The International Capital Market Association has provided fresh guidance on green securitisation and other secured structures in the appendix to its Green Bond Principles, a move that may help to foster growth in a lagging area of the sustainable capital markets through greater standardisation.
The new version of the widely respected guide distinguishes between “standard green use-of-proceeds” bonds, where the cash raised by selling unsecured green debt is ring-fenced for climate-friendly projects, and “secured green bonds”, which could include asset-backed securities, covered bonds or asset-backed commercial paper.
The new guidance provides some clarity for potential issuers and structurers of green securitisations, which have been slower to catch on than other sustainable capital markets instruments. Securitisation bankers have put this down in part to a lack of suitable green collateral, so the ability to label a bond as green, even if the collateral it is secured on is not, may help spur more green ABS issuance.
The guidance opens the door to a two-track green ABS market in which bonds can be labelled as green either because they are secured on eligible projects and therefore qualify as “secured green collateral bonds,” or because the proceeds will be exclusively used to finance or refinance green projects that are not part of the collateral of the bonds themselves. ICMA categorises the latter as “secured green standard bonds”.
In order to comply with the updated Green Bond Principles, issuers of green secured debt should specify in their marketing materials which type of green bond is being issued. There should also be no “double counting” of green projects, for instance by using them as collateral for a green secured bond when they have already been allocated proceeds from another type of green bond issuance. Compliance with the Green Bond Principles is voluntary but they are widely regarded as the gold standard and are referenced by most green bond issuers.
"At any point in time, a green or social project may only be counted towards one GSS bond," ICMA explained in a document accompanying the new version. "This does not preclude refinancing however as once a GSS bond is repaid the green or social project may be used as collateral for a further GSS bond."
The self-regulatory body also addressed ABCP and other structures involving back-to-back financing arrangements. In such a transaction, ICMA said, "there could be various back-to-back financings between the transaction originator, the ABCP conduit sponsor and the ABCP issuer, however only the ABCP is the capital markets instrument so only the ABCP can claim the GSS bond label".
ICMA also left the door open to green synthetic securitisation, while noting however that consideration must be given in such cases to the full impact of the transaction on the issuer, including any capital released and risk-weighted asset benefits, when calculating the amount of capital that must be deployed in green projects.
Last year, Kensington Mortgage Company brought to the market a social UK RMBS, Gemgarto 2021, and a green UK RMBS, Finsbury Square 2021-Green, transactions that ignited a lively debate over the direction of ESG securitisation, with industry figures such as Hugo Davies, head of capital markets at LendInvest, calling for greater standardisation.
However, ICMA left some questions for investors to answer themselves. For example, under the guidance, a bond could be labelled as green because of its use of proceeds while being secured on an environmentally questionable asset. In such cases, ICMA said investors "should form their own views" whether such a bond would be "in line with their investment mandate".