ESG and securitisation: NAB in conversation with the CEFC

NAB recently sat down with the Clean Energy Finance Corporation to discuss the increased focus on ESG activities for both issuers and investors in the securitisation world and what we can expect next.

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With the rise and rise of environmental, social and governance investing, NAB Securitisation Originations Director Lionel Koe spoke with Clean Energy Finance Corporation Director Grace Tam for some key insights into what’s coming up for the sector this year.

Lionel Koe: In 2021, we saw a renewed focus on ESG issuance across both issuers and investors. What are the ESG trends that we are likely to witness in 2022 from a securitisation perspective?

Grace Tam: The publication of the EU Taxonomy’s Environmental Objectives and COP26 were two major events in 2021 that created significant momentum for issuers, investors and sovereigns seeking to align and incorporate ESG criteria into their investment policies. At the same time, issuers were increasingly both actively and reactively turning their minds to establishing or refining their ESG strategies.

We expect to see this global momentum continue in 2022, with Australian issuers continuing to consider how ESG applies to their business and funding strategies. We also expect an increasing number of investors in Australian securitisations to incorporate ESG questions into their due diligence processes.

There are issuers who have over the past few years established securitisation warehouses and origination strategies that focus on green assets. We expect these issuers to come to issue green securitisations in 2022, both repeat green issuers as well as newcomers who haven’t issued in the green format before.

In addition, with the increased focus for both issuers and investors on ESG, we expect more “behind the scenes” activities to occur in terms of the establishment of green origination strategies and warehouses.

The electric vehicle and hybrid auto sales in Australia are still relatively modest as a proportion of the total. How does the CEFC see this trend changing in 2022 and will we see more green auto ABS issuance?

There have been limited green auto securitisations globally and we expect this to continue in 2022.  This is because of the need to build up a pool of green vehicles receivables, which are defined as less than 50g CO2 per km by the Climate Bonds Initiative and the EU Taxonomy.

Over the past year, original equipment manufacturers (OEMs) and sovereigns continued to set targets for their transition to electric vehicles (EVs). This included global automakers announcing new goals to phase out sales of combustion vehicles. Major manufacturers including Jaguar, Volvo and General Motors announced global targets with the aim to stop selling combustion vehicles by 2025, 2030 and 2035, while Honda announced that by 2050 they would be solely selling EVs and fuel cell vehicles globally.

Countries in Europe such as Norway, Ireland, Scotland, and in Asia like Singapore and Japan, have committed to a date by which the sale of new combustion vehicles will be banned.

As such, we expect green auto securitisation volumes globally and domestically will be largely a function of the supply of EVs because issuers will need to build up a sizable pool of assets.

We further expect the supply of EVs in Australia to continue to remain low as OEMs prioritise the deliveries of EVs to countries with well-developed emission standards and regulations – like those in Europe for example.

We expect Australian issuers to already be incorporating EVs into their business and funding strategies as the auto industry transitions away from combustion vehicles. We are hopeful that we may see green auto securitisations in 2022, however, it might not be until 2023 because of the limited – but growing – availabilities of EVs in Australia.

Over the past few years we’ve seen a number of inaugural issuers access the term capital markets. Does the CEFC anticipate any new ESG issuers or asset classes being brought to market in 2022? And with new ESG-related securitisations emanating from UK/Europe – like social and sustainability bonds for example – how do you see this applying in Australia?

In terms of short-term potential green securitisation in Australia, there are essentially three green asset classes: home loans, car loans, and personal loans. We have seen repeat Australian green issuers coming to market with personal loans backed by rooftop solar PV receivables. As the rooftop solar industry continued to grow over the last few years, we have seen new entrants such as new entrants into the industry who use green securitisation as their funding sources.

Similarly, following the success of the NAB RMBS transaction in 2018, we have seen issuers coming to market with green RMBS transactions. As investors continue to develop their ESG strategies and priorities, ESG investors will increasingly preference green home loan securitisations that have tangible and ambitious energy efficiency improvement outcomes. As such, we expect Australian issuers to continue to explore green home loans as part of their business strategies, driven by both increasing consumer and investor demand. We expect to see new issuers come to market in the latter half of 2022 or early 2023.

As for social and sustainability-based securitisations, these are still in the “concept development” stage for Australia. Sustainability bonds are bonds that are typically tied to the CO2 emissions reduction targets of the issuer and are generally more suitable to large corporates. The Scope 1 and 2 CO2 emissions of Australian issuers are relatively small – it would typically include their fleet and office energy consumptions. This means there is a sustainability opportunity for Australian issuers to create green receivables. We think there will be limited social based securitisations in Australia, as there are limited Australian businesses with social agendas that use securitisation as a funding strategy.

Issuers will need to be mindful of “social washing” as they develop their social securitisation strategies, noting that investors will seek genuine positive social impact from their investments. I’m thinking out loud here, but perhaps issuers who have their origination aligned with the medical or education industries and can clearly demonstrate its alignment to UN Sustainable Development Goal(s) could potentially undertake socially-themed securitisations.

We’re aware of some of the data-related challenges issuers face in order for a transaction to be certified – green RMBS for example – and this has slowed potential issuances. What would it take to see issuances increase and how is the CEFC facilitating this?

If we think of green securitisation as a funding tool for new green receivables, then issuers will need to capture the data fields associated with the new green receivables at the time of origination. This should be quite simple for vehicles, as originators already capture the model of each vehicle and can easily look up if they are less than 50g CO2/km to match the eligibility for green auto securitisation until 2025. This is the same for solar panels and home battery receivables backed securitisations – that data should already be captured by originators.

The challenge with green RMBS is twofold: the energy efficiency of a home is not part of the data captured by the originator and that data is not publicly available to be matched to a data field that is stored on the originator’s system – like the address.

The CEFC is encouraging Australian home loan financiers to capture energy efficiency related data for their home loans – the simplest method being the use of accredited home energy rating certificates. The CEFC is also providing discounted funding facilities to home loan financiers to create new green home loan products to stimulate the consumer demand for energy efficient homes.

The data availability hurdle is more challenging to overcome. The Australian securitisation industry is well aware of how robust Australia’s privacy laws are. Home energy ratings are captured under these privacy laws, and therefore state governments will need to make changes to the legislations in order to facilitate public disclosure of home energy ratings. The ACT is the only state or territory that requires the public disclosure of home energy ratings at the point of sale and rental. The CEFC has participated in industry consultations to advocate for the development of a national residential energy efficiency disclosure framework and shared the positive consumer and financial market outcomes that could arise from such a framework.

We have seen the CEFC co-invest in various ESG securitisations. How do you see the investment landscape changing for sustainable products in 2022? Will this form a larger part of investor mandates?

We continue to see rapid and extensive development of ESG ambition from investors and we expect to see this continue at an increasing rate as the sustainability trend becomes even more pervasive in 2022.

What are your views of issuance volumes in 2022?

With the continued growth in Australia’s rooftop solar industry, we expect to continue to see green ABS issuances in this space by repeat issuers and possibly new issuers.

Green RMBS and green auto ABS will be limited in 2022 as originators continue to set their green origination strategies, but we should expect to see some issuances in 2023.