• Sophistication of securitised product investors have rapidly developed over the past 2-3 years. The scope of ESG scorecards have shifted from the first-generation proprietary scorecards which focussed on exclusionary based frameworks, to increasing consideration towards sustainable transition strategies. Investors expect originators to provide regular ESG reports on structured products and are empowered to challenge issuers more thoroughly to better assess the ESG profiles at the asset, originator, and transaction level, and therefore align with their own sustainable investment goals. 
  
• Although, market standardisation and access to key data points (e.g., greenhouse gas emissions – Scope 1, 2 and 3) remain the primary challenges for issuers, data coverage of ESG scorecards have expanded from c.10% to c.90% of an investor’s portfolio. Market guidance such as PCAF has contributed to the recent developments in ESG data standardisation and transparency regarding the quality and processing of data used for reporting.
• The panellists agreed that driving initiatives that evidences ESG impact has merit in providing comfort to investors. This is particularly the case for issuers that are relatively nascent in its ESG maturity, whereby the development of ESG reporting capabilities and measures to address material risks can help issuers to optimise their investor outreach. 

• Developing a sustainable financing framework and obtaining a Second Party Opinion have provided specialist lenders with immense learning and confidence to pursue sustainable financing as well as advance their sustainable lending propositions. “Accelerating the move to a circular economy has been Raylo’s mission from the start” noted Richard Fulton, Co-founder of Raylo, who emphasised that the process of developing the framework and obtaining an SPO was a “catalyst for formalising and enhancing Raylo’s sustainability data and governance”. Similarly, Dave Hindle, CEO of Propensio Finance, highlighted that following the framework development and SPO process, “Propensio decided to create a dedicated ESG committee”, which emphasises the value-add sustainable financing could provide more broadly to an organisation seeking to lead on ESG.
• Despite local community impact being embedded within the products and business strategy, the panellists have observed some challenges in quantifying their social impact. As compared to environmental metrics, the intangible nature of social issues such as accessibility to essential services and equity, have historically tempered interest given concerns of being labelled as “social washing”. Lenders have also found it difficult to attribute their shorter-term lending products and activities to the positive social impact which may materialise over a longer time horizon. As a result of ongoing development and varying maturity in ESG integration, the panellists recognised the need to adjust the scope of their sustainable financing framework to align with the available data with the intention of iterating its scope in the future.
• The panellists agreed that building a sustainable financing framework in alignment with ICMA [1] / LMA [2] principles have helped to further refine the systems in place to report on social and environmental impact. One of the key concerns lenders had prior to developing a framework was determining whether the benefits of tapping into sustainable financing was worth the cost given the resources required to align with market standards, including impact reporting. Both Dave and Richard agreed that the newly formed knowledge as was well as capabilities to capture impact, was worth the cost. Additionally, the impact reporting metrics could also be leveraged to pursue Sustainability-Linked Financing, whereas lenders may otherwise have been limited to a Use-of-Proceeds construct. 

• Discussing the role of climate scenario analysis, Doug Baird from NatWest’s Climate Risk team suggested that lenders should attempt to use qualitative scenario narratives to better understand the risks and opportunities from climate risk over the planning horizon. This is essential to complement quantitative techniques, given the limitations in data and models that mean they can only ever give a limited level of insight. This is particularly important when it comes to physical risks, due to the complex interaction of how physical climate change will cascade through the economy, encompassing direct damages to property, indirect effects (such as disruption to supply chains), and amplifiers (such as potential changes in availability of insurance).
• One way to consider physical risk could be to look at the impact of extreme weather events (rather than changes in average conditions), given this is where the near-term risk will lie as they are forecast to be happening more frequently and severely over this decade. By doing this, a lender may uncover which risks can be managed and which are outside of their direct control. Given the complexity of this type of work, smaller lenders may find it helpful to leverage modelling solutions in the market, but ensuring to interrogate these and where possible avoiding ‘black box’ solutions.
• Closing the ESG data gap is a prerequisite to scaling the Green RMBS market in the UK. Without reliable data, residential mortgage-backed securities issuers cannot accurately assess whether a pool of mortgages qualifies as “green” according to market standards which contributes to limited supply of eligible mortgages. As an example, outdated Energy Performance Certificates (EPCs) may not capture the true energy efficiency of the property realised by recent retrofits, and therefore prevent it from being eligible for a Green RMBS.
• Innovation in data and technology empowers lenders to offer preferential rates for properties that can be identified as, or has the potential to be, energy efficient. The panellists highlighted that creating the market conditions for green assets to thrive and providing homeowners with the visibility of cost savings from retrofits will be key in driving the demand for green lending products and unlock further financing towards decarbonising the UK’s housing stock through the securitisation market.
• Looking at the electric vehicle (EV) market, the depreciating nature of EVs relative to fuel-powered cars have stymied demand in Auto asset-backed securities issuance collateralised by EV loans in the UK. Lack of demand and trust from consumers for EVs despite the UK’s Zero Emissions Vehicle Mandate has limited the pool of eligible assets. Concerns in the lack of traceability and mitigation of emissions and waste in the upstream supply chain of imported EVs (e.g. nickel ore mining and processing), as well as difficulty in recycling EV batteries, have also contributed to lack of appetite for lenders to expand their EV portfolio.

If you’re interested in the topics discussed at the event or want to learn more about how NatWest can assist you on your sustainability journey, then please contact: George Ross, John Whinnett, Vishal Saxena, Rahel Haque, or your NatWest Relationship Manager.

Read more about Climate, ESG Private Finance

1. CMA: International Capital Market Association
2.  LMA: Loan Market Association