The global securitised market was valued at $9.8tn at the end of 2016 and, in recent years, some of these asset backed securities (ABS) have made an imprint on the global low-carbon economy. This is most evident in the US market where pioneering issuances have emerged from companies citing energy sustainability as their primary objective. For example, SolarCity (over $700m issued in 2014) and Hannon Armstrong ($100m in 2015).
Though progress towards mitigating severe environmental degradation is still in its infancy, green ABS can be used as tools to deliver a positive environmental impact. In simple terms, green securitisations pool together loans which have been identified as ‘pure play’, that is, loans which are specifically targeted towards financing projects with an environmental objective, commonly to address climate change. This includes financing for electric or hybrid vehicles, renewable energy infrastructure and energy storage.
One example is the US federal sponsored ‘Property Assessed Clean Energy’ programme (PACE), which helps finance residential and commercial solar panels. State authorities provide 30% tax relief to homeowners, funding the upfront costs of installation. Given the increasingly affordable nature of this infrastructure, this form of renewable energy has become a popular small-scale method of reducing reliance on fossil fuel generated power. In 2017, the scheme encouraged significant private sector financing and approximately $25bn of green ABS bonds were issued (a 500% increase from the previous year’s issuance). The graph below highlights this significant growth in recent years.
There are many reasons for this upward trend in issuance. These securitisations are being viewed as potential portfolio diversifiers, providing new risk and return profiles for investors. They also provide a demonstrable positive environmental impact, reducing the carbon footprint. It is this desire to use finance as a means to ‘do good’ that is drawing investors to ESG-led strategies and impact funds. As an example, Mosaic Solar, a pure play firm in residential solar which lends to 27 US states, issued an oversubscribed $300m deal at the end of 2017. Investors were attracted by the success of its former 2017-1 securitisation: a total of 10,188 homes producing over 61,000 MWh of renewable electricity.
In comparison to the US however, Europe has been slow to adopt similar green securitisation programmes. There have been only a handful of green ABS issuances (three significant deals since 2010), including Toyota’s green auto bond and the sole RMBS issuance by Obvion in 2016, a €500m deal which aimed to finance residential energy efficiency in the Netherlands. Since then, Europe has seen limited development in the market, which is attributed to several factors, namely stringent regulation over asset backed securities and cultural/political differences within the EU. In particular, despite support from the European Investment Bank and government feed-in tariffs (state-backed financing to subsidise the cost of installation of renewable energies), these remain uncoordinated across the geographical and jurisdictional boundaries of the EU.
Despite a slow start, I am hopeful about the outlook for green ABS, especially if Europe is serious about meeting its emission reduction targets by 2030 and building the low carbon economy it desires. The US template may be a good place to start for Europe to fully immerse itself in the ‘green’ paradigm.