This week, the Structured Finance Association held its 3rd Annual “Environmental, Social and Governance in Structured Finance Symposium,” hosted at Cadwalader’s office in New York City on May 3 and 4. This year’s one-and-a-half day symposium covered an assortment of pertinent ESG topics within the structured finance market, including the growing popularity of impact investing in structured finance, greenwashing concerns, and innovative ways of increasing access to credit and providing affordable housing and financial products to consumers and businesses.
Participants were able to engage in various panel presentations tailored to specific areas of ESG implementation, as well as roundtable discussions for each asset class in structured finance. The symposium kicked off with a discussion on the current and future landscape of ESG, followed by a panel on ESG Securitization Programs brought into the market by issuers, and finished with a cocktail and networking reception. The second day featured panels on avoiding “greenwashing” in ESG ratings and discussions on asset-level ESG data needed for the unsecured consumer, CMBS, CLO, autos and RMBS asset classes.
The panels featured industry leaders from, among others, the Structured Finance Association, KPMG, Kestrel Verifiers, Nuveen, Angel Oak Capital Advisors, OneMain Financial, Redwood Trust, RiskSpan, BlackRock, AllianceBernstein, dv01, Income Research + Management, PGIM Fixed Income and Vanguard.
During an informative panel on avoiding so-called “greenwashing”, several asset manager panelists noted that their firms, when making investment decisions, distinguish between ESG risk (risks to the issuer resulting from environmental or social considerations) and ESG impact (the benefit that the issuance has on the environment or society). One panelist added that they consider both “positive externalities” and “negative externalities” of any investment, and up-weight or down-weight such investments in their portfolios based on this analysis. The same panelist described a proprietary evaluation system for labeled green and social bonds based on a shading system (light green, dark green, etc.) that attempts to capture the benefits of the use of proceeds to the target population. Another asset manager described their investment decision as being based on two factors: credibility (whether the offering is credibly providing an ESG benefit) and additionality (how much ESG benefit is the offering providing above and beyond a vanilla offering from the same issuer). A third asset manager explained that they have an ESG score on each security, and a score hurdle that must be passed prior to investing. Another panelist raised the issue that although a particular ABS investment may be favorable from an ESG standpoint at the time of initial investment, the ESG favorability may change over time due to changes in pool composition, and that issuers should provide ongoing reporting on ESG data points after new issuance.
Many of the panelists agreed that ESG factors can supplement traditional return goals, but felt strongly that return goals should not be sacrificed in order to achieve a green or social impact. One panelist cautioned that sacrificing return goals to achieve ESG impacts would ultimately undermine ESG in the long run, if such an approach causes ESG investments to underperform. However, one panelist challenged this view by arguing that some investors are willing to take a small haircut on their return goals in order to meet their ESG goals.
Another theme arose in distinguishing between so-called “labeled” green or social bonds for which a second-party opinion has been provided by an independent verifier, versus “unlabeled” bonds that may have positive ESG characteristics but for which no second-party opinion was obtained. There was a consensus among the panelists that a label is not a prerequisite for making an ESG investment decision, provided that enough data is provided by the issuer or otherwise available in order to quantify the ESG impact of the investment. In the context of labeled single-asset/single borrower CMBS, one panelist voiced skepticism over whether a refinancing of a previously-built LEED-certified property is having enough of an ESG impact, unless it is coupled with a commitment to make further emissions reductions. Another panelist commented that they sometimes prefer to invest in unlabeled green or social bonds as a relative value play as compared to labeled bonds.
On the topic of sustainability-linked bonds, at least two panelists voiced suspicion over whether key performance indicators (“KPI”) that trigger penalties to the issuer if not achieved are being calibrated appropriately. They also indicated concerns that sometimes the penalties are de minimis, or that the date on which the KPI is to be tested falls after the call date of the bonds.
One panel featured several issuers who described their recent efforts to bring new social bond ABS offerings to market in the non-agency RMBS and consumer unsecured asset classes. One panelist confided that their offering was oversubscribed and that they took orders from incremental new investors who are focused on ESG, but that he was unable to quantify whether they achieved a greenium (i.e., a higher price and lower yield as compared to non-ESG offerings) at new issue. Another panelist recommended that issuers should conduct an investor roadshow to obtain investor feedback on their ESG framework, prior to engaging in a deal.
