ICMA Calls for ESG Metrics, Standards for Securitised Assets

Unless ABS investors have better access to standardised and relevant data, they will be unable to appraise ESG risks and satisfy sustainability objectives.

ICMA (International Capital Market Association) is calling on regulators to prioritise efforts to address a lack of ESG data in ABS (asset-backed securities) markets.

The plea came from ICMA’s Asset Management and Investors Council (AMIC) in a statement issued last Thursday (18 March).

“While many jurisdictions have announced mandatory corporate disclosure on climate-related factors, we anticipate that these improvements will enhance ESG transparency unequally across asset classes,” the statement says.

In particular, the AMIC highlights ABS as one investment class that “suffers from a paucity of relevant and standardised ESG information”, and which may not fully benefit from mandatory corporate disclosure requirements.

ABS includes mortgage-backed securities (MBS), commercial-backed securities, auto loan securitisation, collateralised loan obligations (CLOs), and whole business securitisation.

“Unlike the corporate bond market, there are no third-party sources of ESG data for the ABS investment universe,” the AMIC says. “For example, rating agencies that provide credit assessments on ABS do not typically opine on ESG (unless it materially impacts their credit assessment).”

The AMIC argues that unless ABS investors have better access to standardised and relevant data they will be unable to accurately and effectively appraise ESG risks and satisfy broader sustainability objectives.

The statement acknowledges improvements with environmental reporting for RMBS and auto-loans in the UK, and a December 2020 EU proposal to introduce broader ESG indicators for the entire securitised markets.

While these efforts help, the AMIC is calling on regulators to prioritise disclosure of material and standardised ESG data specifically for collateral asset pools.

In addition, it asks that reporting of material ESG risks be required at least annually, saying this frequency will ensure efficient pricing of the ESG risks of securitised instruments over time.

The AMIC also calls for the introduction of ESG metrics, specific ‘green’ securitisation metrics and standards, and collaboration between the structured finance industry and regulators to address the ESG data issues and embed further market changes.

The AMIC has set up an ad hoc working group to discuss ESG transparency of asset-backed securities. The working group plans to identify KPIs for three ABS sub asset classes – auto-loans, RMBS and CLOs.

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