Green Securitisation Roundtable:
A public sector agenda for green securitisation market development in Europe
8 June 2015 | Discussion primer
Project aim
Green securitisation can address the low-carbon financing gap by allowing smaller scaleassets to be aggregated to access the bond markets. This can provide access to capital at scale,and lower the cost of capital. To tap into the potential of green securitisation, policymakers
and the public sector can play a role by working with the private sector to address barriers
that currently exist in the market.
The Green Securitisation Roundtable will feed into a policy brief for European policymakers
and public sector entities that is being developed by the Climate Bonds Initiative and theGrantham Institute for Climate Change at the London School of Economics. The policy brief
will be published in autumn 2015. The work will also be included into the final report fromthe UNEP Inquiry into a Sustainable Financial System, as well as an upcoming green bondreport from the OECD.
Green securitisation can scale investment in low-carbon assets, but barriers remain
There is a strong rationale for green securitisation as a viable financing mechanism. Theassets with a significant potential for green securitisation include mortgages to green
buildings; cash flows from operating solar and wind assets or loans to these projects; energy
efficiency project loans; loans to green SMEs and car loans to electric vehicles and hybrids.
The potential benefits of securitisation of these small-scale low-carbon assets are well known,
and include improved access to capital, and access to capital at lower cost. However, barriers
currently remain that prevent private market actors to rapidly grow a green securitisation
market in Europe:
Barrier
Supply side
Lack of green loans tobundle

Description

Lack of standardised
green loan contracts

Standardisation reduces the due diligence of bundling many loans together andevaluating their risks.

Lack of pool of green
loans at individualloan provider level tosecuritise

There are very few banks with adequate loan books for renewable energy, energy
efficiency projects, green mortgages or loans to electric and hybrid vehicles in theirown right.

Credit risk profile canbe too high at theearly stage of a greensecuritisation market

Institutional investors have restrictions from asset owners in how large risks they
can take in their investments. This means they will not be able to invest in lowcarbon asset-backed securities if these are too high risk for their investment rules.

Demand side
Uncertain investor
demandTo successfully tap debt capital markets using securitization, banks need a pipelineof loans big enough to ensure bulk and liquidity in a market.

Institutional investor demand for asset-backed securities generally remains low inEurope post financial crisis. Institutional investors’ demand for financiallycompetitive green investments is however increasing, evidenced in particular by
the rapid growth of the green bond market, but it is not clear if this evidence ofdemand extends to green asset-backed securities. Experience from trying to gauge
the investor demand for green ABS suggests investors are reluctant to engage.

Q: Are these identified barriers applicable in the European market? Are there additional
barriers to consider? Can some of them be overcome easily without support from publicentities?

The public sector can play an important market development role by taking concrete actions
to work with the private sector to speed up the process of breaking down the barriers that are
currently preventing the market forces on their own from taking advantage of the green
securitisation opportunity. Policymakers and public sector entities have stepped in to workwith the private sector to successfully facilitate the development of securitisation markets inother policy priority areas. This includes in particular securitisation of mortgages, student
loans and loans to small-medium enterprises. Lessons can also be drawn from how green
securitisation is currently being facilitated in countries outside Europe, especially the US,
where there are several examples of green securitisation deals and public market development
initiatives.
Preliminary recommendations for the public sector
The opportunities of green securitisation are intertwined with the overall securitisation market
in Europe. Therefore, a preliminary recommendation is for EU policymakers to reiterate theirpolicy support to revive a high-quality securitisation market in Europe, and continue toeducate the market on the potential benefits and risks of securitisation and how policymakers
have learnt from the financial crisis in this respect. Recommendations for policymakers andpublic entities are mainly on the supply side, to facilitate that the market can offer investors
green asset-backed securities that have attractive risk-adjusted returns. The public sector canfacilitate green securitisation market developments through the following action areas:

1. Encouraging deal flow of green loans
Public institutions can offer preferential lending rates to green projects to encouragebuilding a deal flow of loans large enough for securitisation in the bond markets. Forexample, Kommunalbanken Norge, the municipal bank of Norway, has offered 10 basis
points preferential interest rates on loans financing green projects since 2010. In 2015, thepublic US mortgage loan provider Fannie Mae, started offering preferential lending rates andadditional loan proceeds to green as well. At the EU level, relevant entities for direct
preferential lending include the European Investment Bank and national development banks,
such as KfW, the German development bank.
Policymakers can provide tax incentives for green loans. While the European Commission
do not have taxation powers, the Commission can use their convening power to harmonise tax
incentives for green loans across EU member states.
Q: What is the role for public entities to facilitate an increased deal flow of green assets
suitable for securitisation? Are preferential lending rates and tax incentives suitablemechanisms to achieve this aim? What other tools are available?

2. Supporting the development of standardised contracts for low-carbon assets
Public institutions can offer direct financial support to existing market efforts onstandardisation of green loan contracts, and establish public-private initiatives andworking groups. In the US, the National Renewable Energy Laboratory (NREL) of theDepartment of Energy set up a 3-year project in 2013 to support the securitisation of contracts
for solar assets in particular.
Policymakers can also support standard contracts by making public warehousepurchasing of loans conditional on the loans adhering to standard contracts, andensuring publically supported green lending adhere to standardised loan contracts. The
New York Green Bank is an example of this.

EU policymakers can use convening power to encourage harmonization of standards
throughout Europe. There is an opportunity to utilise the momentum of the Capital Markets
Union where it is already proposed to work to harmonise high-quality securitisation.
Q: What is the role for public entities to facilitate the development of standardised loan
contracts for low-carbon assets? Are the identified mechanisms suitable to achieve this aim?
What other tools are available?

3. Supporting the establishment of financial warehousing facilities foraggregation
Public institutions can set up a specialised green warehouse entity in public-private
partnership. There are several examples from the US market. For example, in Pennsylvania,
the Warehouse for Energy Efficiency Loans (WHEEL) was established as a public-private
partnership in 2014. The UK’s Green Deal Financing Company is an example of warehousefor energy efficiency loans in Europe.
Already established public green banks can host a green warehouse. In 2014,
Connecticut’s green bank, the Clean Energy and Finance Authority (CEFIA), issued their firstround of ABS backed by loans funding energy efficiency upgrades in commercial buildings.
The green bank had grown their loan book over time, holding onto loans in a $40m financial
warehouse.
Similarly, a green warehouse can also be hosted or supported by a development bank.
In emerging markets, in 2014, the Inter-American Development Bank initiated a project for
securitisation of energy efficiency projects in Mexico.
Q: What is the role for public entities to support financial warehousing facilities for lowcarbon assets? Which of the identified mechanisms (public-private partnership, green bank ordevelopment bank) are preferable? What other tools are available?

4. Reduce risks to investors in a transition phase
The public sector can supporting an initiative to build a publically available database oncredit and operational performance of various green assets in Europe Providing market
actors with improved access to data will improve their ability to model and evaluate risks ofgreen assets. The US NREL Initiative has successfully built a database for solar assets that
now includes 3800 installed systems.
Public credit enhancement facilities should be established for the green securities in atransitional phase. Abnormally high levels of overcollateralisation have been used as amarket-led credit enhancement to gain investment ratings on green ABS deals in the USmarket. Public credit enhancement would reduce the level of overcollateralisation required,making issuance more attractive. Public entities can apply credit enhancement tools used inother investment areas, in particular subordinated debt, partial guarantees and monolineinsurance.
At the early stage of the market, credit enhancement support can be combined with publicprivate warehousing solutions. For example, European public entities can replicate the modelof the joint EIB/EC SME Initiative that facilitates securitisation of loans to small-to-medium
enterprises (SMEs). The European Investment Bank is also recommended to continue
developing the proposed EU Renewable Energy Platform for Institutional Investors (REPIN),a specific green securitisation initiative that would combine warehousing and credit
enhancement.

The public sector can support an initiative to work with credit agencies to facilitate thatthe capabilities to rate green securities are strengthened. A mock filing to rating agencies
of a green securitisation deal by a public-private working group is a tool that was used by theUS NREL Initiative.
Q: What is the role for public entities to reduce the risk to investors of green ABS in atransitional phase? Which of the identified mechanisms of supporting a public database on
asset performance, providing various types of credit enhancement and working with rating
agencies is preferable? What other tools are available?

5. Investor demand
Public sector actors can engage with institutional investors, for example throughorganising investor roundtables and issuing subsequent investor statements. This would bevaluable to establish the investor interest in green securitisation in Europe for different green
asset classes.
Public entities can also engage more directly on the demand side. The EuropeanInvestment Bank, the European Bank for Reconstruction and Development and national
development banks, can take a cornerstone investment role in initial green ABS deals andmake their commitment to do this clear to market actors. Once initial deal flow of green ABS
is established, European Central Bank could prioritise green securities in their assetpurchasing program.
Q: What is the role for public entities to engage with institutional investors to encourage
demand for green ABS? Is there also a role for more direct demand from public entities?
Which of the identified mechanisms of supporting demand, both indirectly through investor
engagement and directly through investment, are preferable? What other tools are available?