EuGBS Provisional Agreement Reached and ESAs-ECB Call for Enhanced Disclosure on Climate Change for Structured Finance Products
As sustainable finance gains importance in the EU, policy makers are working tirelessly to establish standards and frameworks that will stimulate green investments and reduce the risks associated with greenwashing.
On 28 February 2023, the trilogue negotiations between the European Parliament, the Council of the European Union and the European Commission concluded with a provisional agreement on the creation of European green bonds (EuGBs).
Under the provisional agreement, all proceeds of EuGBs will need to be invested in economic activities that are aligned with the EU taxonomy, provided the sectors concerned are already covered by it.
EU Taxonomy-eligible sectors include:
- Agriculture, Forestry, and Fishing
- Manufacturing/Production of Goods
- Energy Supply
- Water Supply, Sewerage, Waste Management and Remediation Activities
- Transport and Storage
For those sectors not yet covered by the EU taxonomy and for certain very specific activities there will be a flexibility pocket of 15%. This is to ensure the usability of the European green bond standard from the start of its existence.
The provisional agreement represents an important milestone in the sustainable finance market, especially, for environmentally sustainable bonds that are aligned with the EU taxonomy.
Call for High-Quality Data
Meanwhile, in a joint ESAs-ECB statement on disclosure on climate change for structured finance products published on 13 March, ESMA, together with the EBA and EIOPA, and the ECB have called on issuers, sponsors, and originators to collect high-quality and comprehensive information on climate-related risks during the origination process.
This would be of particular relevance to the RMBS, Auto, and Leasing asset classes, where the underlying assets are most exposed to climate-related impacts, and would enhance transparency and clarity for investors.
It also states that the revision of ESMA’s loan-level securitisation disclosure templates will also consider the introduction of ‘new, proportionate, and targeted climate change-related metrics’ whilst taking existing reporting requirements from the EU Taxonomy Regulation, the SFDR, and forthcoming EuGBS into account.
The introduction of new climate change-related disclosure requirements for securitisations may also become relevant for similar funding instruments backed by the same type of underlying assets, such as covered bonds.
These recent developments represent an important step ahead towards financing a climate-neutral and resource-efficient economy.
Sustainable Securitisation Framework on the Horizon
Whilst it is still unclear whether securitisations will be considered under the EuGBS, as recommended by EBA in its ‘Developing a Framework for Sustainable Securitisation’ report, the compromise reached by the EU institutions could also help to define such a framework, potentially facilitating the labelling of deals whose proceeds would be used to finance EU taxonomy-aligned activities as ‘green.’
In particular, EBA’s report recommends that the EuGBS requirements for use of proceeds apply at originator level, instead of issuer/SSPV level, allowing securitisations not backed by a portfolio of green assets to comply, provided that the non-green portfolio finances new green assets.
Such an approach could help the EU market overcome the one of the highest scoring challenges identified in its market survey on sustainable securitisation, a ‘lack of available sustainable collateral to securitise,’.
From a supervisory perspective, the national competent authorities of the designated home member states are expected to supervise issuers´ compliance with their obligations under the new standard.
The agreement, which is not yet public, needs to be confirmed and adopted by the Council and European Parliament before it is finalised and will become applicable 12 months after entering into force.