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?
13 Sustainability in Securitisation
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.
