Sustainable securitisation could make a big impact
Bond markets cannot do the heavy lifting of financing a more sustainable global economy alone; securitisation could play an important role.
To date, the term sustainable finance has often been synonymous with the green and, latterly, social bond markets. But if the world is to achieve the ambitious targets that governments and businesses alike are increasingly setting for themselves around greenhouse gas reduction, and other environmental factors, the sustainable finance universe will need to expand considerably. Add to this the need to counter the worst impacts of Covid-19 and finance an equitable economic recovery, and funding requirements for environmental and social causes continue to grow.
But while securitisation, which sees individually illiquid assets pooled together into securities, is inherently about identifying and exploiting additional fundraising opportunities, it is not a market that has been widely utilised for environmental, social and governance (ESG) purposes.
There are clear, but not insurmountable, reasons for this — not least that there is yet to be an agreed definition for what qualifies as a “sustainable securitisation”. Do the underlying assets need to meet a certain threshold of sustainability, or is how the proceeds from the transaction are used the most important thing? Should both be measured?
The European Banking Authority is working on a sustainable securitisation framework which may become a blueprint
A powerful lesson from the bond markets is that having clear frameworks in place, such as the Green Bond Principles and Social Bond Principles, can drive market growth. The European Banking Authority is currently working on a sustainable securitisation framework which may become something of a blueprint.
But, ultimately, it will be investors who decide whether a security fits within their own ESG parameters. And with asset managers and other institutional investors increasingly prioritising ESG matters, securitisation markets will have to step up to the challenge. The bond markets cannot do the heavy lifting of financing a more sustainable global economy alone; securitisation could play an important role.
Market participants seem confident that the hurdles that have so far prevented significant growth in this market can be overcome, so the question seems less one of if, but rather when this market will take off.
Continue reading: Sustainable ABS: as easy as ABC?
