Dentons - Prospects for green securitisations

The EuGB Regulation introduces a harmonized standard for green securitisations. However, while the use of proceeds approach overcomes the limited availability of green assets, it might be difficult to apply to traditional securitisations.

Avv. Gianpaolo Garofalo, Avv. Bianca Chiara Sinisi, Dentons Europe Studio Legale Tributario, 29 Feb 2024 - 09:33
On 30 November 2023, Regulation (EU) 2023/2631 of the European Parliament and of the Council of 22 November 2023 on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds (the EuGB Regulation) was published on the Official Journal of the European Union, introducing for the first time a harmonized standard for green bonds and green securitisations. The new standard will apply from 21 December 2024.

Securitisation transactions will be able to benefit of the EuGB lable to the extent the securitisation proceeds (i.e. the purchase price paid to the originator(s) for the securitised assets) are employed by the originator(s) towards taxonomy-aligned assets as identified under in accordance with Article 3 of Regulation (EU) 2020/852 (i.e. the so called “use of proceeds” approach). 

The EuGB Regulation also adds certain assets exclusions to the “use of proceeds” approach, to avoid the paradox that green securitisations are implemented by transferring “brown assets”. Accordingly, securitised exposures shall not comprise exposures financing the exploration, mining, extraction, production, processing, storage, refining or distribution, including transportation, and trade of fossil fuels, save as for exposures financing electricity generation from fossil fuels, co-generation of heat/cool and power from fossil fuels, or production of heat/cool from fossil fuels, where the activity meets the criteria for ‘do no significant harm’ set out in Delegated Regulation (EU) 2021/2139, may be included in the pool of securitised exposures for the purposes of this Regulation. 

It is worth to note that synthetic securitisation would not be able to benefit of the EuGB label. 

Additionally, the EuGB Regulation imposes certain transparency obligations, which include:

  1. pre issuance disclosures, including the provision of a factsheet to be prepared by the originator(s)
  2. post issuance periodic reporting and an impact report upon full application of the proceeds to be prepared by the originator(s);
  3. pre and post issuance external reviews; and
  4. certain disclosures in the prospectus, including (i) a statement that the bond is a securitisation bond and the originator is responsible for fulfilling the commitments undertaken in the prospectus regarding the use of proceeds and (ii) details on the share of taxonomy-eligible economic activities.
The EuGB Regulation is certainly a welcomed intervention in the securitisation market, providing a harmonized framework for green securitisation and the “use of proceeds” approach, as pointed out in the Recitals to the EuGB Regulation, was likely the solely viable option to allow the development of green securitisations, until there will be an adequate volume of taxonomy-aligned assets in the EU to allow securitisations having “green assets” as underlying.

Nonetheless, its practical application might not be adequate for all securitisation structure.

Indeed, the “use of proceeds” approach and the extensive reporting requirements would be hardly compatible with securitisation involving a large number of originators. Furthermore, also in the hypothesis of securitisation of bank loans involving one or more originators (i) compliance with the reporting requirement might be hard to ensure, if the underlying bank loans do not provide for symmetrical information undertakings on the debtor and (ii) further limitations might derived from the prohibition for the proceeds of financial assets to be allocated for the investment in more than three subsequent financial assets in succession.

Conversely, the new framework may find a favorable market in basket bonds, where the underlying bonds use of proceeds can provide for the investment in taxonomy-aligned activities and the bond documentation can provide for EuGB Regulation aligned reporting requirements. 

Accordingly, it remains to be seen how market practice will react and adapt to implement “green securitisations”.

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