ESG growth primarily an asset story for nonbanks
Issuance with an environmental, social and governance (ESG) theme could be a godsend to nonbanks seeking incremental funding liquidity, and many are keenly pursuing opportunities to bring green or even social securitisations to market. The biggest challenge is likely to be finding sufficient volume of qualifying assets to support issuance at scale.
Issuers of ESG-aligned debt instruments tend to say access to incremental liquidity, rather than superior pricing, is their primary motivation for coming to market in this format. Australia’s nonbank securitisation issuers are arguably the only sector of the local institutional credit market for which access to sufficient volume of debt financing is even a live consideration – so ESG should be a natural fit.
Green, social and sustainability (GSS) issuance is clearly of interest. Consumer-finance lenders like Brighte and hummgroup have included green-labelled tranches in their asset-backed securities issuance, largely backed by loans taken out to buy and install household solar facilities. Meanwhile, Firstmac privately placed A$750 million (US$556.1 million) of green residential mortgage-backed securities (RMBS) in June 2021.
“There are definitely pools of funds available for ESG from existing investors and also from others that otherwise would not participate in securitisation,” says Sarah Samson, National Australia Bank’s head of securitisation originations.
She continues: “There is also no shortage of willingness on the issuer side – they are desperate to do it, in fact. The challenge is assets. It is hard to quantify and label back-book assets – in fact it may not be possible. Efforts are focused on creating front books that capture the data needed for labelled ESG issuance.”
The challenges are myriad, especially on the mortgage side. They include variable building standards across Australian states, lack of data on outstanding loans and even the characteristics of the mortgage market.
For instance, Natixis’s head of credit markets and global structured credit solutions, Asia Pacific, Fabrice Guesde, points out that the heightened pace of conditional prepayment rates in the Australian market makes it harder for issuers to ensure the level of green-qualifying mortgages in a securitisation asset pool is maintained throughout a transaction’s life.
Keeping up with mainstream investors’ ESG requirements is already a challenge, let alone finding sufficient supply of suitable assets for labelled issuance. Bankers recommend that the main focus for nonbank lenders should be on producing loan products with broad ESG appeal that can facilitate asset underwriting at volume and thus support issuance growth.
At the same time, they say are clearly seeing heightened market focus on ESG – even in regular transactions. It just might not mean more issuance of green or social RMBS.
While green has been the most used single GSS issuance option across asset classes, Australian nonbanks also have a potential angle in to social-themed issuance that could in theory provide a much larger qualifying asset pool.
By lending to customers that are under-served by banks, for instance the self-employed, nonbanks open up home ownership to a wider section of society than it would otherwise be available to. If these loans could be lined up for social-bond issuance it could revolutionise the ESG securitisation market.
Once again, however, the path to market is not straightforward. “I think we will see social-themed issuance, though in fact in some ways this is even harder than green,” Samson argues. “An issuer might have to prove, for instance, that every loan in an RMBS pool does not meet mainstream bank lending criteria – which is hard to do, as those criteria move around all the time.”