SCI CRT Quarterly Report Spring 2020

CRT Research Report | Spring 2020
Securitisation innovation in focus
Spectrum of Capital
Financial-only Responsible Sustainable Impact Impact-only
Delivering competitive financial returns
Mitigating Environmental, Social and Governance (ESG) risks
Pursuing Environmental, Social and Governance opportunities
Focusing on measurable high-impact solutions
Focus:
Limited or no regard
for environmental,
social or governance
(ESG) practices
Mitigate risky ESG
practices in order to
protect value
Adopt progressive
ESG practices that
may enhance value
Address societal
challenges
that generate
competitive financial
returns for investors
Address societal
challenges where
returns are as yet
unproven
Address societal
challenges that
require a belowmarket
financial
return for investors
Address societal
challenges that
cannot generate a
financial return for
investors
Examples:
• PE firm integrating
ESG risks into
investment analysis
• Ethically-screened
investment fund
•“Best-in-class”
SRI fund
• Long-only public
equity fund using deep
integration of ESG to
create additional value
• Publicly-listed fund
dedicated to renewable
energy projects (e.g. a
wind farm)
• Microfinance
structured debt
fund (e.g. loans to
microfinance banks)
• Social Impact
Bonds / Development
Impact Bonds
• Fund providing quasi
equity or unsecured
debt to social
enterprises or charities
Source: Bridges Fund Management
In terms of social factors, demographics,
employment, income levels and labour market
dynamics can influence consumer behaviour and
therefore the performance of an asset. Equally,
environmental contamination, implementation
of an environmental action plan, compliance
with environmental regulations and geographic
climate risk can impair the value of collateral.
The agency suggests that ESG investment
can generally be mapped along a spectrum based
on the relative balance of positive social and/or
environmental impact and expected return. If
a transaction has a targeted ESG thesis with an
acceptable projected financial return – for example,
bonds issued to provide funding for projects
that have long-term and sustainable social or
environmental goals – it is traditionally referred
to as ‘impact’ or ‘thematic’ investing, where the
goal is to create positive social or environmental
change in the context of a profitable investment.
Green securitisation
For its part, AFME believes that the new securitisation
framework and the existing Green Bond
Principles set the context to develop principles
and practices for green securitisation. However,
in terms of defining what constitutes a green
“
FROM OUR PERSPECTIVE, A GREEN
SECURITISATION NEEDS TO BE A
SECURITISATION, SENSU STRICTO,
THE UNDERLYING ASSETS SHOULD
BE GREEN AND THE PROCEEDS USED
FOR GREEN PROJECTS
”
securitisation, the association takes a stricter
approach than ICMA, for example (see Box: Green
Securitisation principles).
“From our perspective, a green securitisation
needs to be a securitisation, sensu stricto, the underlying
assets should be green and the proceeds used
for green projects. The definition holds true for both
cash and synthetic deals,” explains Anna Bak, associate
director in the securitisation division at AFME.
Bak says that at present, there is much discussion
around transitioning – in other words, the
process whereby an issuer is becoming greener. For
such cases, she says it is necessary to encourage the
issuers to transition from brown to green issuance.
She concludes: “The industry should also
be aware that ‘green’ is connected with technological
developments and is therefore changing
quickly. As standards evolve over time, a transaction
originally considered to be green could cease
to meet the requirements of the relevant green
principles. The need to potentially grandfather
this should also be taken into account.”
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