Public sector agenda for stimulating private market development in green securitisation in Europe

Headline issue

Scaling up investment in low-carbon infrastructure is of paramount importance for limiting global warming to 2°C and for the EU to meet its 2030 emissions targets. The annual global investment required for infrastructure in a low-carbon scenario amounts to trillions of euros; this is not being met.

This paper examines the role that green securitisation could play in plugging this gap.

The authors present the rationale for green securitisation – including investor demand – as well as the current challenges for green securitisation in Europe and how they can be addressed, how the public sector could play a key role, and concluding messages for policymakers.

What is green securitisation?

Securitisation refers to the process of transforming a pool of illiquid assets into tradable financial instruments (securities). Low-carbon assets can be aggregated, securitised and sold to institutional investors; the investors’ return on the security is drawn from the cash flows of the underlying assets, such as loans, leases or receivables. A securitisation can be defined as ‘green’ when cash flows backing it come from low-carbon assets.

Key findings

The public sector can play a key role in kick-starting and supporting the green securitisation market in Europe. There is momentum to revitalise the securitisation market and to introduce sustainability elements into capital markets legislation; this should be capitalised on. Actions to stimulate the growth of green securitisation markets include:

• Issuing guidelines for ‘green’ assets to support the identification of green investments in existing portfolios
• Developing standardised green loan contracts
• Initiating financial warehousing of standardised green loans
• Providing credit enhancement to support demand
• Supplying cornerstone investment and incorporate environmental factors into risk weightings
• Creating a credible policy framework to deliver EU climate goals
• Securitisation is one option for addressing the challenge of financing fragmented low-carbon assets. Traditional channels of finance are not sufficient and fragmentation of low-carbon assets limits access to capital markets.
• Policymakers and market participants have addressed many of the risks of securitisation exposed by the financial crisis and are taking steps to revive asset-backed securitisation as a viable channel to raise capital.
• Simple, transparent, standardised and sustainable securitisation can facilitate access to capital at lower cost for small-scale low-carbon projects.
• The timing to evaluate policy options to support green securitisation is appropriate, given the policy momentum to revive the securitisation market more broadly, particularly in the EU.
• Green securitisation will be most effective in the presence of coherent and clear policies to support investment in low-carbon projects.

This paper was written in collaboration with Climate Bonds Initiative. The authors are grateful to the ESRC Centre for Climate Change Economics and Policy for project funding, which came through the ESRC Innovation Fund.