Sustainability in Securitisation 2021

Sustainability in Securitisation A Perpetual and ASF study

Contents Executive Summary

3

The Study

4

A Matter of Definition Sustainability or ESG?

5 6

The Big Themes

7

The Drivers for the Focus on Sustainability

8

Social Conscience

9

Climate Change

9

Issuer Passion

10

Investor Demand

10

Motivation 10 The Europe Factor ESG Factors Given Priority

11 12

Environmental Factors

12

Social Factors

12

Governance Factors

12

In summary

12

Sustainability & Securitised Product

13

Supply 13 Securitised pools

14

RMBS 14 ABS and Innovation

15

Greenwashing 17 Measurement and Reporting

19

The Need for Standards

19

Accreditation 20 Technicalities 20 Expertise 22 Data, Technology & Skills

23

Data 23 Technology 25 Skills 26 Investor Demand

27

Opportunity or Risk?

30

Industry Role

31

Words of Wisdom

32

About Perpetual Corporate Trust

34

About the Australian Securitisation Forum

35

Executive Summary As part of its continuing series of research studies, Perpetual Corporate Trust (PCT) and the Australian Securitisation Forum (ASF) have collaborated to undertake a comprehensive study of the views and expectations of market participants with respect to the themes of sustainability and Environmental, Social, and Governance (ESG) in the securitisation market and transactions.

Securitisation continues to have an important role to play in bringing competition to consumer finance lending markets and augmenting the financing of economic activity.

New primary market issuance in 2021 has been exceptionally strong, with a large number of diverse issuers and transactions being brought to market in Australia and New Zealand, including inaugural issues.

The study For a number of years, there has been a rapid acceleration of interest in sustainability within financial markets. Sustainability has been a trending topic in a number of investment markets and jurisdictions, particularly in the European Union.

Perpetual and many Australian companies are increasing their focus on sustainability and now produce annual sustainability reports*, while investment managers are increasing their focus on sustainability for their investment decisions.

We also see regulators adding sustainability into regulatory frameworks. As an example, the Australian Prudential Regulation Authority (APRA) recently released a Draft Prudential Practice Guide CPG229 Climate Change Financial Risks (CPG 229) which reflects the established framework for considering and managing climate risks developed by the Financial Stability Boards Task Force on Climate-related Financial Disclosures (TCFD). In September 2021, APRA also published an information paper on the Climate Vulnerability Assessment (CVA), focusing on the transition and physical climate risks arising in Australia that directly impact Australian lending. APRA has flagged that regulated banks will be required to assess residential mortgages and corporate and business lending exposures, which account for approximately three-quarters of their Australian lending exposure.

Richard McCarthy Group Executive Perpetual Corporate Trust

* Sustainability - Responsible investing | Perpetual

3 Sustainability in Securitisation

As part of our 2021 study, we spoke to a wide range of securitisation industry participants about the topic of sustainability, how it relates to ESG and the factors driving market interest. Innovation has long been a hallmark of the securitisation industry and this study seeks to illuminate the trends and expectations of the securitisation market with regards to sustainability, and what it may mean for the future.

Perpetual Corporate Trust and the ASF thank the author, Gary Lembit, Senior Manager, Strategy and Business Insights at Perpetual, and all the industry participants who made this report possible.

Their time, candid opinions and views are greatly appreciated and lend this report both rigour and insight. Their responses have been relayed liberally throughout the report whilst maintaining their anonymity.

We hope you enjoy the illuminating insights this report provides.

Chris Dalton Chief Executive Officer Australian Securitisation Forum

The Study The 2021 Australian Securitisation Forum (ASF) - Perpetual Sustainability in Securitisation report represents the collective views of a diverse range of securitisation industry participants from Australia, New Zealand, Europe and the US. In depth interviews were conducted with 31 individuals including CEOs, CFOs, Group Treasurers, Portfolio Managers, Executive Directors and Department Heads.

24 organisations participated in this report, including: • Domestic and Global Investors • Domestic and Global Banks • Non Bank Issuers • Fintechs, and • Service Providers, including industry associations, trustees and ratings agencies.

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The report does not identify individual participants or their organisation.

All interviews were conducted

by Gary Lembit, Senior Manager Client Insights at Perpetual. Gary was also responsible for writing the commentary in the report.

Conversations were free flowing, covering a range of topics with participants able to share personal views and perspective.

We would like to thank participants for generously sharing their time and thoughts which are reproduced liberally throughout the report.

A Matter of Definition Sustainability is a widely used term, yet it remains hard to define.

Common words associated with sustainability include Environmental, Social, Governance (ESG), 'green', impact, engagement and renewables.

Unsurprisingly, securitisation professionals gravitate to defining sustainability in the context of securitisation.

This definition provided by one of our participants covers the spectrum.

“For me, as an organization in this corporate space, it's around being engaged and interacting and positioning yourself in society as a business that has a consciousness of environmental factors, governance, operations, and more broadly how the business is being run, those sorts of things. That's the way I think about it. In terms of my experience around sustainability it is really focused on that environmental piece more than anything else.”

- Non Bank Issuer

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For several participants, the focus was on the sustainable qualities of securitised assets. For others the emphasis was on the way securitisation participants manage their business. Investors tend to focus on governance, and issuers on both product and corporate behaviour.

“Part of our investment process has always been engagement with our originators. The underlying due diligence of our originators is extremely important. This type of engagement involves both the Social and the Governance [in ESG].”

- Local Investor Industry participants are typically focused on the big picture and long-term goals. For lenders who want to support sustainable investments, how the borrower uses the loan is as important as creating investments that are attractive to investors.

“We've got a mission to make every home sustainable.

There are two lenses in which we look at it. One, we think about the sustainability of environment, household and the sustainability of a business such as ours. In terms of the environment it's a path to sustainability, so we focus on renewables, and on a transition to a renewable energy system that uses energy sources that are renewable and efficient.

That effectively includes the electrification of a home where the source of energy is also sustainable.”

- Non Bank Issuer If we were to summarise the thoughts of participants into one more definition it could look something like this: The practice of surviving and thriving in a way that’s beneficial to your stakeholders and the planet.

Sustainability or ESG? Grappling with the difference between sustainability and ESG was not easy for participants and the terms are used interchangeably, without a clear distinction between the two. For example: “Right now, I think of sustainability and ESG as synonymous” - Global Investor

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“The ESG lens is sort of a subset of the sustainability framework” - Local Investor

“Within our market, I think the way folks look at ESG is as a broader term than sustainability” - Service Provider

“The ESG risk management framework is often used as sort of a booster framework when first looking at the issues of sustainability and disclosure in business” - Service Provider

It’s a matter of perspective and there are no right and wrong answers. The majority were comfortable referring to ESG as a framework for thinking about the vast array of factors they consider when thinking about sustainability.

The Big Themes Several themes emerged, with most related to the lack of a standard set of measures or guidelines around the factors covered by sustainability. These are summarised briefly below and are subject to greater scrutiny in the chapters that follow.

Investor demands

Focus

Measurement

Technology

Investors are asking issuers to lay their sustainability cards on the table

Choices galore and no easy way to choose

What to measure and how to measure it has led to a scramble for standards

Big data and artificial intelligence are moving in

Skills

Supply

Greenwashing

Impact

New roles in securitisation are emerging

Sustainable assets are hard to find

There are many shades of 'green' and not all are attractive

Proving the value of a sustainable approach will take time

At the beginning of 2020 (preCOVID-19), the ASF and Perpetual asked industry participants to give us their thoughts on the emerging trends in securitisation in the new decade. Looking back at that report now, it is interesting that while ESG received a passing mention, there was barely a comment about sustainability. 18 months later and the word is on everyone’s lips.

Experienced participants will say they have always had a focus on sustainability. Investors, for example, typically include assessments of the quality of issuers, originators and assets in their models. Yet the emergence of an overt collective focus on sustainability and ESG factors is new.

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It’s interesting that the ‘critical mass’ seems to be occurring now. While very few participants directly associated the focus on sustainability with COVID-19, it follows that the pandemic has galvanised thought around sustainability.

“You can almost pinpoint the month (it was sort of MarchApril last year, while COVID was breaking). All of a sudden one of our ratings agencies announced a whole swathe of very formal ESG considerations in their ratings framework.

We've had 10 years of building up to this point - it's just reached critical mass.”

- Non Bank Issuer

“One of the things that a lot of the ESG market participants have been saying is that, eventually, there'll be a critical mass. Once you get to critical mass of interest, then that will precipitate a much broader take-up of this idea, approach or philosophy.”

- Global Bank

The Drivers for the Focus on Sustainability Understanding why sustainability is emerging as an immediate issue in securitisation is not easy, as there are many related factors.

The dominant factors are social conscience and climate change as these have led to changes in attitude and behaviour amongst industry participants; the former because it affects investor demand and the latter because of its impact on risk. The primary drivers are summarised in the table below.

Social conscience

Climate change

Investor demand

Issuer passion

There is a heightened awareness of corporate behaviour globally, particularly in younger generations, which has led to higher expectations of the companies people choose to deal with.

Climate change sceptics have gone the way of dinosaurs and there are plenty of examples of severe climate events leading to financial risks.

Investors are asking a lot more questions about the ESG credentials of the companies they engage with.

Some issuers are satisfying their own social conscience through delivering quantifiably sustainable assets.

Global regulation and goals

Participant motivation

Greenwashing

Impact

Europe is the commonly accepted front runner when it comes to formalising its approach to sustainability and this is directly impacting investor mandates. Global net zero carbon emission targets are also on the radar.

Investor demand, incentives, attractive returns and an underlying belief that opportunities will arise from the focus on sustainability are shaping the market’s interest and response.

There are many shades of 'green' and not all are attractive

Proving the value of a sustainable approach will take time

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Social Conscience

Climate Change

The following comments give a sense of how a social conscience has increased the focus on sustainability.

There are equally strong views on the impact of climate change. In particular, there is a strong belief that inaction on climate introduces risk to the sector. It is a galvanising focus for both the public and the industry.

“There is a social conscious movement, moving through the investment world, and all the superfunds are certainly at the forefront of that, especially the large ones.”

- Global Investor

“We are changing as individuals in terms of our expectations. And that feeds through to these conversations at the corporate level. It's quite indirect, but it's almost directly related because normal human beings expect more from every company they engage with, whether it's their bank or their super fund, and that then feeds into expectations across mandates.”

- Non Bank Issuer

“If you look out into the world, there's a lot of focus now in media, in schools, and people wanting to do good. As a fiduciary that's ultimately what you're there for. You're there to act in the best interest of others and not yourself. So, I think it's literally in the business, the brand, the lifeblood of the company and our people to act in the best interest of others.”

- Service Provider

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“My overall, overriding message to everyone is: it doesn't matter what you think of climate change, you've got to be there, or you're not doing the right thing by your company.”

- Non Bank Issuer

“I think the fact that climate factors are translating into financial risks has become tangibly real and we've seen numerous examples of that, whether it's within our oil and gas companies or fossil fuelrelated dominant companies.”

- Local Bank

“I think that it's a matter of the private market, forging their own path on climate change as opposed to waiting for governments to dictate.

Ultimately, society will move ahead of any government.”

- Non Bank Issuer

“Let's just look at climate change as one factor. Never mind about our domestic politics, we can see offshore governments doing a heck of a lot, whether it's legislating electric vehicles and phasing out internal combustion engines or just various standards coming in. The world is rapidly decarbonising by way of policy.”

- Local Bank

“Also, on climate, it's not an easy discussion because the only solution would be a global price on carbon but nobody's going to do it, right?”

- Service Provider

Issuer Passion

Investor Demand

Motivation

A small number of participants have written their commitment to sustainability into their corporate vision and mission. They are setting their own standards against what they would expect of others.

Investors are also driving conversations about sustainability.

They have a rising expectation that issuers will have a philosophy and be able to state their position and credentials. But investor demand is typically driven in the first instance by demand for transparency amongst their own clients.

Whether it’s encouragement from investors, the potential for better returns or the promise of opportunities in the future, there are many good reasons for participants to be taking a closer look at sustainability and the benefits it can bring.

“So those friction points, whether it's economic, financial, or whether it's literally what we call a brain damage factor (the complexity for the consumer); those are all the friction points that delay the acceleration to the new world. I suppose that was part of the drive, you know, the purpose was to help remove those friction points, to help the everyday Australians to be able to access these renewable assets.”

- Non Bank Issuer

Investors have heightened expectations of the issuers they deal with. Pitch documents without a focus on ESG factors are becoming increasingly rare.

“I don’t think it’s sudden. It's been around. Australia has just been very slow on the uptake. We’ve been doing an enormous amount of work on it. One of the reasons is, our clients are asking us a lot of questions about it because their equity investors are asking them, and their bond investors are asking them.”

- Local Investor

“We’re getting asked a lot from our clients and prospective clients - every pitch document now, we need to talk about ESG; how we go about it, what we're doing, what's our process, how would we write it into our investment process, etc…”

- Local Investor

“Having investors sort of care about what you're doing on the ESG side (1) encourages you - it's positive reinforcement - and (2) also provides incentives to prioritise that over other work streams that you have in your day-to-day business.”

- Global Bank

“I think, now, what you're seeing is that people definitely - both from the investor side and the issuer side - people care about the philosophy more.”

- Global Bank

“What we've seen is some really good case studies out there in the market of what happens when businesses run sustainably.”

- Local Investor

“The 'green' bonds are going out the door very easily.”

- Non Bank Issuer

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The Europe Factor There is no doubt the European focus on sustainability is having a direct impact on local awareness and sensitivity. In practical terms, global investors are taking their lead from the work done to introduce standards in Europe and their clients are now expecting them to ask the same questions of issuers they deal with in all other markets.

The increasingly ambitious targets being set for carbon emissions are also impacting the Australian market by heightening their focus on risk, even if it is not a requirement from the Australian regulators.

“Generally, managers everywhere - you see it every day - more managers are signing on to the UN Sustainable Development Goals, or the PRI, or what have you. It's, I think, an inevitable trend.”

- Non Bank Issuer

“Outside the investor base, the stars are really aligned in Europe when it came down to having a receptive investor base and probably more importantly a political willingness and push to have sustainability up and running” - Global Investor

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“I think the increasing focus comes from things like net zero carbon emission targets by 2030. If you think about corporate bonds, you are actually having deals that mature after those windows.

As a financier you want to be making sure that the businesses has plans to address those sorts of things.”

- Local Investor

“You just have to see how big it's grown in Europe and growing in the US, to know that this is a trend that's not going anywhere.”

- Local Investor

ESG Factors Given Priority In discussing sustainability related issues, participants typically used the ESG framework to classify the various factors that are important to their own business or the businesses they invest in.

There are many of them.

Environmental Factors With RMBS being the dominant asset in the Australian securitisation market, it was no surprise the focus of participants was on housing when talking about the E in ESG. In fact, participants considered the role of securitisation in delivering 'green' assets as opposed to considering the environmental impact of the issuer or originator. This was in contrast to social and governance factors, where it was more common to consider the behaviour of (and within) a business.

Addressing climate change dominated the response for housing and office properties, with carbon footprint, energy efficiency, solar and battery use commonly noted. Factors like location of assets (e.g. flood plain, fire risk areas), building material usage, the paperless office and lending for sustainable causes were raised by just a few.

Social Factors A long list of social factors were mentioned. Some noted the potential to offer loans and pooled loans which deliver a social benefit. Several pointed to the difficulty some groups in the population have in getting access to credit. Affordable housing was another area raised in the context of the potential for social based securitised assets.

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However, the vast majority of social factors raised related to the business. These included relationships with employees, the community, customers and suppliers, lending practices, and investment.

Employees dominated the thoughts of participants in talking about their own business or the companies they deal with or invest in. Employee wellbeing, diversity and inclusion, safety and worker conditions were all raised as factors relevant to sustainability.

Of the broader social issues, modern slavery, social risks of Buy Now Pay Later, support of developing countries, and human rights in supply chains are all on the minds of participants.

The key issue with social factors is the qualitative nature of many of these factors and the difficulty in their measurement.

Governance Factors The majority of participants are confident that governance factors are adequately assessed. Investors, in particular, have always had a strong focus in this area as it forms part of their risk assessment – most commonly the businesses’ management team and the risk framework. New factors are being considered as a more formal approach to sustainability and ESG is adopted by issuers. Board

diversity, consumer expectations, a formal focus on sustainability and the integrity of their partners and suppliers are emerging factors.

The major banks have well established sustainability related governance policies, but regional banks are often less advanced in this area. Investors are seeking out ESG philosophies and frameworks as well as making assessments of ‘business conscience’.

The management team and the risk framework are the governance factors reviewed most thoroughly.

In summary When it comes to the primary focus of industry participants on ESG factors, three areas dominate.

Environmental Climate change

Social Employee wellbeing

Governance Management behaviour As investors increasingly request details of an issuer’s ESG credentials, the above are near-mandatory inclusions in pitch documents and roadshow presentations.

Sustainability and Securitised Product There’s not enough of it.

The latent demand for ‘green bonds’ is exceptionally high yet markets globally just can’t get enough of it. The supply limitations may be short-lived and the potential for sustainable ‘product’ is generating excitement beyond traditional asset classes.

“There's a lot of money that's pouring into these types of mandates currently. I think everybody's sensing that there is an opportunity there and the sponsors of the transactions that come to market through the supply pipe are no different. If there's a way that they can label something as being 'green', or being ESG, or being ESG criteria, they will be happy to do it but investors have to kind of make up their own mind as to whether or not they agree.”

- Global Investor

Supply The practical barriers to supply of ‘green pools’ are easy to see.

New sustainable houses and electric vehicles are not plentiful.

The difficulty in knowing what is likely to be accepted as a truly sustainable asset may also inhibit issuers in the short term.

A key issue for investors and issuers is the need to validate the ‘green’ credentials of an asset.

What exactly can be considered a green asset or a sustainable asset?

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What criteria needs to be satisfied?

Who makes the judgement?

With no accepted industry standard, issuers and investors need to rely on their own judgement and, for many assets, opinions differ about the characteristics that make an asset ‘green’.

“What you want is something that's much more rigorous than what we have today.

In the future you really want to be able to compare one green bond against another in terms of its performance.

At the moment, the problem with green bonds is that a lot of investors are pretty much in the dark.”

- Service Provider Most believe availability of green assets will increase significantly and the growth in the sector will be sustained and ultimately replace unsustainable investments.

“You only have to look at what the historical level of increase green assets has been over the last five years, it’s only going in one direction. As the economy rotates into more of a green economy you won’t have this distinction between what is a green loan and what is not.”

- Global Investor

Similarly, as green-based pools are new, there is no history of performance (although participants cite examples of positive outcomes). This creates uncertainty in relation to pricing, and the expectations of investors and issuers may be poles apart.

'I don't think the Australian market has got to a point where ESG is being rewarded by better pricing. It’s funny, you know, a fund manager will sit there and say, ‘I want an ESG focus’ or ‘I want to be able to tell my investors that we have got a sustainability twist’, but I don't want to give up on pricing. So, until the investing market values, truly values, ESG in terms of improved pricing, it's going to be hard for the market to be drawn to it.

- Service Provider There is also the difficulty of considering factors that go beyond the asset itself. With the backdrop of their own clients’ expectations, investors are just as interested in the sustainability and corporate practices of the issuer (or originator) as they are in the asset itself. No matter how green a pool, investors are likely to forgo the opportunity to invest in a pool that is offered by an issuer that their end clients would prefer they reject.

“At the moment, it looks like the overwhelming majority of securitisations are just kind of neutral and that's because the thinking hasn't gotten as sophisticated quite yetbecause there isn't general agreement on the level of detail at which I should be determining the suitability.

Is it at the SPV level, is at a particular level, is it sponsor level, what level is it?”

- Global Investor Equally there are some investors who thrive on uncertainty and back their own ability to price effectively for risk through their rigorous process and a unique perspective on the weight various factors have in their models.

“The ability for you to make your own ESG assessment is actually fundamentally important in this transition, and where we all end up.

There shouldn't be one standard. Ultimately, it comes down to how we assess it, how do we actually implement that from a portfolio construction perspective, and how it’s measured in our net performance at the end of the day? From a volatility risk adjusted returns perspective, if we are really bad at it, we're not going to be producing really good numbers because the volatility in our portfolio is going to be really, really high.”

- Local Investor

Securitised pools

RMBS

‘Green’ is an easy label for sustainable investments in securitisation because people often think of it from an environmental lens.

Despite the dominance of RMBS in the Australian securitisation market, the limited number of new homes built in Australia each year (a few participants claimed about 60,000), mean RMBS doesn’t have quite the same dominance when it comes to sustainable investment.

These are also spread across a wide range of originators and issuers, making it difficult to form exclusively ‘green’ pools.

In reality, issuers and investors are equally interested in bonds with a social emphasis. Lending to disadvantaged or community groups and particularly to people who struggle to access credit from banks is a key focus for many issuers. Several point out they’ve been doing this for a long time.

On the ‘green’ side there is a tendency to focus on sustainable housing, but there is equally a view that the inputs to sustainable housing such as solar panels and batteries are ripe for securitisation.

Both ABS and CMBS also have potential for delivering green pools.

Some go as far as to claim almost everything is up for grabs.

“Every asset class lends itself to securitisation, excluding coal” - Global Investor

And not all new homes are equal.

While local councils encourage sustainable practices, these are adopted to varying degrees as there is a cost-to-build trade-off to be considered as well.

“The proportion of home loans that are consistent with a trajectory to net zero would probably be 5%.”

- Local Investor Issuers are responding by including 'green' tranches in their pools and taking into account refinance when it intends to upgrade the sustainability of a home. There are differences of opinion about whether pools should be exclusively 'green' or not.

“The industry is probably better off doing really strong ring fencing of 'green' assets and other ESG as opposed to say, well, around about half this pool is 'green' and therefore around about half the notes that we issue can also be 'green'.”

- Local Investor

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And said in another way…

“My late father used to say, life's too short to drink blended whiskey, son! I think life is too short to buy a 'green' asset that is backed by not entirely 'green' loans.”

- Local Investor Others feel securitisation is an ideal vehicle for transitioning to greener investments. They feel this is realistic given the limited supply of loans that can reasonably be considered 'green'.

“We’ve been able to include structural features, such as revolving aspects, and that allows us to initially fund with light 'green', and then substitute out for dark 'green' whilst we build our dark 'green' program.”

- Non Bank Issuer

ABS and Innovation The thing getting the market excited about sustainability is the raw potential for new and emerging asset classes. When asked about sustainable assets in ABS many pointed to electric vehicles (EV) as the obvious place to start. Realistically they noted there would need to be a much stronger incentive to encourage the Australian population to adopt EVs in the short term.

In fact, the public is likely to need to see the value of EVs before the sector takes off.

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“Would I pay a premium for a smaller electric car? Yes. Is that premium, you know, double? I think the answer is no.”

- Local Bank Nevertheless, there is a quiet excitement in the market about innovation in sustainability-related assets. Energy-related assets, in particular, are capturing attention.

“On the commercial side, for example, I remember hearing about people who were doing efficiency installations where, in a commercial building or a car park, they replace all the lights with energy efficient lights.”

- Global Bank

“In 'green' energy financing, it doesn't need to be a Buy Now Pay Later type product, but any sort of financing arrangement that is specifically tied to 'green' energy. I think there's opportunity there as batteries evolve and there's still a huge opportunity in terms of solar financing. While there's pockets of concentration in terms of panels and take-up of that stuff, there's still obviously a huge way to go in terms of a real push towards more 'green' energy across the country.”

- Non Bank Issuer

“If you think about all the sorts of kits that can be financed, both in big business and in the homes as well, I think there's a lot of opportunity there. I think for nimble FinTechs that can see those opportunities and sort of prosecute them, there’s lots of opportunity.”

- Non Bank Issuer The borrower is very much in mind when issuers think about sustainability no matter what the asset. Whether it’s providing access to credit to people who have traditionally not been able to access it, affordable housing for those in lower socio-economic classes, responsible lending practices or lending to specific communities, this focus on the borrower demonstrates a combination of social conscience and innovation that ensures needs can be met in a sustainable way.

“There's definitely a dislocation in terms of access to finance for certain parts of society. I think that First Nations people struggle to get business finance up and running. I think that there's a certain amount of government support but it tends to be programmatic. I'm not sure how well developed it is, but I think that there's probably a role there for securitisation.”

- Local Investor

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“It's about positioning yourself as a responsible lender.

There're benefits there both from origination to consumers as well as to your institutional investors and if they choose your program over the next program.”

- Non Bank Issuer

“Are you lending across the spectrum of communities within wherever that portfolio has originated?

Are you originating to all communities? That includes high income, low income.

Is your product something that impacts the consumer in a positive way? Was that loan something that helps build capital, helps somebody through a difficult time? Was it a responsible loan?”

- Service Provider The potential for the securitisation industry to use its strength to achieve sustainable outcomes is best summed up in this statement from a local investor.

“Securitisation, as a tool or a device, is uniquely placed to further society’s increased appetite for environmentally sustainable parties. I think the ability to ring-fence assets, to be able to follow the dotted line from money going out the door to achieve some outcome through to an investor - I think that is a strength of securitisation. I actually think it's got something to add to society as a whole in terms of sustainability.”

- Local Investor

Greenwashing While ‘greenwashing’ is not a term that instantly strikes fear into the hearts and minds of securitisation industry participants, it does put people on the alert. How can one tell if a pool is truly 'green'?

A lack of industry standards or guidelines and a vast array of often disparate factors used to define an asset’s status, together with an emerging market focus and desire to dive into the ‘sector’ can make it difficult to know just how 'green' a pool really is.

There is no shortage of demand for 'green' assets but when there is doubt, 'green' turns to grey.

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“Even if you issue according to the Green Bond Principles of the ICMA there's a bit of suspicion about the compliance aspect of the 'green' bond that they sell investors. The 'green' bond market still has a lot of evolving to do, but I do think it's got a massive future.”

- Service Provider

“There's no accreditation, there's no global standard.

That's coming though as all these investors are waking up.”

- Global Investor

“What troubles us is when people say this is quite 'green'.

You look at it and go, actually, that's not terribly 'green'. So provided everybody knows, it's fine, but you get all these people saying, yeah, we're the leader in ESG investment approaches and you drill down on it, and all they're doing is that they're not funding cluster munitions, tobacco or child exploitation, and that's it.”

- Local Investor

There is an underlying belief amongst participants that these issues will eventually come out in the wash. That is, measurement will improve, a common understanding or framework will emerge and that anyone guilty of greenwashing will be ignored by investors.

In the meantime, the industry is going through a transition period where there are valid uncertainties to be considered. Some might arise from differences in opinion; in other cases, issuers will test the water or accept the criteria that may not be acceptable in the future.

“In some cases it will be what you might call “good faith green-washing”. People will be trying to catch up and trying to build the proper framework and in a sense, they'll be desperately trying to make it but also trying to fake it until they can make it, so it's going to be iterative.”

- Non Bank Issuer

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“I think our industry is very well governed, and I think it is actually so full of responsible, smart people. If I had to make a comment at all here, I'd probably be a little bit critical of the light 'green' style bonds, because I don't believe that those originators have gone out specifically to target or encourage that type of origination, and they're just picking through their pools and saying this will do, let's put those in. I'm not sure if that's necessarily satisfying any objectives in climate change.

That's more an issuance of convenience as opposed to a true 'green' bond.”

- Non Bank Issuer

“I think it's the vibe. It's what everybody wants to do because it makes them feel good at the moment, because they haven't got any alternative. The ultimate outcome still needs to be measured and this is where I believe that there's going to be a reckoning to pay because, once somebody goes in and starts to audit every dollar that was borrowed on a 'green' basis, where did it actually go?

It's going to be really hard to explain.”

- Local Investor

Measurement and Reporting It’s no surprise that measurement and reporting formed a decent chunk of the conversation with participants.

If it was just a matter of determining whether a pool of assets satisfied a commonly accepted standard it would be relatively easy. But sustainability incorporates factors that go well beyond the pool and includes factors that, by their nature, require qualitative assessment rather than quantitative.

Investors pride themselves on their ability to assess the quality of governance in the organisations they choose to invest in. This has been their bread and butter since securitisation began. But when it comes to social issues, they face challenges they may not have considered in the past.

Not only do they need to make judgements about whether an issuer or originator meets their expected standards for things like employee relations and care, they also need to price these for risk.

The growing focus on supply chain relationships, offshoring of processes and diversity in all its forms means they need to look beyond the parts of an issuer’s operation that deliver securitisation pools to how these impact on the sustainability profile of the companies they invest in.

There are four key themes across participants’ discussion of the challenges of measurement and reporting:

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1. The need for standards 2. Accreditation 3. Technicalities 4. The potential value of expertise

The Need for Standards There is a unified call for industry standards, yet differing views on how they should be devised and who should be responsible for devising them. There is also a question mark about how far standards will go as so many of the potential measures are qualitative in nature.

There is a strong call for international standards, yet concern that there will be differences when it comes to Australian standards, as there is for US-based investors and issuers.

It is generally accepted that Europe has taken the lead. Local issuers are already being asked for the information that global investors have access to in Europe, as the Europeans have already established standards. The view is that global investors will have a significant impact on the standards developed in Australia simply because those standards are built into their mandates.

Adding to the challenge is a sense of urgency because participants foresee rapid growth in the sustainable sector. No one thinks it’s going to be easy.

“There really isn't any kind of a general agreement at the moment in the market on how this is all supposed to work its way through the investment process. One asset manager’s criteria for identifying suitable investments can be different from other asset managers criteria for determining suitability.”

- Global Investor

“Each lender is doing the right thing in their own eyes, but you need to get investors comfortable with that approach. We really just have one chance to go right, so this needs to be collaborative across the investor and the issuer.”

- Local Bank

“We expect that definition of 'green' to become globally adopted because EU’s already talking to China about harmonising their taxonomy there. I know there's work in the background from some of the well-known 'green' certifiers to start harmonising their taxonomy.”

- Local Investor

“If you're talking global markets, you want international comparability.

You know, it’s like having multiple languages but, if you have one language, it makes things a lot easier.”

- Service Provider

Accreditation While there is general agreement on the need for standards and a broad acceptance that these standards should be globally compatible, there is less agreement on how the standards would be administered.

Some believe it should be up to the issuer to demonstrate compliance with the standards.

Others see a role for third parties including certified accreditors or ratings agencies. Some mavericks even feel their own ability to determine compliance gives them a competitive advantage.

“I don't think it's going to be independent accreditation.

I think what will happen is that the individual investors who buy these securitisation bonds are going to say: A is acceptable; B is acceptable; here is the standard we need to make for our board.”

- Global Investor

20 Sustainability in Securitisation

“The development by the International Accounting Standards Board to set up a Sustainability Accounting Standards Board is a good step. Essentially, you've got standards in terms of ESG reporting and that it is audited, so at least you're starting to get data in sort of baby steps.

You start to get data on ESG, starting with, obviously, E with the climate and the carbon outcomes from a company.

A bit like financial reporting, you can then start to draw conclusions that are based on reasonable evidence. I think it’s early days. We’ve got to move much faster than we are. It's a bit like the Wild West at the moment.”

- Service Provider

Technicalities If the issues raised by participants are the tip of the iceberg, once it gets down to a discussion of measurement, thousands of technical questions and issues are raised.

At a high level, participants recognise that many of the issues facing securitisation are the same as those affecting financial markets more broadly. They also suggest the measurement of sustainability is not just about assets but about activities and practices of the company delivering the asset.

Many participants consider that what constitutes 'green' is a matter of opinion. One person’s 'green' can be another person’s black and more often simply grey.

“What if the company is a power generator and has a significant amount of its generation coming from coal, but they are in the process of transitioning to renewables? What's the correct assessment of that, what kind of a carbon environmental standpoint? Yes, it has got harmful elements, but they're actually transitioning to a more sustainable future and footing.”

- Local Investor

Measurement of the ‘Social’ component of a company’s ESG credentials is vexing for many participants. This is due to the difficulty of finding relevant data about an issuer and then making an assessment of the relative performance of the issuer in meeting social standards.

The underlying problem is that issuers in Australia are exceptionally good at providing information about their pools, but when it comes to assessing their employee relations, customer relations, diversity, equality and other social measures they not only do not routinely provide these, but they can be difficult for investors to find. Several participants said they can find what they’re looking for on the issuer’s website, but every website is different and what is reported also depends on what’s collected and whether it’s included.

“The definitions around 'Social' are just exponentially more complex than the environmental stuff because, at the end of the day, you can reduce all environmental outcomes to emissions.”

- Local Investor

“'Social' is one of those ‘how do you measure it’ kind of things.”

- Service Provider

21 Sustainability in Securitisation

Rigorous investors have always advocated visiting issuers and originators to look at their operations in action. This probably won’t change under a more formal reporting regime. But for investors who can’t visit or who simply want to assess, for example, the way originators look after their employees and their customers what information will be accessible and will it be in a form that gives the investor confidence in the information supplied? Will the investor be able to use this information to determine the impact of what is provided on the quality of the pool?

Some participants are already providing detailed information about the social fabric of their firm.

However, in looking at what they are measuring or reporting on, it’s clear that there is a lot of work for an investor to sift through the data, find what they’re looking for and assess it.

“Some key areas in ‘Social’ include wellbeing, diversity and inclusion, providing sustainable products and services, a safe environment and a safe workplace and equipping our leaders with what they need to be successful. These are areas of measurement, which we can use to show how we are improving. So, the measurement of gender equality, inclusion, equity, identity, and diversity, whether it's gender diversity, cultural diversity, age, and life stages, LGBTQI, disability, parents, cognitive diversity, diversity of thought, all of those things now are starting to be measured, which then can demonstrate how we actually continue to improve.”

- Service Provider When it comes to pools, data for specific environmental factors can be difficult to source. For example, the vast majority of mortgages are existing houses for which energy data is rarely available and even when issuers want to report on it, they are relying on the borrower including the energy rating on their application form.

“I don't even know what energy rating my house might be. The Energy Star rating of all houses across Australia is probably less than two. So why would you even bother? No one's rushing out to go and get energy scored, which means you need to find another means to go and assess your pool data that has all of those energy efficient homes in there that are energy scored.”

- Local Investor

“I think we've got 12 or 13 additional data fields that we'll be adding into our end-of-month portfolio cuts, designed to support a 'green' and/or social bond program.

Obviously, the decision we'll need then to make is whether we go and pull the loan files out and do the painful backfilling of those data points for previous loans, or whether we look at it on a go-forward basis.”

- Non Bank Issuer

“How do we, as the issuer, go and effectively backfill data of tens of thousands, or hundreds of thousands of loans, to get ourselves comfortable that they meet 'green' requirements and then be able to report on them to investors or some other third party?”

- Local Bank One local investor summed it up by saying: “I think our preference would be to ultimately arrive at a more quantitative process, if that's possible.”

And it’s probably fair to suggest they are not alone. The key to moving to a more quantitative process is data and there are already moves by some issuers to prepare for the future need for more detailed sustainability related data.

22 Sustainability in Securitisation

Expertise Not all participants have the resources to manage and manipulate data in the ways they believe will be necessary to both comply with standards or regulations and be competitive in the future. Several believe new skills and expertise will be required.

There’s a degree of excitement about what might be possible in the future through a combination of technology and expertise.

“Using things like a distributed ledger and smart contracts in the future, you can really produce pretty fabulous reporting very quickly.”

- Service Provider Ultimately, some participants are going to be comfortable using their own expertise and others will seek to outsource it. None are really expecting technology and systems to do it all.

“The easy stuff is always going to be easy and systems and technology really only serve the stuff that's already easy. The complex stuff where you need to actually have an assessment or a review, that's where you need to have a bit of ingenuity around the raw data - where to find it and how to manipulate it. That’s where new skills will be required.”

- Local Investor The one thing that everyone seems to agree on is that there will be an increasing demand for more transparent, detailed ESG reporting in the future and most are at least thinking about how they will satisfy that need.

“I know of an issuer who's working with a Europeanbased investor who is signatory to all sorts of sustainability principles for responsible investment and whatnot. This issuer is being asked so many detailed questions by the ESG team. If this is the trend going forward, I think Australian issuers should start up-skilling themselves to be able to answer questions from an ESG perspective, even though you're not doing ESG, because that's the additional due diligence that will be coming down.”

- Local Investor

Data, Technology and Skills The Australian securitisation industry is full of data loving professionals who are comfortable manipulating swathes of complex data, yet many are cautious about their ability to deal with sustainability related data.

There are many practical reasons for caution. These include the need to begin collecting new types of data and understanding the technicalities of energy and emissions measurement. Many are concerned about the suitability of their systems to capture the data, the uncertainty about what data will be useful and meaningful as well as the task of backfilling data and missing data generally.

Some believe that investment in technology will be necessary to manage and manipulate the new data required. Others feel the capture of additional data fields will do the trick.

There is also a sense of positive anticipation about the potential for artificial intelligence as systems and technology progress. Despite the analytical skills inherent in the industry there is a belief that new roles will emerge as a direct result of the shift to sophisticated ESG reporting.

Data Participants are not just thinking about the collection of new forms of data in a passive way. There is a growing appreciation of the value of data. The term Big Data has been attributed to many people with earliest sightings of the phrase in the mid-to-late 1980s and more widespread use towards the end of the 20th century. It became a buzz word in the in the beginning of this century but somehow didn’t quite live up to its promise. There are several participants who feel that may be about to change.

“In that FinTech space, when you look at newer players in market - not to suggest that banks or larger institutions don't have great data - I think there's been a real shift in thinking around the value of data. I think that prompts data to be considered as an absolute requirement in terms of getting as much data as you can in connection with everything you do upfront.”

- Non Bank Issuer

23 Sustainability in Securitisation

“You know, the industry is moving quite firmly towards capturing as many data points as possible, wanting to better understand the user, but also to better be able to manage the risks and optimise the funding.”

- Global Bank Equally, there are valid concerns about how quickly the industry can respond to the data requirements sustainability will generate.

“If you think about how long it took to get loan level data post-GFC and the push across a number of securitisation markets to mirror what they saw in the US in terms of the loan level data availability it took many, many years, and for ESG, it's going to take just as long, if not longer.”

- Global Investor

There’s a degree of excitement about what might be possible in the future through a combination of technology and expertise.

24 Sustainability in Securitisation

Technology Data and technology go hand-inhand. By adding a sprinkle of AI, more possibilities are opening up.

In particular, several participants feel the data-technology-AI combination will prove highly beneficial in dealing with sustainability related data and facilitating ESG reporting.

“I think AI will help enable ESG reporting and analysis. A lot of people now are thinking about how that aspect of ESG can be delivered to investors.

First of all, use blockchain to secure the data and then you use AI to analyse the data, and then deliver that data to the investors. Use the Internet of Things to collect the data. You take it, secure it and then you analyse and deliver it.”

- Service Provider

“Already in Hong Kong, they are looking at a 'green' bond, a retail bond, that will double the outcomes on a real time basis to investors using blockchain and AI, like smart contracts. For example, in areas like infrastructure, with having sensors on things, you can actually measure stuff and then, using smart contracts, you can ultimately deliver them through to investors?”

- Service Provider

Many participants spoke of their own efforts in upgrading technology or seeing others doing so, as the data management and analysis needs of the industry continue to grow. Whether it’s for data capture and processing, analysis or enhancing the customer experience, there is a belief that existing systems are often not up to the task.

In practical terms there are immediate needs to be satisfied.

“One, we are not collecting all the data. If you think of how many home loans we deal with in our portfolios, we're not collecting 'green' numbers. We don’t know how many of those mortgages have solar cells in the top of the house that are generating power and things like that. It's not collected now.

Eventually that kind of data will be collected because, if the 'green' bonds are any example, a mortgage with a solar system should get a lower interest rate, so it's going to come through.”

- Global Investor

There is also a belief that the need for accreditation of 'green' pools or tranches will require digitisation.

“For the 'green' tranches we’ve seen so far, I don’t think in the future you'll be able to say that, well look at this pool, it's a light 'green' pool. I just don't think that will wash soon, and that it's all got to be in the data. You'll be able to present it digitally. Otherwise, you're just not going to get the accreditation.”

- Non Bank Issuer The use of technology for ESG reporting in the ways described is not the only opportunity to harness new technology capabilities in the sustainability space.

“There's currently a start-up company that’s effectively doing some of that energyrelated piece based on Big Data and they're able to say, when people are buying homes, ‘okay, this is what the shape of the home is and, therefore, I can tell you how much energy you'll save by choosing this window over this window.’ AI technology is able to say, what is the sustainability impact of that choice.

How does the consumer understands it is absolutely a really big piece of that puzzle, and some really exciting stuff is being done on that.”

- Non Bank Issuer

25 Sustainability in Securitisation

Here is another example of how technology and data can improve measurement of sustainability of individual properties.

“There is technology that's sitting there that can tell you, for example, if your solar isn't operating as it should be, based on the sort of information I have around your neighbours. It looks like yours is either maybe in shade or, you know, something is covering it and things like that. So there's much more granular nature of what the assets are actually doing and, therefore, why they're sustainable. That's a key trend that must be a software solution.”

“To date, the people who have been at the forefront and who are in the responsible investment kind of jobs in different organizations are the tree huggers, right? They are going to get replaced by people with a scientific background. Think about who is best to calculate CO2 emissions and things like that – it’s either the right engineers, or chemists (people with a chemistry background or a physics background, things like that) - it's not the guys with the Liberal Arts degree who dominate what I would say is the responsible investment world today.”

- Non Bank Issuer

- Global Investor

Skills All this talk of technology, AI and Big Data got us wondering about who is going to deal with it all and prompted us to ask participants whether they believe there will be new skill sets required in securitisation to do so.

The first response summed it very well.

It didn’t take long before others joined the chorus.

“The best stuff I've seen (referring to technical analysis) is done by proper technicians and technical companies true independent engineering companies - who are able to understand the science and understand Avogadro’s number and things like that.”

- Global Investor That may get you, like me, wondering what Avogadro’s number is. Apparently, Avogadro's number is the number of elementary particles (molecules, atoms, compounds, etc.) per mole of a substance. I’m none the wiser but I am certainly impressed that a global investor lets it roll off the tongue.

26 Sustainability in Securitisation

I use this example to highlight the natural caution existing securitisation participants have towards this frontier of sustainability measurement.

There are probably many easier ways to describe the impact of an asset on sustainability, but it does seem new skills may be required.

“If you think about data as an asset, I think in all these newer businesses there is clearly a very, very big focus on intelligence platforms, IT resources, engineers in the data space - that is a booming area in terms of skills that are required. I think that is very much here to stay.”

- Non Bank Issuer

“We certainly encourage that sort of technology mind-set and one of our key strategic pillars is about data. Part of the task, for example, within our organisation, will be to have a champion of data whose job is to make sure that the culture moves towards that sort of data-led decision making.

Their skills are about the cultural shift in thinking about data, the consumer-centric side of things, using data to understand how best to help the consumer.”

- Non Bank Issuer The other option is to outsource those skills and perhaps that’s a trend we will see in the future.

Investor Demand Irrespective of the growth and trajectory of sustainability as a focus for the securitisation industry, investors are likely to have the final say.

For investors it is clear that demand is being led by the demands of their clients, but increasingly there is regulation to consider as well.

Local participants claim there has not been a lot of new activity from regulators in relation to sustainability and ESG, but there is a sense that this might eventuate.

In New Zealand, laws are being introduced that will require companies to report on climate change in their financial reports.

In Europe, as we’ve seen, there are both guidelines and regulation already in place. Participants from the United States talk about guidelines and standards being on the way.

Against this backdrop, global investors are asking a lot of questions about ESG based matters.

“It's very rare to speak to an investor these days who isn’t actually properly check-listing sustainability requirements as part of their investments.”

- Non Bank Issuer Recognising an issuer’s ESG credentials is common, but it’s still not dominating investment decisions and investors are not yet walking away from investments that don’t meet specific mandated criteria. However, the move towards minimum requirements for sustainability reporting is probably not far away.

27 Sustainability in Securitisation

“I definitely think there's a focus on the underlying assets.

Again, I don't think it's at the level yet where investors are not participating in transactions because they've got these really firm mandates that must be met - there's still this sort of broader investment lens. So I think it's an element.

I think it will continue to grow in importance, but it's not changing investment decisions at this point.”

- Non Bank Issuer

“I’ve been asking all of our issuers for their statement on modern slavery and it’s something that our credit team look at now. It’s like KYC in some ways.”

-Global Investor For those that have been able to deliver 'green' assets to the market, they report a sense of excitement amongst investors and a genuine interest in what they are doing.

This is likely to continue until volumes catch up with demand.

“Following our first public term deal issuance, I do think there's probably a couple of things; I think the level of interest and curiosity was probably above the normal level for a first-time issuer, because of the mission letter and because of the 100% 'green' nature of the assets. The questions were probably more under the lens of excitement, rather than questions, because it was very clear what we did.

In terms of the questions around the sustainability piece it was generally, ‘what else could be included in sustainable assets?’ and that was the interesting question.”

- Non Bank Issuer As we have found with securitisation deals generally, investors have an ongoing need to report on the performance of the pool over time. However, the other issue raised in the context of 'green' investments is whether the intended outcome or impact of the 'green' assets was achieved.

Securitisation is perceived to have an advantage as they can ringfence assets which gives investors confidence that what they see is what they get.

28 Sustainability in Securitisation

“I would put a few 'green' issuers in a pretty positive sort of box because they can essentially ring-fence all of the assets in a trust and say these are all 'green' and meet certain standards. An investor buying the security that comes out of that knows that all of the assets floating around in that vehicle are 'green' and they know what they're getting.”

- Local Investor As demand for sustainable investments rises, investors will continue to look to issuers to provide a steady stream of opportunities.

"Typically, the scale of deals on these types of things are a little smaller, certainly smaller than RMBS. This makes the ticket size a potential problem, particularly across the mezzanine pieces and particularly when it's oversubscribed, so the importance to the investor that he'll be a multi-issuer is critical.”

- Non Bank Issuer

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Investors are hungry for information that helps them do the analysis they require, which makes the provision of this information critical. When investors review sustainable investment opportunities, they are likely to be looking for certain types of sustainability-related information irrespective of whether a new deal is 'green' or not. Many of these factors have not traditionally been available.

Pitch documents and issuers’ websites will be common sources, so it’s worth considering how easy it will be for investors to find what they’re looking for in these sources.

Opportunity or Risk?

The vibe of participants towards the emergence of sustainability as an issue is generally positive.

Many see it as both inevitable and necessary. When asked whether this focus on sustainability felt more like an opportunity or a risk, the weight was more towards opportunity.

“Firstly, if you're going to do it, you have to do it genuinely.

If you don't do it, you get left behind. I think just paying lip service to it and doing it just for the sake of doing it is probably not an optimal strategy. It is where our world is moving to, and it is an opportunity.”

- Global Bank

“Just because you’re focused on risk management doesn’t mean you’re not thinking positively about opportunities, I’m certainly a glass half full, initially it’s just prudent to be doing this on a risk management basis.”

- Global Investor Participants are alert to the emergence of sustainability as an issue that is here to stay, but also realistic about how long it will take before critical mass in the market occurs.

“In our asset class, in the short term, it is probably just mitigating risk. Long term, I think there are opportunities, but asset originators have a lot of work to do in this country to come up to speed, to create those opportunities.”

- Local Investor A lack of long-term analysis of the impact of sustainable practices on both investment returns and environmental or social outcomes has many being cautious about what to expect in the future.

There is a confidence amongst participants in relation to their governance and many have been working towards ensuring their social footprint is sound, but the impact companies can have on both the environment and collective social issues is really an unknown.

“We feel like we were founded on this, what amounts to a social loan. We feel like, you know, 70 years with dealing with institutional mandates, we've got the “G” in spades.

The “S”, I think, comes along with our commitment to social loans, but always the battle for us was the “E” - how do we, as a humble small-scale mortgage lender, how do we really make an impact on 'green' issues?”

- Non Bank Issuer

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Some are in no doubt that this focus on sustainability will bring benefits both to their own business and to society as a whole.

“Look, it's absolutely an opportunity, it's a huge opportunity for companies who want to lead and lean in. ESG is for the good and is going to make the world a much better place moving forward.”

- Service Provider There is heightened awareness and discourse that participants may be left behind.

“The developments that we've seen - the UK leading on 'green' bonds has been particularly valuable, because what it’s shown to the market is, actually, there is a way - for us, I think it's an opportunity.

There is a big thematic to capture and we are really well positioned to capture it. We want to make sure we're not left behind at the station, clutching our suitcases, wishing we were on the train.”

- Non Bank Issuer

Industry Role Participants are realistic about the work ahead to achieve a truly sustainable industry and enjoy the benefits that sustainability are expected to deliver.

They are willing to contribute but hungry for guidance as well.

The need for standards is paramount and there is a sense of urgency when participants talk about that need.

“There are so many different views and no standardisation, even at the originator level. It's very difficult from an investor perspective too. The body of work we’re doing, you would think there would be a lot of investors doing a similar body of work. We're taking guidance from international peers and if there was leadership from the ASF it would be good. It would have to happen pretty soon.”

- Local Investor

The interesting thing you find when reviewing discussions about ‘industry’s role’ is the fact that the majority do not assume addressing these issues are ‘someone else’s problem’. The industry is widely known for its collaborative and collegiate nature, and this comes through when people talk about doing the work to arrive at standards and guidelines and everything else that needs doing.

“The industry has a vested interest or should have a vested interest in standardising this, because the more standard it is, the more accessible it is to more participants, and the more participants there are, the sooner you reach a critical mass point. It’s an industrywide obligation. I wouldn't say it is the ASF’s role, for example, but it certainly should be like a multi-party effort like a lot of the things that have been done in the securitisation industry here.”

- Global Bank

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Several participants felt there was much work to be done towards industry sustainability, particularly in relation to opportunities for women.

“I think it's just harnessing that collaborative nature of the industry to really push support for women. How do we help them build their profiles and how do we help them build their confidence to continue on in this space in their careers and think about opportunities outside of those more bottomline type roles?”

- Non Bank Issuer

Words of Wisdom The hardest thing about bringing these reports together is to get to the end and realise there were so many wonderful, interesting and insightful comments that didn’t find a place in the body of the report. For that reason, last year we created this ‘Words of Wisdom’ section to deliver some of those ‘missing’ insights. Think of it as the ‘cutting room floor’. We hope you enjoy them.

“There are interesting philosophical questions about whether you try and work from the bottom up (in other words, just try and kill off all the problematic stuff in your portfolio); whether you try and actively shift your portfolio into things that are definitively 'green', or whether you take your existing portfolio and make it as 'green' as it can be or whether, in fact, you do some combination of those three things. Now, those are philosophical questions! With securitisation it's probably not too tricky because, provided what you're doing isn't a problem, it's probably okay and you should actively seek to try and get as much as you can of the stuff which is pushing for good outcomes.”

- Local Investor

“Impact is a very valid and important part of the whole ecosystem, but I think there's as much to be done with the greys of the world, as there are with the ultra-greens.”

- Local Investor

“Energy companies using more 'green' energy sources can have huge impacts. But equally, you can have 'green' bonds which are lacking in substance, shall we say. I think the fact that people are being more nuanced in the way that we think about things just massively increases the opportunity set of things that you can look at. “ - Local Investor

“In terms of the mortgage market the ‘S’ and the ‘G’s are just, you know, waking up every day putting your pants on. That's what you do.”

- Local Investor

“Green bond reporting will become more and more of a science, and so you'll find there'll be more and more exposure in that area to environmental finance.”

- Non Bank Issuer

“The other thing that also is extremely relevant - again, this comes back to the skews we see – is, on the investor side, there are even less women.

I have done a lot of road shows and it is very rare for me to meet women that are representing fund managers, fixed income investors, anyone on that investor side, and often I'll do 20 investor meetings and there'll be one female across all the meetings. So I do think that the gender diversity, maybe in terms of industry as a whole - it may look like there are a lot of women but they're very much skewed to particular products and pockets (say trustees, legal).

There are pockets that are very, very under-represented in that space.”

- Non Bank Issuer

“I think my biggest one, to be honest, is the macro trend. You know, think about the macro trend as one of electrification and one of distribution.

When you go to distributed assets, you are talking about translating people's OpEx, like paying energy bills, into CapEx, i.e. buying solar and that, if we just take the solar market for example, is accelerating.

If you could go back 10-or-so years, Australia was putting 120,000 of those things on the roofs and now we’re in the 300,000s, and the rate is sort of increasing. So there is what I would call an OpEx to CapEx trend.”

- Non Bank Issuer

32 Sustainability in Securitisation

“There's a lot of fads at the moment, but are you as an enterprise being sustainable or are you just taking advantage of particular definitions or window dressing to access funding cheap? Investors and investment committees are wise to this now and they're saying, well, we would like your assets to be sustainable and we'd like your corporate activities to be the same.”

- Non Bank Issuer

“Everybody is collecting data and everybody knows that it’s a very rich source of information. The collecting is one thing, but you’ve got to be able to use it properly. I think analysis is more important.

Yes, I think it is changing the way some companies are approaching things.”

- Non Bank Issuer

“There is a real concern around, obviously, climate but also the broader issue of ESG. Europeans are ahead of the game in terms of thinking about all three areas. Their culture of ESG has been pretty well embraced, but more than embraced – it's now being embedded in law. So it’s not just voluntary disclosure. It’s mandatory.”

- Service Provider

33 Sustainability in Securitisation

“The evidence shows that companies that adopt an ESG risk management strategy generally do better than those that don't. So the opportunity is for better returns over the longer term. That’s the theory. So, by implementing a good ESG risk management framework, basically, it’s the opportunity to execute a lot better returns over the longerterm.”

In the future, if you saw a deal that didn’t have sustainable loans in them or could not be certified by a rating agency and the loans do not meet the standard they’ll stand out and you’ll go, “Why are we investing in this?”

- Service Provider

“For a company or a government, if what the community and customers are saying, or their investors are saying, look, we're not going to deal with companies that are dealing in coal or have problems with human rights in their supply chains, it affects either the sellers to their customers or to their workers, who don't want to work for them, or the investors invest in them. That is all encompassed in their social license and I think that's what's driving this.”

- Service Provider

“I have very strong confidence sustainability will have an impact, just seeing the tide of interest and anticipation in it. It’s become very real in Europe. A lot of the flooding we have had in Europe has affected peoples view of the impact of climate change and sustainability and its affecting every aspect of home and work life. I’m confident that the changes institutions are making, regulators are pushing for and governments are pushing for will make the real life of individuals and companies better as a result.”

- Global Investor

“This focus on sustainability is something that people will always look at. There are so many people worried about the environment and what we all do with our environment.

There are so many people that are concerned about how their money might be impacting other people in society. They want to speak with the power of their pockets. It's similar to social media. People recognise they have a power in numbers and voice and I think now they believe they have a power in their money too, even if it's small amounts. If there's a lot of people that believe that they can, they can make a difference.”

- Service Provider

About Perpetual Corporate Trust The vision of Perpetual Corporate Trust (PCT) is to be the leading fiduciary and digital solutions provider to the banking and financial services industry.

Australia’s leading financial institutions trust us to administer their securitisation portfolios and debt structures so that the interests of their investors are protected.

We also provide solutions to the corporate debt, structured finance and syndicated debt markets. Our broad range of fiduciary and agency products – including facility agent, security trustee, paying agent and escrow agent services – help make debt financing and business sales more efficient and effective for all parties.

Our client-first focus means our Debt Market Services business manages over 2500 trusts with funds under administration of A$582.9bn*. This focus is also reflected in our client satisfaction (NPS) score of 58 (as at 30 June, 2021) and being named KangaNews’ Australian Trustee of the Year in 2020 for the fifth consecutive year.

Perpetual Corporate Trust’s new innovation company, Perpetual Digital, leverages over 25 years of expertise and experience in securitisation and data services.

We help clients become more effective and efficient and achieve economies of scale, while reducing cyber risk and maintaining compliance through workflow, automation, reporting and analytics.

What we do for our clients Since the inception of securitisation in Australia, PCT has enabled our clients’ success by providing a unique suite of products through its three businesses: Debt Market Services, Data & Analytics Solutions and Managed Fund Services.

In Debt Market Services our offering includes trustee, trust management, document custody, standby servicing and agency services. As more Australian issues attract offshore investors, our managed fund custody operation can also provide bond safekeeping to meet risk-retention requirements for Reg S/144A deals.

Perpetual Digital includes three unique client and market solutions.

Perpetual Data Services has evolved to meet the changing regulatory obligations of our clients and now includes investor, intermediary and regulatory reporting through to the RBA and ESMA. Perpetual Roundtables provides portfolio insights and benchmarking on ~$2.7 trillion* of retail loans across multiple asset classes. This insight is delivered via exclusive, professionally guided Roundtable discussion forums focusing on credit, risk and treasury.

www.perpetual.com.au *Source: Perpetual Limited FY21 results presentation, 19 Australia 2021 ** Perpetual’s Client Net Promoter Score in 2021

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Perpetual Intelligence is our new cloud-based Platform-as-a-Service (PaaS) featuring a holistic suite of products delivering workflow, automated data management and analytics. We help our clients become more effective, efficient and scalable while reducing cybersecurity risk and maintaining compliance.

Perpetual Corporate Trust is dedicated to continually developing and delivering new products and services which meet our clients’ needs today and into the future.

Perpetual Corporate Trust enables client success.

About the Australian Securitisation Forum The ASF is the peak body representing the securitisation industry in Australia. The ASF’s role is to promote the development of securitisation in Australia by facilitating the formation of industry positions on policy and market matters, representing the industry to local and global policymakers and regulators and advancing the professional standards of the

www.securitisation.com.au

35 Sustainability in Securitisation

industry through education and market outreach opportunities.

The ASF is comprised of a National Committee, specific subcommittees and a national membership of over 150 organisations.

This report was prepared by Perpetual Corporate Trust, a division of Perpetual Limited, in collaboration with the Australian Securitisation Forum (ASF). Any statements or opinions made in the report are personal to those interviewed by Perpetual Corporate Trust and are not, nor are they deemed to be, the views of the ASF nor are they necessarily endorsed by the ASF. Perpetual Corporate Trust services are provided by Perpetual Corporate Trust Limited ABN 99 000 341 533 AFSL 392673, Perpetual Trustee Company Limited ABN 42 000 001 007 AFSL 236643, Perpetual Limited ABN 86 0000 431 827 and its subsidiaries. Perpetual Limited and certain of its subsidiaries act as Authorised Representatives of Perpetual Trustee Company Limited. This publication contains general information only and is not intended to provide you with financial advice. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by the law, no liability is accepted for any loss or damage as a result of any reliance on this information.

Any statements or opinions made in the report are personal to those interviewed by Perpetual Corporate Trust and are not, nor are they deemed to be, the views of the ASF nor are they necessarily endorsed by the ASF.

Trust is earned.