Securitisations funding climate change projects offer opportunity to investors

EU member states have pledged to reduce greenhouse gas emissions by between 80% and 95% by 2050. Large-scale initiatives that help to achieve this, such as offshore wind farms, can source funding via existing markets for project finance and infrastructure debt. However, an opportunity is also emerging for institutional investors to finance smaller scale “green” projects that have little or no access to such markets.

 

In the wake of the credit crisis and the EU Sovereign Debt Crisis, the balance sheets of banks, utilities and public sector entities are stretched. As such, NN Investment Partners (NN IP) anticipates that the financial resources of institutional investors will be needed to meet the sheer scale of the spending that is required for the EU to meet its targets. Indeed, the EU High-Level Expert Group on Sustainable Finance has indicated that in order to keep the increase in global temperatures to well below 2 degrees celsius, Europe will need to spend an additional EUR 180 billion a year over the next two decades[1].

For Europe to achieve its green targets, more granular projects will need to be financed. For example, individual consumers will need to finance improvements that make their homes more energy efficient. They will need to purchase or lease hybrid/electric vehicles, and electric vehicle charging stations will need to be installed. Irrigation systems will need to be improved to make small-scale agriculture and garden-related water utilisation more efficient.

The individual loans needed for projects such as rooftop solar panels, solar water heating or vehicle charging stations are typically far too small to attract efficient financing via debt capital markets. However, they can be aggregated with other similar loans to underpin marketable debt securities. Such “green securitisations” could be attractive investment opportunities not only for institutional investors seeking to participate in the development of a new class of sustainable investments, but also for those seeking exposure to highly rated, floating-rate assets with an attractive risk/return profile in anticipation of rising interest rates. These opportunities could be delivered via a range of green securitisation investment products, such as mutual funds and segregated mandates, designed to provide investors with access to this fast-growing asset class.

 

Calvin Davies, Head of Asset-Backed Securities & Covered Bonds at NN Investment Partners, commented: “While the rate of growth in the issuance of green securitisation transactions over recent years has been encouraging, this growth is from a very low base. The global market for green securitisations is still very much at a fledgling stage. Total issuance around the globe in 2016 amounted to USD 5 billion. However, the OECD sees the potential for green securitisations to reach an annual issuance level of USD 20 billion in the EU alone by 2020, with global issuance as high as USD 380 billion per annum by 2035.[2]

The growth witnessed in recent years in the global bond market for all green bonds also provides an indication of the potential future growth levels in this area. The Climate Bonds Initiative has reported that over USD 155 billion of green bonds were issued globally during 2017.”

Some steps towards establishing a fully fledged market for green securitisations have already begun. For example, in July 2017, the European Mortgage Federation and the European Covered Bond Council unveiled an Energy Efficient Mortgage Action Plan. This initiative involves a pilot scheme that aims to develop a standardised data collection infrastructure for green residential mortgage loans across Europe. The project has received funding from the EU’s Horizon 2020 research and innovation programme and the pilot project is expected to start in March or April this year.

Davies added: “This initiative has the potential to be a key development. The establishment of such infrastructure would be an important step in making the Green Securitisation process both more efficient and more transparent.”

 

 

[1] Source: EU high-level expert group on sustainable finance: “financing a sustainable european economy – interim report (july 2017)

2 Source: OECD 2016: A quantitative framework for analysing potential bond contributions in a low carbon environment