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EU clarifies ESG reporting for residential and auto loans or leases

The European Union (EU) is taking a new step towards integrating environmental, social, and governance (ESG) factors into securitization transactions. On June 18th, 2024, the Commission Delegated Regulation (EU) 2024/1700, or the “RTS,” was published, outlining new disclosure requirements for “Simple, Transparent, and Standardized” (STS) securitizations backed by residential mortgages and auto loans or leases.

Background

Securitisation transactions frequently involve underlying assets that could have an impact on environmental, social and governance (“ESG”) risks. While there is an increasing focus on disclosure requirements throughout the transaction chain generally, regulations relating specifically to ESG aspects have been limited to date. The only regulatory reporting requirement for securitisations ESG data is in Regulation (EU) 2017/2402 (the “EU Securitisation Regulation”) which currently requires the provision of limited environmental performance metrics (where available) in respect of residential and auto portfolios. In 2021, the regulation was amended to allow originators to disclose the “principal adverse impacts” (PAI) of their underlying assets instead. To define how this PAI information should be presented and analyzed, the European Supervisory Authorities (ESAs) were tasked with creating specific guidelines.

What’s new with the RTS?

  • Focus on residential and auto loans: The RTS applies specifically to STS securitizations backed by residential mortgages and auto loans/leases.
  • Voluntary reporting: While not mandatory, originators can choose to disclose “principal adverse impacts” (PAI) on sustainability factors using a standardized template aligned with the EU Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
  • Enhanced transparency: The RTS aims to create a level playing field for securitization compared to other financial products, allowing investors to make informed decisions based on ESG considerations

Challenges and considerations

  • Frequency: The requirement for at least quarterly reporting might not be ideal for long-term transactions where ESG factors are unlikely to change significantly.
  • Data availability: Reporting at the issuance stage, when investment decisions are made, might be hindered by a lack of available data.
  • Consistency: Potential inconsistency arises between transactions reporting under the new RTS and those under the existing EU Securitization Regulation.

Despite the challenges, the RTS represents a positive step in promoting sustainable finance within the EU securitization market. Clearer guidelines can encourage more participation and innovation, providing investors with the information they need to make responsible investment choices.

Streamlining ESG integration with Cardo AI

The new EU regulations present an opportunity to enhance stakeholder engagement by leveraging a common data management platform like Cardo AI. Our platform allows for:

  • Centralizing data: Integrate financial and ESG data from various sources, including loan-level data, energy performance certificates, and other sustainability metrics required by the RTS.
  • Easy access and analysis: Empower both issuers and investors with access to review and analyze all relevant data in one place.
  • Flexibility for all needs: Our solution adapts to your specific data analysis and reporting needs, whether it’s for regulatory compliance, risk management, ongoing monitoring, or informed investment decisions.
  • Future-proof compliance: Our platform offers the adaptability to keep pace with evolving regulations in the EU Securitization landscape, ensuring you stay compliant.


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