score threshold that had to be crossed before investing. Another panelist raised the point that while a particular ABS investment may be favorable from an ESG perspective at the time of initial investment, the ESG favor may change over time due to changes in the composition of the portfolio. pool, and that issuers should provide ongoing reporting on ESG data points. after new issue.
Many panelists agreed that ESG factors can complement traditional performance targets, but believed that performance targets should not be sacrificed to achieve ecological or social impact. One panelist warned that sacrificing return targets to achieve ESG impacts will end up hurting ESG in the long run, if such an approach results in ESG investments underperforming. However, one panelist challenged this view, saying that some investors are willing to take a small discount on their return targets in order to meet their ESG goals.
Another theme arose by distinguishing so-called “labeled” green or social bonds for which a second-party opinion was provided by an independent verifier, versus “unlabeled” bonds which may have positive ESG characteristics but for which no second party opinion was provided. was obtained. There was consensus among panelists that a label is not a prerequisite for making an ESG investment decision, provided sufficient data is provided by the issuer or otherwise available. to quantify the ESG impact of the investment. In the context of a single-asset/single-borrower labeled CMBS, one panelist expressed skepticism about whether refinancing an already-built LEED-certified property has enough ESG impact, unless coupled to a commitment to further reduce emissions. . Another panelist commented that they sometimes prefer to invest in unlabeled green or social bonds as a relative value play versus labeled bonds.
When it comes to sustainability bonds, at least two panelists raised doubts about whether key performance indicators (“KPIs”) that trigger penalties for the issuer if not met are calibrated appropriately. They also expressed concern that sometimes the penalties are de minimisor the date the KPI is to be tested falls after the call date for the obligations.
A panel included several issuers who described their recent efforts to bring new social bond ABS offerings to market in the non-agency and unsecured consumer RMBS asset classes. One panelist shared that their offering was oversubscribed and that they took additional orders from new ESG-focused investors, but was unable to quantify whether they had achieved greenium (that is to say, higher price and lower yield compared to non-ESG offerings) when reissued. Another panelist recommended that issuers organize an investor road show to get investor feedback on their ESG framework, before committing to a transaction.