The European Commission's Directorate-General on Climate Action has released an interesting policy paper, entitled Shifting Private Finance Towards Climate-Friendly Investments, which considers (amongst many other things) the possibility of using securitisation as a financing tool for "green" securitisations and covered bonds, and focuses on mobilising institutional investors to provide capital for such investments. Specifically referencing the recent European Commission proposals for an EU Capital Markets Union (CMU) (see Edition 14 of this SCM Briefing for detailed background), the paper suggests integrating actions to increase climate-friendly investments with the CMU (and the related Investment Plan for Europe), such as developing green mortgage-backed covered bonds and securitisations, and including renewable assets in covered bond regulatory frameworks. Item 4 of the paper's short-to medium-term action plan is "supporting green securitisation", which suggests that in developing the CMU, a greater emphasis should be placed on climate-friendly, "high-level" securitisation, including the development of industry standards for loan contracts for climate-friendly assets. Support for warehousing structures to pool climate-friendly assets could also be provided, and the model used for the SME initiative (whereby credit enhancement is provided by the European Structural and Investment Funds to ensure the senior tranche receives the highest possible credit rating) could be adopted for climate-friendly assets. The paper also notes that securitisation can also help break down the barriers to investors' access to financial markets, by addressing high transaction costs, supporting the re-financing of smaller loan portfolios, and enhancing market liquidity by increasing the volume of climate investment opportunities. Among the actions to be taken by way of follow-up to the paper include the formation of an EU-wide group of stakeholders to develop standard contracts and agreements for the green securitisation of loans, and to integrate green securitisation issues into existing EU legislation such as the Prospectus Directive, the Capital Requirements Directive IV and Regulation and the Markets in Financial Instruments Directive.

Useful links:

Policy Paper: Shifting Private Finance Towards Climate-Friendly Investments