In Short

The Situation: The implications of the developments of the EU sustainable finance legislation are very significant for the EU securitisation market. Although today the volume of EU sustainable securitisations is still limited, the EU sustainable securitisation market is now growing and expanding. There is an increasing demand for sustainable securitisation products from many institutional investors, who have increased their commitment to invest in sustainable assets in line with their internal policies. Interest in sustainable securitisation is also coming from originators, now more committed than in the past to achieving sustainability, environmental and social objectives.

The Action: The European Banking Authority ("EBA") recently published a report on developing a framework for sustainable securitisations (the "EBA Report"), providing an overview of the recent developments and challenges of introducing sustainability into the securitisation market and exploring (i) how the EU Green bond standard ("EU GBS") could be incorporated in securitisation transactions and (ii) whether a potential dedicated framework for sustainable securitisations should be introduced. Regarding the latter, the EBA Report concludes that it would be premature to establish a dedicated framework for sustainable securitisations in Europe. Rather EBA believes that the EU GBS should be applicable, with some adaptations, to securitisation transactions as well.

Looking Ahead: In conjunction with the review of Regulation (EU) 2017/2402 (the "Securitisation Regulation") and based on the outcome of the EBA Report, the European Commission will submit a report to the European Parliament and the European Council on the creation of a specific sustainable securitisation framework, together with a legislative proposal if deemed appropriate. A specific timing for these further actions cannot be predicted at this stage.

EBA Report on Developing a Framework for Sustainable Securitisation

The EBA Report examines how sustainability could be introduced in the specific context of the securitisation market in order to support its sound development.

On the assumption that the overarching EU regulations on sustainable finance are still being developed and that the EU sustainable market is still at an early stage of development, EBA explores the following three core aspects under its report:

• The application of EU GBS to securitisations;
• The relevance, policy implications and possible design of a dedicated framework for sustainable securitisation products; and
• The nature and content of sustainability-related disclosure for securitisation products.

Application of the EU GBS to Securitisation

The EBA Report assesses the application of the EU GBS to securitisations, and is of the view that to ensure consistency and efficiency in the application of the EU GBS to a securitisation, adjustments should be made to the EU GBS so that the EU GBS requirements apply at originator level (instead of at the issuer/securitisation special purpose entity ("SSPE") level).

This would allow a securitisation that is not backed by a portfolio of green assets to meet the EU GBS requirements, provided that the originator commits itself to using all the proceeds from the green bond to generate new green assets.

In this respect, EBA sees the above adjustments as an intermediate step to help the sustainable securitisation market to develop.

Furthermore, as a consequence of the shift of the use of proceeds requirements from the SSPE to the originator level, additional EU GBS disclosure requirements would be necessary to ensure that investors are made aware of the green characteristics of the underlying portfolio and to limit the risk of 'adverse green selection of assets'. In particular, it is important that the reporting of the EU GBS disclosure framework is adjusted in a manner that is compatible with the disclosure requirements under Article 7 of the Securitisation Regulation.

No Need for the Establishment of a Dedicated Framework for Sustainable Securitisations

In assessing the relevance of establishing a dedicated framework for sustainable securitisations, the EBA Report is of the opinion that:

• With reference to true-sale securitisations, it would be too early at this stage to establish a dedicated framework in addition to the EU GBS one. More in particular, in the EBA's view, considering that the specificities of the securitisation transactions would already be taken into account under the EU GBS regulatory framework by just switching the relevant reporting obligations from the SSPE level to the originator level, an additional label does not appear necessary at this stage. Furthermore, in the current situation where the priority is mainly on the financing of new green assets rather than on the (re)financing of existing green assets, a parallel framework based on a collateral-based approach would not appear necessary. However, it cannot be excluded that once the EU economy has further transitioned, more green assets would be available and the use of a proceeds approach—now prevailing in the EU GBS regulation—would become less relevant, a dedicated framework for sustainable securitisations could become pertinent; and
• With reference to synthetic securitisations, it would also appear too early at this stage to establish a dedicated framework. In particular, in the EBA's view, further assessment would be required to determine whether and how the specificities of synthetic securitisations should be reflected in a green framework, especially given that no green standard has been considered yet for any other forms of credit protection instruments such as a synthetic securitisation.

In terms of relationship between STS securitisations and sustainable securitisations, in the EBA's view they are completely unrelated. As a result, being an STS securitisation does not need to be a precondition for a securitisation to be considered green, and vice versa as both labels could be achieved independently.

Nature and Content of Sustainability-Related Disclosure for Securitisation Products

In this respect, the EBA also recommends that the Securitisation Regulation is amended in order to extend voluntary 'principal adverse impact disclosures' to non-STS (simple, transparent and standardised) securitisations.

Three Key Takeaways

1. Pursuant to the EBA Report, there is no need at this stage for the establishment of a dedicated framework for sustainable securitisations.
2. On the contrary, the EBA Report believes that EU GBS should be applicable, with some adaptations, to securitisation transactions as well. In particular, EU GBS requirements shall apply at an originator level (instead of at the SSPE level). As a consequence, a securitisation that is not backed by a portfolio of green assets could meet the EU GBS requirements, provided that the relevant originator of the securitisation commits itself to using all the proceeds from the green bond to generate new green assets.
3. The EBA Report recommends the Securitisation Regulation to be amended in order to extend voluntary 'principal adverse impact disclosures' to non-STS (simple, transparent and standardised) securitisations.