SCI CRT Quarterly Report Spring 2020

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CRT Research Report | Spring 2020Securitisation innovation in focusIndeed, Mariner has participated in somedeals where the pool is positively screened; forexample, the assets are 100% renewables oraffordable housing. But Hohns says the firm isalso seeking to drive innovation in conditionalredeployment requirements.Conditionality“We feel it’s important to address non-ESGcompliant loans that are already on bank balancesheets. The aim is to liberate the capital heldagainst such loans and procure a commitment toredeploy it into pro-green lending. Conditionalityrequirements are ultimately a transfer pricingmechanism to reduce financing expense for suchprojects,” he explains.He continues: “SG and Credit Agricole areat the forefront of this initiative. It creates adynamic force in terms of inf luencing overallbank behaviour. If we see more commercialbanks, alongside of MDB regional ECAs followingtheir example, it should catalyse significantlylower pricing for new loan generationthat is positively impactful. With these kinds ofinitiatives, we’ll be moving in the direction weMilestones for EBA regulatory mandates on sustainable finance4Q 2019EBA response to call foradvice on short-termism 2020Consultation paper2020Discussion paper2021Final report (by 28 June)2021Final draft ITS20212020Final draft RTSneed to in order to do our part for climate from acapital markets perspective.”While the primary motivation behind executingan SRT remains achieving capital relief, anyway that ESG features can be incorporated is anadditional benefit, according to Pascale Olivié,director, asset-backed products – advisoryat Societe Generale. The aim with the Jupitertransaction, for instance, is to reallocate part ofthe released capital to new assets with positiveimpact features.“Societe Generale has adopted the higheststandards in terms of governance and decided toexclude from its operations certain counterpartiesor transactions that do not meet environmentaland social standards,” Olivié explains.“We adopted the UN Principles for ResponsibleBanking in 2019, so it’s a combination of theright management of our own operations, theright management and exclusion of certaincounterparties or transactions that do not meetESG standards and pushing on Positive Impact.A positive impact feature adds value to an SRTtransaction, but only if it’s consistent with theBank’s overall strategy in terms of ESG.”Consultation paper2022-2024Discussion paperSuitable assetsIn terms of identifying a suitable portfolio toreference in an SRT, she says it depends onthe nature of the bank’s balance sheet and theavailable amount of assets that are potentiallyeligible for a trade. “In an SRT deal, the bankaims to select a portfolio representative of its corebusiness. However, restricting eligible assets topositive impact finance assets or allocating thefreed capital to positive impact finance assetsonly could be a stringent constraint,” says Olivié.She adds: “While there is a broader trend withinbanks to originate more green assets or assets withimpact, we still hold assets that aren’t necessarilygreen. Typically, banks don’t have enough assets tobuild an entirely positive impact portfolio, so firstwe can use reallocation of capital to support neworigination of ESG/ positive impact assets.”Amitji Odedra, associate director at QberaCapital, agrees that synthetic securitisationcan enable banks to redeploy capital fromlegacy ‘dirty’ assets into new ‘clean’ assets. “Wehave seen four ESG SRTs issued so far and themarket is getting its head around this. However,one potential limiting factor in the near termis whether banks are able to originate enoughimpact assets to execute a deal.”In terms of increasing impact SRT volumes,Warna-kula-suriya suggests that the next stepis to translate this motivation for private sectorparticipants. “The technology is available, buthow do we bridge the gap?” he asks.Whether impact SRTs will attract new investorsto the capital relief trades market is debatable,however. “We have significant interest amongour limited partners for deals that feature positiveimpact components. But SRT is bespoke and specialist,so the addition of impact as an asset class isunlikely to generate an influx of new investors tothe market. Nevertheless, other managers involvedin the sector may begin incorporating ESG aspectsinto their underwriting, which would create positivereverberations across LPs looking to deployinto impact assets,” Hohns observes.EBA advice on short-termism2022-2024Possible update of relevant EBAGuidelines or new GuidelinesEBA Report on incorporation of ESG into riskmanagement and supervisionUpdated implementing technical standard on Pillar 3disclosure – ESG disclosure2025Final report (by 28 June)EBA Report on classification and prudential treatmentof assets from a sustainability perspectiveESA’s regulatory technical standards on consumerand investor disclosureSource: EBAAmitji Odedra, Qbera Capital08 Quarterly analysis for the risk transfer community | www.structuredcreditinvestor.com
Securitisation innovation in focusCRT Research Report | Spring 2020IMPACT AND THE UN SDGSThe most assertive approach to integratingESG factors into investment processesis ‘impact investing’, whereby capital isallocated not only to avoid doing harmbut also to bring about positive changes.‘Impact’ is most commonly measuredwith reference to the United Nations’ 17Sustainable Development Goals (SDGs),which are incorporated into its 2030UN Sustainable Development GoalsSource: United NationsCapital benefitAnother helpful development would be theintroduction of an explicit capital benefit forportfolios that address climate risk, according toBadie. “Banks want to undertake more pro-ESGactivities and have made commitments underdifferent international charters. The SRT marketcontinues to grow in terms of new jurisdictions,issuers and asset classes. To the extent the toolis used more widely, more and more issuers willadopt it for ESG portfolios.”Agenda for Sustainable Development. Arecent NN Investment Partners survey ofNordic institutional investors – conductedin association with consultancy Kirstein –suggests that in terms of specific SDGs,Climate Action (Goal 13) is the mostimportant SDG for those polled, followed byAffordable and Clean Energy (Goal 7) andClean Water and Sanitation (Goal 6).Olivié agrees that a pricing incentive for SRTissuers would be helpful in terms of syntheticsecuritisation playing a meaningful role inaddressing ESG risk. “Aligning positive impactwith financial interest may boost new originationfor SRT transactions with positive impactfeatures. Positive Impact Finance does notaddress climate-related matters only: it’s a holisticapproach that incorporates social and environmentalissues. Targeted SRT and incentiveframeworks could therefore push on one specific“ALIGNING POSITIVE IMPACTWITH FINANCIAL INTEREST MAYBOOST NEW ORIGINATION FOR SRTTRANSACTIONS WITH POSITIVEIMPACT FEATURES”SDG or risk, but that would necessarily be linkedto one specific transaction and documentation,”she observes.She suggests that a first step towards morefavourable treatment for assets with positiveimpact is the provision in CRR 2 for essentialpublic service assets to benefit from a regulatoryhaircut, to be introduced in mid-2021.Further, defining ESG standards for impactSRT may contribute to increased liquidity ofSRT notes.Anna Bak, associate director in the securitisationdivision at AFME, says the introduction ofpreferential regulatory capital treatment for greensecuritisation would likely make a material differenceto the growth of the market – although,of course, to meet prudential requirements, suchtreatment would need to be based on evidence ofbetter credit or liquidity performance.The introduction of a capital benefit for greenissuance has been proven to work, with Chinaimplementing such a scheme in its green bondmarket. But Odedra notes that regulators have toplay a role in ensuring it is well thought out andintroduced in a timely manner, otherwise participantscould be incentivised to enter the marketfor potentially the wrong reasons.Warna-kula-suriya warns that as a policy matter,reducing the brown charge via risk transfermay not be palatable to regulators, as it could beseen as a way to circumvent the need for lendersto change their behaviour.Meaningful roleFor synthetic securitisation to play a moremeaningful role in addressing the climatecrisis, Ingrid York, partner at White & Case,says that there needs to be greater awareness ofthe adaptability of SRT trades and the fact thatthey can be used for innovative purposes. “Thepro-ESG movement is likely to keep growing inimportance, bolstered by the EU Green Deal andECB support. Ultimately, we’ll get to the stagewhere investors are asking issuers why their tradedoesn’t have a climate feature. Then the marketwill move to a second phase, where the underlyingis all ESG assets.”Paul Petkov, coo and head of securitisationadvisory at Qbera Capital, concurs: “It’s clearthat the future lies in ESG origination and capital(re)deployment, and synthetic securitisation isan efficient tool for balance sheet optimisation,especially with Basel 4 coming down the line.We’ll see a market adjustment where more playersenter the synthetic space and banks will haveto adapt accordingly their asset origination tobecome greener.”He concludes: “It takes one participant topush the envelope and the rest of the market willeventually follow. I expect to see further innovationin terms of ways to incentivise green SRT.”Quarterly analysis for the risk transfer community | www.structuredcreditinvestor.com09
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SCI CRT Quarterly Report Spring 2020

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