Over the last few years, the financial sector has steadily embraced the development of various sets of regulations related to sustainable economic activities. While management companies, investment advisors, managers and large companies are subject to the disclosure requirements pursuant to the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR), where relevant, transparency on sustainability in securitisation transactions has not yet been addressed by the European legislators.
Pursuant to Article 45a of the Securitisation Regulation[1], the European supervisory authorities (EBA, ESMA and EIOPA) are required to publish a report on the development of a specific sustainable securitisation framework in order to integrate sustainability-related transparency requirements into the Securitisation Regulation and consequent securitisation transactions. In this context, the EBA published the long-awaited report on 2 March 2022 on developing a specific sustainable securitisation framework to integrate transparency requirements.
I. Key points of the report
The recommendations from the EBA include mainly (i) the application of the EU Green Bonds Standard (EU GBS) to securitisation transactions (ii) the establishment of a dedicated framework for sustainable securitisation and (iii) the development of sustainability-related disclosures and due diligence requirements for securitisation products.
Application of the EU GBS to securitisation transactions
As the structure of a securitisation vehicle is different from an issuer taking the form of a classic company or an investment fund, difficulties are faced when applying the EU GBS to securitisation transactions, notably due to the limited legal and economic substance of the securitisation vehicle (SV) itself.
For instance, the EBA report underlines that applying the EU GBS requirements to the SV may not be relevant. For example, the SV would have to be the one reporting under the green bonds, using data usually provided by the originator and/or sponsor. The SV would also be potentially subject to the administrative sanctions included in the EU GBS although the economic substance of the SV is limited to the securitised pool of exposures, which is usually small. Therefore, the EBA suggests instead shifting the applicability of such requirements to the originator, such entity being the one usually deciding on the use of proceeds art the SV level and more likely to face potential sanctions in light of their position in the SV structure.
In that context, the EBA recommends amending the current draft EU GBS[2] in order to consider the specificities of a securitisation vehicle, and notably to
- apply the requirements at the level of the originator instead of the SV level,
- ensure the disclosures of environmental performance of the underlying assets,
- adjust the reporting of the EU GBS disclosures with the transparency requirements under Article 7 of the Securitisation Regulation, so as to ensure consistency between the two regulations.
Establishment of a dedicated framework for sustainable securitisation
The EBA is of the opinion that a dedicated framework is not of great necessity at the moment, despite being mandated in contributing to such framework by the Securitisation Regulation. However, should such framework be established, the EBA report recommends including (i) a clarification of the relevant definitions, (ii) introduction of a “green assets” definition specifically relating to securitisation transactions and (iii) ensuring synergies between the STS label and green securitisation label framework, a label designed to differentiate transparent and simple products from more opaque and complex securitisation products to make it easier for investors to understand and assess the risks of investing in a securitisation.
Sustainability-related disclosures and due diligence requirements for securitisation products
The EBA report flags the need to improve the availability of data on principal adverse impact (PAI) of securitisation investments on sustainability factors. The EBA therefore recommends applying disclosure requirements on PAI to all type of securitisations (not only to STS securitisation, as it was envisaged). The Joint Committee of the European Supervisory Authorities (ESAs) is to prepare the Regulatory Technical Standards (RTS) related to the PAI disclosures for securitisation transactions, aiming the inclusion therein of different PAIs compared to the ones contained in SFDR, hence adapting the concept to securitisation specificities.
II. What’s next in Europe and in Luxembourg?
Despite the focus of the European legislators being heavily placed on creating a sustainability framework affecting predominantly investment advisors and investment funds managers, the recent increased popularity and demand for securitisation vehicles in the financing world makes it imperative in exploring a tailored sustainable securitisation framework as well. The EBA report aims to provide recommendations and further guidance to the European legislators in achieving such framework.
The EBA report was published simultaneously with the adoption of the revised securitisation law in Luxembourg[3], which offers more flexibility for securitisation on the Luxembourg market. As a leader in sustainable finance, Luxembourg would thus certainly be an attractive place for the development of sustainable securitisation.
[1] Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02017R2402-20210409
[2]https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0391
