Ireland: ESG: key performance indicators for automotive ABS investments
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The International Capital Market Association’s Asset and Investor Management Board (“AMIC“) issued a statement in March 2021 highlighting the”lack of relevant and standardized ESG information“for investors in asset-backed securities (“absAMIC explained that the absence of such information can make it difficult for ABS investors to accurately and effectively assess ESG risks for their investments and can also result in penalties for these investors as their regulators and clients introduce requirements more related to sustainability, such as the regulatory requirements set out in Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector. AMIC expressed the view that ABS investors will able to increase their investments in sustainable ABS assets if they have better access to relevant information and standardized ESG information.
In this context, AMIC believes that the key performance indicators (“KPI“) are essential to enable asset managers to compare the ESG performance of originators. AMIC recommended the adoption of key performance indicators for different sub-classes of ABS assets in order to facilitate related reporting obligations to the sustainability of ABS investors.
Discussion Paper on ESG KPIs for Automatic ABS
AMIC released a discussion paper in May 2021 identifying KPIs for auto loan and lease-backed securities (“Automatic ABS“).
AMIC noted that the transparency requirements for ‘STS’ securitizations set out in the EU Securitization Regulation (Regulation (EU) 2017/2402) oblige originators to publish available information relating to the environmental performance of securities. vehicles financed by Auto ABS transactions. However, the European Banking Authority (“TSA“), in its guidelines on STS criteria for non-ABCP securitization, clarified that this requirement should only be applicable if information on energy performance certificates for vehicles financed by the relevant Auto ABS transaction is available originator involved for the transaction and captured in its internal database or IT systems. AMIC noted that this information is inconsistent from transaction to transaction and, in our experience, UK and Irish originators of loans and car rentals securitized in Auto ABS transactions generally disclose in the relevant transaction prospectus that this information is not available.
AMIC’s list of most needed KPIs for automatic ABS includes:
1. Environmental aspects
- the average carbon dioxide emissions of the vehicles in the underlying portfolio;
- the average well-to-wheel carbon dioxide emissions of the vehicles in the underlying portfolio;
- a breakdown of the number of underlying portfolio vehicles powered by gasoline, diesel, hybrid, fuel cell, other zero emission vehicles or electricity;
- whether the car loans and rentals and the vehicles in the underlying portfolio comply with the EU taxonomic principles for sustainable activities set out in Regulation (EU) 2020/852;
- where there are electric vehicles in the underlying portfolio, the average recyclability of these vehicles and their batteries;
2. Social aspects
- the average safety score of the vehicles in the underlying portfolio;
3. Governance aspects
- the client’s compliance and the process for monitoring compliance with Principles 1 to 10 of the United Nations Global Compact or the OECD Guidelines for Multinational Enterprises;
- certain disclosures related to the gender pay gap with respect to the Offeror’s company; and
- the diversity of the initiator’s board of directors.
AMIC also recommended that unlisted auto loan and rental originators / repairers provide information regarding the Association for Financial Markets in Europe’s Securitization ESG Due Diligence questionnaire published in March 2021. Relevant questions for originators / unlisted repairers covered by this questionnaire include:
- data privacy and security policies and related matters;
- material complaints and / or any dispute concerning the way in which the company carries out its activities;
- composition of the board of directors (number of women, independent directors and / or from ethnic minorities);
- active charitable initiatives;
- lending policies to underserved communities;
- affordability strategies for borrowers;
- level of direct responsibilities of the board of directors for ESG matters;
- adequate policies to guard against illegal practices (including, but not limited to, corruption and fraud) and any history related to such incidents;
- corporate governance and / or enforcement / ethics related disputes or employee complaints or violations related to issues such as anti-bribery, corruption, unfair labor practices , human rights violations and other wrongdoing; and
- relevant information about the initiator’s auditor, including any material dispute between the company and its auditor, and / or any material restatement of the company’s financial statements.
AMIC recommended that the disclosures be made available prior to issuance to inform the investment decision-making process and be updated on a quarterly basis to take into account a possible replenishment of the portfolio.
ESG Disclosure for Future Auto ABS Transactions
In light of the initiatives mentioned in this article and the broader focus on ESG issues in the financial services industry, it is likely that originators and service providers will be required by both regulators and investors to ” considerably increase the level of ESG information provided. for future Auto ABS transactions. Originators and managers will be encouraged to keep abreast of developments in this area in order to be able to attract the widest possible investor base to future securitizations of their loan portfolios.
Other sub-classes of securitization assets
It is understood that AMIC will publish discussion papers identifying KPIs for two other sub-classes of ABS assets: residential mortgages (“RMBS“) and guaranteed loan obligations (“CLO“).
Sustainable securitization framework
In line with recent changes to the EU Securitization Regulation, which we have already written about, EBA is required to publish a report by November 1, 2021 on the development of a specific sustainable securitization framework with the aim of integrating transparency requirements related to sustainability in the EU. Securitization Regulations. AMIC’s KPIs for Auto ABS, RMBS and CLO can be incorporated into the EBA report and can be adopted by other market players as well.
Originally posted 5/24/2021
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