How to grow green securitisation in Europe in a potential $380bn asset backed securities market

Encouraging the public sector to facilitate private sector investment and deal flow.

Scaling up investment in low-carbon infrastructure is of paramount importance for limiting global warming to 2°C and for the EU to meet its 2030 emissions targets. The annual global investment required for infrastructure in a low-carbon scenario amounts to trillions of euros; this is not being met. One key question is the role that green securitisation could play in plugging this gap.
To that end, the Climate Bonds Initiative and the Centre for Climate Change Economics and Policy (CCCEP) at the London School of Economics, have released a new paper, titled: ‘Public sector agenda for stimulating private market development in green securitisation in Europe’ authored by Sean Kidney, Diletta Giuliani and Beate Sonerud. It analyses the rationale for green securitisation – including investor demand – and the current challenges for expansion in Europe as part of developing wider climate finance and green investment markets. It does this by looking at the strategic role the public sector could play to facilitate the development of a green securitisation market and increase private sector investment and deal flow. The report argues that green securitisation is a global USD380bn+ opportunity as maturing green bond markets increase the potential for green asset-backed securities (ABS), a global market that has already grown to USD5bn of issuance in 2016, but is currently dominated by issuance outside of Europe. According to the OECD, however, green ABS annual issuance could reach USD 84bn by 2035 in Europe to represent 37% of green securities against a global tally of USD 280-380 billion in ABS by 2035 for renewable energy, energy efficiency and low-emission vehicles (LEVs) alone. Investments for low carbon public transport, adaptation, land- use and waste would add to the figure.
To achieve this though, it says, policy makers have a central role.
The public sector has historically been instrumental in promoting securitisation in new asset classes, including mortgages and student loans.
In Europe, there is momentum to revitalise the securitisation market through the European Commission’s proposed regulation for Simple, Transparent and Standardised Securitisation, and to introduce sustainability elements into the capital markets legislation through the High-Level Expert Group on Sustainable Finance.The paper outlines five recommendations for the public sector to help develop and grow the European market for green asset backed securities:

  • Work with market players to develop clear and consistent definitions of what qualifies as green.
  • Establish or offer financial support to existing initiatives and groups working on standardisation of green loan contracts
  • Support financial warehousing of standardised loans; warehouses can be set up as public-private partnerships or hosted by a local development banks
  • Offer guarantees for junior and mezzanine tranches of green asset-backed securities to make the senior tranches attractive to institutional investors
  • Invest in green ABS and consider incorporating environmental factors into capital weights to favour climate-friendly investments

On their own, traditional sources of funding for new green technologies from banks, utilities and government are unable to fund the multi-billion euro investments needed. Grouping these investments into packages means the debt can be sold on to much bigger investors who buy and sell securities on the multi-trillion Euro bond market. The Climate Bonds-CCEP report highlights how strong and effective public policy around green ABS, underpinned by a credible climate policy, offers another opportunity for mobilising the capital needed to fund the EU transition to a low-carbon economy.

Link to the report

The Climate Bonds Initiative’s Annual Conference is at London’s Guildhall on March 6th. Responsible Investor is a media partner.

Diletta Giuliani was co-author for this article