EBA publishes excellent report of "Green Securitisation"

Today the European Banking Authority released its Report on Developing a Framework for Sustainable Securitisation. This report was requested by the co-legislators who asked the EBA to outline how they would envisage a regime for green securitisation.

Although PCS still has to review the report in detail, a first look suggests that the EBA should be commended for the logical, coherent and fair approach it has brought to bear of this subject.

First, the EBA has concluded that there is no need or rationale for having a conceptually different approach to the definition and regulation of green securitisations from that of capital market instruments generally. PCS had expressed a concern over the asynchronicity of the work on green securitisation and the work of green capital market instruments in general in the context of the legislative passage of the EU Green Bond Standard. Specifically the accidental request that the EBA define “green securitisations” as a sub-category of capital market instruments before the EU had settled on a definiton of “green capital market instruments” as a whole. The EBA wisely concluded that this made little sense and that securitisations should be regulated under the same conceptual umbrella as all other capital market instruments.

Secondly, flowing from the first point, the EBA has agreed that a green securitisation should be defined, like any other green bond, by the use made of the proceeds of the issuance rather than by the green nature of the securitised assets. PCS strongly approves of this approach as we have pointed out publicly that any other would lead to deeply illogical consequences and reduce the amount of financing to the green transition.

The EBA also suggests that this proceeds based approach might be a transitional one until we have greened the European economy. There is a lot to be said for this view.

Finally, the EBA has pointed out that there is a technical amendment required to the current draft of the EU Green Bond Standard legislative text to ensure that the proceeds the use of which defines a green securitisation are the proceeds in the hands of the originator and not the special purpose vehicle. The same point had been made by the ECB and a number of market participants (including PCS). This appears not to be a political issue but merely (if crucially) a matter of getting the drafting right.

On synthetic green securitisation and social securitisation (the "S" in "ESG"), the EBA suggests more work needs to be done. This seems reasonable to us at PCS.

This is a well thought through and excellent report that deserved to be a building block on the path to mobilising the securitisation market in financing the desperately needed ecological transition

Green securitisation - ECB adds its voice in support of the "green proceeds" approach

The European Central Bank has just published its opinion on the draft EU Green Bond Standard legislation. Overall an excellent piece, it is notable when it comes to securitisation for its support for a definition of green that encompasses issuance where the proceeds are used by the originator to finance sustainable projects. This can be found in article 3.1.5 of their opinion.

As our readers will recall, a debate arose as to whether the legal EU definition of sustainable securitisation should be limited solely to securitisations of green assets (eg mortgages of green housing or auto loans for electric vehicles) or could also cover - as is the case for all other capital market instruments - bonds whose proceeds are used to finance the transition to a sustainable economy. PCS has argued forcefully that the latter is both logically compelling and far better helps achieve Europe's sustainability goals.

In the context of the draft EU Green Bond Standard legislation, the intervention of the ECB is welcome not only for its support for the broader definition but also at a technical drafting level by suggesting a clarification of the text. As currently drafted, the law may not allow a real "use of proceeds" approach because of the ambiguity of the definition of proceeds for securitisations. The ECB has rightly suggested the ambiguity be lifted to clarify that proceeds of a securitisation in the hands of the originator may be used for green purposes and not, if one followed a technical narrow reading, only the proceeds in the hands of the special purpose vehicle.