However, for secured finance assets such as consumer and commercial loans, analysing and managing ESG risks is easier said than done. We believe there are complexities and challenges regarding data and disclosures that investors need to resolve in order to invest in such assets responsibly. However, there are steps that investors can take to make progress.
The challenges facing secured finance investors
Secured finance markets present responsible investors, seeking to understand and engage on ESG risks, with several challenges.
- Analysing and measuring ESG risks for secured finance securities can be complex, with many different potential ESG risks to take into account.
- There can be many stakeholders in the lifecycle of a secured finance asset, as underlying asset pools may change over time.
- There is a lack of standardisation and depth in the ESG reporting which issuers complete. It can therefore be difficult to access relevant and comparable data.
Steps towards a responsible approach
We believe Insight is leading efforts to encourage issuers to consider and disclose ESG risks in secured finance markets.
ESG factors are an important part of the rigorous fundamental analysis we undertake on originators. This includes detailed due diligence both prior to making an investment, as well as on an ongoing basis.
To support this, we have developed proprietary questionnaires which aim to help us better understand the ESG risks. These are created for a range of sectors, with more in development. Of the questionnaires we issued in 2020, c.75% elicited responses from public ABS issuers, and 100% for private secured finance transactions (direct lending).
Progress is still needed
In 2020, we engaged with selected issuers to explore the potential for improved ESG disclosures for securities based on consumer loans and mortgages. We sought to consider how we might encourage the wider industry to move forward on these issues.
These engagements highlighted a number of key challenges. Some issuers faced technical challenges in obtaining data across the pool of assets, in particular energy certificates within residential mortgage pools. Originators that have gone through several historical mergers and acquisitions have client information spread across legacy systems.
Also, some issuers, despite our engagement, were less willing to bridge these data gaps. One major European auto manufacturer, despite emphasising its ESG credentials at the corporate level, said the lack of demand from investors meant it would not consider incorporating ESG disclosures in its asset-backed securities issuance in the short term.
Although we continue to engage with originators more widely, we recognised that by engaging with other asset managers we could accelerate this process. We therefore raised the issue with the Asset Management and Investors Council (AMIC) at the International Capital Markets Association (ICMA) and proposed a joint initiative with other major global asset managers to agree and develop key performance indicators on ESG issues and to engage with local regulators on these topics.
An initiative focusing on this issue was announced in March 20211. The key priorities include:
- standardisation of ESG disclosures
- annual reporting of material ESG risks
- ESG support for market participants
- creation of ‘green’ standards
- increased collaboration between industry and regulators
For more information on the issues facing responsible investment in secured finance, please read our paper expanding on this article, available here.
For information on Insight’s responsible investment approach and activities, please visit our responsible investment home page.