Data is central

Market participants agree there is potential for significant growth in green residential mortgage-backed securities (RMBS) issuance. The primary challenges continue to be loan-data capture and the related absence of nationwide environmental homebuilding standards.

“I hope there will be more green RMBS over the next 12 months. But I think a lot of it comes down to the availability of data and tailoring green mortgages so we can hand-on-heart say they are compliant,” notes Joonas Keranen, structurer at J.P. Morgan.

Keranen says the central issue is having sufficient data to allow lenders to secure the relevant second-party opinions and other requirements of legitimate green labels for their RMBS structures.

David Jenkins, global head of sustainable finance at National Australia Bank (NAB) in Sydney, says there has not been a great deal of progress on the data-capture front since NAB issued its first, and so far its only, green RMBS tranche in 2018.

On a more positive note, the value of improved data capture is becoming increasingly apparent to industry players and work is ongoing, especially by nonbank and smaller bank issuers.

Resimac’s general manager, treasury and securitisation, Andrew Marsden, tells KangaNews the obstacles do not seem as insurmountable as they once did. “We need to know the sustainability features of either the property itself or what the funds will be allocated to. We are solving this through systems enhancement,” he reveals.

This would not be a one-off task in the leadup to issuance, however. Marsden points out that issuers are obliged to provide ongoing reporting to investors even after they have printed a green RMBS transaction.

New and old housing

New builds are the lowest-hanging fruit for green mortgages, as they should be aligned with building standards. If these standards have sufficient rigour on emissions criteria they should suffice for green lending and thus funding. Firstmac’s green mortgage product, for instance, is aimed at new builds.

Expanding the scope of green lending to existing housing stock is also an ongoing task. Michael Lambden, associate director, climate solutions at NAB in Melbourne, says this area holds a lot of opportunity for green financing if the data conundrum can be solved.

At present, it is difficult for lenders to get energy-efficiency data for existing homes. Property energy ratings, even in states where they are available, are laboursome to apply to existing stock: doing so involves an assessor physically walking through a residence. There is also a lack of incentive for property owners to pay for it, and with no real tangible benefit or need for doing so it is often a fruitless endeavour.

Lambden has been involved in conversations with lenders and government about access to energy-efficiency data. He says such parties generally acknowledge that government could play a greater role in supporting data capture in the housing market.

“This is where having a point-of-sale star rating scheme could help,” Lambden suggests. “This way, the rating becomes part of the many conveyancing costs involved in selling a property. On average, properties sell every seven years – so it should be easy to start to build quite a detailed data set in a fairly short period of time.”

A model of this type has been active in the Australian Capital Territory (ACT) for a number of years. There, a property’s energy-efficiency rating – based on the ACT house energy rating scheme, which provides a rank between one and six – has been mandatory to disclose when selling a property since 1999. Victoria’s residential efficiency scorecard performs a similar role.

Neither, however, hold equivalency with the Nationwide House Energy Rating Scheme (NatHERS). Furthermore, at present NatHERS is limited to new builds, though work is underway to open the scheme to existing housing.

Even when this work is complete, Lambden notes that it would be up to individual states and jurisdictions to adopt the national rating and work it into policy. “In the absence of policy, lenders would be requesting clients to go above compliance,” he adds.

Lambden adds: “We would like to see a consistent star-rating scheme for point of sale and for leasing across Australia. We don’t think this should be a mandatory performance requirement, because we recognise this could present an issue for people on lower incomes who may have poorer-performing properties. But we need data capture to start happening so we can get a sense of exactly what each property’s energy ratings are.”

Funding implications

Once data standards and capture are in place, the jump from lending to green funding should be relatively small. “Capturing a summary of the property and tagging it in our system is quite an easy fix from a lender’s perspective,” Lambden tells KangaNews.

In the meantime, issuers have to jump through a number of hoops to bring green RMBS to market. Firstmac engaged Sustainalytics as part of its deal preparations, to review its green-bond framework and to provide a second-party opinion on its credentials and alignment with the Green Bond Principles.

To qualify for a Firstmac green home loan, a property must have been built within the last 12 months and have a NatHERS rating of seven stars or higher. However, as the product is relatively new the RMBS asset pool included A$520 million (A$381.9 million) of existing Firstmac home loans that meet the residential low-carbon buildings criteria created by the global Climate Bonds Initiative – a similar basis to that used by NAB in its 2018 green RMBS.

Specifically, the Firstmac securitisation pool includes New South Wales houses constructed after July 2005, Victorian houses and apartments constructed after May 2011 and Tasmanian houses constructed after May 2014.

Even the NatHERS seven-star requirement only addresses a residence’s thermal efficiency. However, the Sustainalytics opinion concluded that coupling this requirement with the 12-month criteria would mean properties also adhered to the national construction code 2016, which includes standards around installed equipment and features including lighting, heating and cooling systems, and energy-monitoring facilities.