Green securitisation unlocking finance for small scale

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BRIEFING PAPER
Green Securitisation: unlocking finance
for small-scale low carbon projects
GREEN SECURITISATION can help unlock finance in debt capital markets for smaller
scale low carbon and climate-resilient assets. The public sector has a key role to play
to scale up securitisation markets for green assets.
Maturing green bond markets Securitisation refers to the process of transforming a pool of illiquid assets
are seeing increased issuance (normally many thousands of separate assets) into tradable financial instruments
of green Asset-Backed (securities). The investors' returns on the securities are drawn from the cash flows of
Securities (ABS) the underlying assets, such as loans, leases or receivables against other assets. The vast
About USD 5bn (6% of market share) majority of securitisation is used to refinance loans to existing assets, and banks are the
of green securities issued in 2016 main issuers of asset-backed securities.
were asset-backed securities (ABS), up
from USD 1.9 bn in 2014. Obvion's green RMBS
Leading examples from the US market
include solar developer SolarCity, energy Dutch-based Obvion issued the world's first green Residential Mortgage-Backed Security
efficiency lender Renovate America (RMBS) in June 2016, a EUR 500m (USD 557m) deal certified under the Climate Bonds
and sustainable infrastructure company Standard.
Hannon Armstrong. Other markets are Green RMBS are an ideal asset class to spur market development given the size of the
growing as well as shown by the Canadian mortgage market.
North Power and the two Australian
climate bond certified FlexiGroup ABS
issuances.
Europe also saw its first green ABS issuance Growth of green labelled ABS issuance
in 2016 by Obvion, a Dutch mortgage
provider (see box).
5
Annual green ABS to reach at
least USD 280-380bn by 2035 4
Despite recent growth, the potential for 3
issuance given investment needs is far
greater. 2
The OECD estimates that annual issuance
of green ABS could reach between USD 1
280-380 billion by 2035 for renewable
energy, energy efficiency and low-emission 0
vehicles (LEVs). Investments for low 2013 2014 2015 2016
carbon public transport, adaptation, land-
use and waste would add to the figure.
A securitization can be defined Asset classes suitable for green securitisation
as `green' when cash flows
backing the securitization come Within asset classes that are already New asset classes
from low carbon assets being securitised
Green securitization can also refer to any
asset-backed security with proceeds raised Mortgages to green buildings Leases from solar and wind assets
to finance loans for green infrastructure.
An example is the Toyota ABS securitising Car loans to electric vehicles and hybrids Loans for energy efficiency upgrades
loans for electric and hybrid vehicles. Loans to green small-to-medium Loans to battery and storage projects
enterprises (SMEs)
PAGE 1
Issued by year (USDbn)
GREEN SECURITISATION
Green securitisation improves Regulators are addressing Similar initiatives as those taken for
access to capital and lowers many of the securitisation risks securitisation of student loans or of loans to
small and medium sized enterprises can be
cost of capital Following the 2008 financial crisis, where replicated for green assets (see table for policy
Access to capital: the US market for sub-prime mortgage- recommendations).
? Loans to small-scale projects can be
backed securities played a catalysing role,
aggregated and then securitised to reach an
securitisation markets have shrunk globally. To be effective, public support for green
adequate deal size for bond markets
? Capital raised through the sale of asset-
securitisation must rest on a broader
Efforts have been carried out to mitigate risks favourable policy environment that generally
backed securities by the loan originators
associated with the crisis, including moving supports investments in low carbon projects.
can be used to create a fresh portfolio of
away from re-securitisation, imposing higher This builds an important foundation for green
loans
risk retention requirements and improving securitisation by providing stable cash flows
the transparency of risk evaluations. from low carbon projects and driving demand.
? Tagging the securitisation as `green'
enables issuers to tap into the increasing The public sector has an FlexiGroup certified solar
demand for securities with environmental important role to play to securitisation
benefits scale up green securitisation In 2016, FlexiGroup issued the
Lower cost of capital: markets first Climate Bonds certified green
? In high interest environments, asset- securitisation for AUD 50m (USD 39m)
backed securities issued in bond markets Historically, public sector entities have been - a `green' tranche of a AUD 265m (USD
can offer lower cost of capital compared involved to facilitate securitisation in policy 204m) issue of securitised notes backed
to bank financing priority areas since the market commenced by loans for residential rooftop solar
? This is important for low carbon with the securitisation of mortgages in the US power systems. A second certified solar
projects that typically have high capital in the 1970s. Securitisation markets in other securitisation followed in February 2017.
asset classes such as auto loans, functioned Both issuances received a AUD 20m
expenditure well throughout the crisis.
cornerstone investment from the Clean
Energy Finance Corp and saw tighter
pricing, suggesting investors are willing
to pay a premium for eco-friendly assets.
Policy actions to scale up green securitisation markets
Challenge Recommendation 2016 Green ABS issuance
No clear and harmonic Work with market players to develop clear and consistent Issuer Amount (USD)
standards to define `green' definitions of what qualifies as green
assets Toyota 1.6bn
Difficulty in identifying Provide financial support for data collection on green Renovate America/Hero 1 bn
green assets in existing assets at the initial stages of the markets
loans Obvion 595m
Limited standardisation for Establish or offer financial support to existing public-private
loan contracts for relevant initiatives and groups working on standardisation of green Wuxi Communication 296.8m
low carbon asset types loan contracts Suzano Papel 295.3m
Low credit ratings for green Offer guarantees for the junior and mezzanine tranches to
ABS make senior tranches attractive to institutional investors AP Renewables 226m
Lack of sufficient volume Support financial warehousing of standardised loans. A Flexitrust 218m
of green loans within one green warehouse entity can be set up as a public-private
lender partnership or can be hosted by a local development bank Xinjiang Goldwind 192.2m
Uncertain investor demand Invest in green ABS and consider incorporating Ygrene Energy Fund 117.6m
for green ABS environmental factors into capital weights, favouring
climate-friendly investments Renew Financial 10.8m
Public sector agenda for stimulating
privatemarketdevelopmentingreen
securitisation in Europe
Read more
Diletta Giuliani, Sean Kidney and
Beate Sonerud
Policy Paper
about green
February 2017
Want to know more? Please contact CentreforClimateChangeEconomics
and Policy
diletta.giuliani@ Incollaborationwith
securitisation
(in collaboration with XX)
[Logo]
in Europe
Climate Bonds Initiative ? February 2017.
Disclaimer: The information contained in this communication does not constitute investment advice and the Climate Bonds Initiative is not an investment adviser. Links to external websites are for information purposes only. The Climate
Bonds Initiative accepts no responsibility for content on external websites. The Climate Bonds Initiative is not advising on the merits or otherwise of any investment. A decision to invest in anything is solely yours. The Climate Bonds Initiative
accepts no liability of any kind for investments any individual or organization makes, nor for investments made by third parties on behalf of an individual or organization.
PAGE 2

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