Securitisation, tainted by financial crisis, is key to financing climate transition – OECD

Intergovernmental body puts its weight behind tarnished technique

The OECD has called on policymakers to “revitalise” the securitisation market globally in order achieve green investment targets.

“Revitalising the concept of securitisation, which was tarnished during the 2007-2008 financial crisis, is important to the scaling up of low-carbon infrastructure finance,” researchers at the Organisation for Economic Cooperation and Development said in a report, Analysing Potential Bond Contributions in a Low-Carbon Transition.

The securitisation of subprime mortgages into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) is seen as major contributing factor in the subprime mortgage crisis.

“This revitalisation may be achieved in large measure by standardising the assets and by making the process, and the market activity it spurs, safer, simpler and more transparent,” the report states.

In order to do that, the authors continue, there is “a need to activate and scale up issuance of asset-backed securities” especially around solar assets and leases for low-emission vehicles. ABS, they claim, have a “disproportionately large potential to scale”. This is because, unlike other big areas of the climate-aligned bond market, such as municipals and SSA (Sovereigns, Supranationals and Agencies) issuance, ABS aren’t bound by government decisions or balance sheet constraints.

According to scenario analysis done by the OECD, almost one third of outstanding bonds from the low-carbon sectors – renewables, energy efficient property and lower-emission vehicles – could be asset-backed by 2035.The US would be expected to lead on this because of a more mature securitisation market in the country, compared with other markets assessed in the report – China, the EU and Japan.

“Efforts to support green securitisation must be undertaken in a prudent, judicious and transparent manner so that green ABS markets emerge with integrity and with due consideration for any financial stability issues.”

Currently, examples of labelled green securitisations come from car maker Toyota, Australian rooftop solar leasing firm Flexigroup and Rabobank’s subsidiary Obvion.

The research finds that, of the total investment needed to transition to a 2°C scenario between 2015 and 2025, around 60% will be covered by debt and bonds. This will decrease to 52% in 2035, the authors say, because low-carbon vehicles and energy efficiency projects are generally financed by equity and cash, and will become a larger part of the project mix going forward.

“The analysis suggests that the 2020s have the potential to be the beginning to the ‘golden years’ for bond issuance in the low-carbon sectors,” the report says, as green technologies mature and become less dependent on unstable government policies, making them more attractive to conventional bond investors.

The OECD, which is currently holding its third Green Investment Financing Forum in Tokyo, next month holds a workshop on financing green infrastructure in Paris. One of the topics is ‘Establishing a secondary market for green infrastructure: the role of institutional investors’.