Why ABS is a key contributor to the sustainability transition

13/06/2022

Securitisation of cars, homes and credit card receivables has a role to play in transitioning to a zero-carbon economy and reducing social inequality. While issuance is set to grow, challenges remain to be tackled along the way.


When Solar Mosaic launched its largest loan securitisation to date in March 2022, the US platform for financing energy-efficient home improvements illustrated the potential of asset-backed securities (ABS) in the ongoing energy transition. Co-led by Societe Generale, the Mosaic Solar Loan Trust 2022-1 raised $ 382.7 million that will equip US homeowners to fund energy efficiency in ways they can afford.

Why does this matter? Because residential energy use accounts for roughly 20% of US greenhouse gas emissions, according to a recent study1.  That means making homes more energy-efficient is an essential part of decarbonising the economy in the US, just as it is globally. 

Green and social ABS are relatively new but have a unique place in sustainable finance because the underlying assets – cars, homes and credit card receivables for example – are at the heart of today’s environmental and social challenges. As such, innovative and well-executed securitisations can play a powerful part in supporting decarbonisation and, to a lesser degree, reducing social inequality.
 

Fledgling market but fast-growing

Environmental and social securitisation issuance is growing fast, such is the confluence of businesses aiming to become more sustainable and investors seeking green and social assets. At the same time, banks have an incentive to take part, not only because there are opportunities for expansion but also as regulators are expected to soon differentiate between green and non-green assets when allocating capital charges.

US and Chinese ABS markets are the largest globally. At the end of the first quarter of 2021, the cumulative issuance of US green securitisations stood at $ 115.5 billion (EUR 107.9 billion), compared with less than EUR 10 billion in the EU, according to a recent report from the European Banking Authority (EBA)2.  Meanwhile by the end of 2020, there had been RMB 115 billion (EUR 16.1 billion) of Chinese deals. 

Notably, the EBA report proposed that green securitisations need not necessarily be backed by green assets but that the focus should be on the proceeds of the transaction being used to finance green assets. Effectively, this means that the proceeds of securitisations backed by ‘normal’ residential mortgages or car loans, for instance, could be used for financing energy-efficiency improvements on existing houses or development of electric vehicles respectively. In other words, they could be used to support the transition from brown to green.

Obvion, the Netherlands’ largest mortgage lender, pioneered green residential mortgage-backed securities (RMBS) in Europe. In 2016, it issued the continent’s first green RMBS, which at EUR 500 million was over-subscribed. It followed this with a 2018 EUR 550 million RMBS for financing both energy-efficient new buildings and those with major improvements in energy performance. Societe Generale acted as joint lead manager for both deals.

A more recent Societe Generale securitisation supported both the sale of zero-emission electric vehicles and the household finances of low-income people. In April 2022, Hyundai Card, the credit card affiliate of Korea’s Hyundai Motor Group, issued the first ABS to straddle both green and social criteria.

The KRW 350 billion (EUR 259 million) ABS aligns Hyundai Card’s ABS programme with the group’s sustainability programme, which aims to benefit both society and the environment in line with the UN’s 17 sustainable development goals. The Hyundai Motor Group sold over 6 million vehicles globally in 2021 and is investing heavily in zero-emission mobility. Illustrating the importance of this, road vehicles accounted for nearly three quarters of transport CO2 emissions as recently as 2019, according to the IEA3


Overcoming the pioneer’s challenges

Yet pioneering ABS transactions such as these remain challenging. For instance, some debate remains as to what constitutes a green securitisation. What’s more, there are entirely new sectors that have yet to be developed, including solar panel loans in Europe and finance for electric batteries.

The success of these novel transactions will depend on deep knowledge of the investor base and partnering with a bank that’s both entirely focused on sustainable finance and has a good understanding and coverage of the entire value chain. These qualities equip a bank to offer the advice needed. 

If the energy transition is to be successful, every part of the financial markets must play its part. Transactions such as Solar Mosaic’s, Obvion’s and Hyundai’s will eventually become the norm. They have the potential to make a big impact on carbon emissions – as they do on the access of less well-off groups to finance. Further innovation and pioneering transactions will help us get to that point.

 

1 The carbon footprint of household energy use in the United States. School for Environment & Sustainability. University of Michigan. www.pnas.org/doi/10.1073/pnas.1922205117
2 EBA report on developing a framework for sustainable securitisation. March 2022.
3 www.iea.org/reports/tracking-transport-2020

 

Emile Boustani Head of Asset Backed Products UK Societe Generale