Investor Demand

Irrespective of the growth and trajectory of sustainability as a focus for the securitisation industry, investors are likely to have the final say.

For investors it is clear that demand is being led by the demands of their clients, but increasingly there is regulation to consider as well.

Local participants claim there has not been a lot of new activity from regulators in relation to sustainability and ESG, but there is a sense that this might eventuate. In New Zealand, laws are being introduced that will require companies to report on climate change in their financial reports. In Europe, as we’ve seen, there are both guidelines and regulation already in place. Participants from the United States talk about guidelines and standards being on the way. Against this backdrop, global investors are asking a lot of questions about ESG based matters.

“It's very rare to speak to an investor these days who isn’t actually properly check-listing sustainability requirements as part of their investments.”

- Non Bank Issuer

Recognising an issuer’s ESG credentials is common, but it’s still not dominating investment decisions and investors are not yet walking away from investments that don’t meet specific mandated criteria. However, the move towards minimum requirements for sustainability reporting is probably not far away. “I definitely think there's a focus on the underlying assets. Again, I don't think it's at the level yet where investors are not participating in transactions because they've got these really firm mandates that must be met - there's still this sort of broader investment lens. So I think it's an element. I think it will continue to grow in importance, but it's not changing investment decisions at this point.”

- Non Bank Issuer

“I’ve been asking all of our issuers for their statement on modern slavery and it’s something that our credit team look at now. It’s like KYC in some ways.”

-Global Investor

For those that have been able to deliver 'green' assets to the market, they report a sense of excitement amongst investors and a genuine interest in what they are doing. This is likely to continue until volumes catch up with demand. “Following our first public term deal issuance, I do think there's probably a couple of things; I think the level of interest and curiosity was probably above the normal level for a first-time issuer, because of the mission letter and because of the 100% 'green' nature of the assets. The questions were probably more under the lens of excitement, rather than questions, because it was very clear what we did. In terms of the questions around the sustainability piece it was generally, ‘what else could be included in sustainable assets?’ and that was the interesting question.”

- Non Bank Issuer

As we have found with securitisation deals generally, investors have an ongoing need to report on the performance of the pool over time. However, the other issue raised in the context of 'green' investments is whether the intended outcome or impact of the 'green' assets was achieved. Securitisation is perceived to have an advantage as they can ringfence assets which gives investors confidence that what they see is what they get.

“I would put a few 'green' issuers in a pretty positive sort of box because they can essentially ring-fence all of the assets in a trust and say these are all 'green' and meet certain standards. An investor buying the security that comes out of that knows that all of the assets floating around in that vehicle are 'green' and they know what they're getting.”

- Local Investor

As demand for sustainable investments rises, investors will continue to look to issuers to provide a steady stream of opportunities.

"Typically, the scale of deals on these types of things are a little smaller, certainly smaller than RMBS. This makes the ticket size a potential problem, particularly across the mezzanine pieces and particularly when it's oversubscribed, so the importance to the investor that he'll be a multi-issuer is critical.”

- Non Bank Issuer Investors are hungry for information that helps them do the analysis they require, which makes the provision of this information critical. When investors review sustainable investment opportunities, they are likely to be looking for certain types of sustainability-related information irrespective of whether a new deal is 'green' or not. Many of these factors have not traditionally been available.

Pitch documents and issuers’ websites will be common sources, so it’s worth considering how easy it will be for investors to find what they’re looking for in these sources.