As with other areas of the financial services industry, ESG is reshaping the mortgage and securitisation markets. The unique nature of housing as both an asset, but also an essential social good (most basically as a form of shelter) cuts across all three pillars of Environmental, Social and Governance. For example, climate (‘E’) risks are becoming a prominent consideration for housing, reflecting its importance as a source of Greenhouse Gas (GHG) emissions (and, therefore, of the need to reduce the environmental footprint of the housing stock). While society’s interest in providing individuals with access to decent, affordable and secure housing is a key social (‘S’) factor underpinning issues, such as minimum deposit levels or the treatment of borrowers falling into arrears.
Investors, originators, servicers, and other stakeholders increasingly recognise that they have an important role to play in helping to move the mortgage market on to a more sustainable basis of operation by seeking to integrate ESG considerations into their lending and investment decisions. However, they are frequently held back by the limited disclosure and transparency across much of the market. ESG is an area of increasing focus in the securitisation markets. While the concept of Green Securitisation has been in place for a few years, issuance has been relatively low and questions remain as to the definition. For example, the green use of proceeds element is difficult to apply given the structure of securitisations and the Social component of ESG does not appear to be covered.
Industry bodies such as AFME and PRI continue to drive for solutions and the EBA is due to publish its view on how to incorporate ESG in regulations. In the meantime, ESG is moving to the top of the list of concerns of investors in securitisations as they look to understand whether these transactions comply with their own mandates. Anecdotally, lenders report that there as many ESG related questions arising in investor roadshows as there are about more ‘traditional’ credit matters.
Simon Collingridge, Director of Fortrum, who has extensive experience in addressing the need for enhanced transparency in securitisation markets commented “against this backdrop, lenders are trying to find more effective ways to communicate their ESG credentials to investors in their securitisations and those investors need practical solutions to their need for verification and transparency”.
As a leading provider of consulting and assurance services to the Netherlands and UK residential real estate markets, Fortrum is well placed to assist institutions to create a more sustainable model of mortgage lending and securitisation. The development of our ESG proposition is a natural extension of Fortrum’s existing capabilities and builds on its deep mortgage expertise and strong reputation for rigorous credit and operational due diligence to provide assurance and transparency for investors and funders. To enhance the quality of its services further and support the extension of its service, Fortrum has hired a senior industry executive, Gary Killick to lead the roll-out of its ESG service. Speaking about the appointment, Collingridge commented, ‘ESG and sustainability have, quite rightly, risen up the agenda of investors and other stakeholders and will continue to do so. I am confident that Gary will bring a valuable depth of expertise in ESG and sustainability issues that will help us develop our proposition to address this important need.’