European Union: Tailwind Pushes Green ABS Along Challenging Road

Last Updated: 13 August 2018
Article by Andrew Steck

The road to creating a thriving green asset-backed securities market is going to be long and hard, with some unexpected pot holes and changing signage, but one thing is certain: it is going to happen.

That was the opinion put forward by industry experts at the 22nd Annual Global ABS in Barcelona, Spain, in June. The event is the largest annual European structured finance gathering, attended by nearly 4,000 leaders in the global ABS market.

Experts acknowledged a definite tailwind pushing the development of green asset-backed securities (ABS). Among the drivers are increased investor appetite for green products, tougher regulation promoting energy efficient construction and the phasing out of fossil fuel-powered cars. With the proliferation of greener homes and cars, there's simply more opportunity to develop green finance products that can be bundled for securitization.

Recent developments

There is a lot of hard evidence to show that green ABS is gaining momentum. For example, 2017 was a record-breaking year for the solar ABS market, which passed the US$1b mark and added new players such as Sunnova Solar Energy, Mosaic and Dividend Solar Finance.

Acceleration of Property Assessed Clean Energy (PACE) securitization

Originating in California, PACE is the innovative financing mechanism that empowers property owners to make energy efficiency, renewable energy and water conservation improvements (such as the installation of solar panels, water pumps, new heating or insulation). The owners pay for the voluntary upgrades over terms of up to 20 years (at a competitive, fixed interest rate) through an extra line item on their regular property tax bills.

Over the past four years, PACE has enabled more than US$4.7b in funded projects, including the retrofit of more than 200,000 homes.

Securitization of bonds associated with PACE assessments first began in 2014 and has continued to gather momentum in the United States. Renovate America, for example, completed its 13th PACE securitization in May this year, with another planned for Q3 2018 and the intention to become a programmatic issuer from the beginning of 2019.

In general, the PACE investor base has grown tremendously and there are now 70 unique investors across the globe. There has also been a significant increase in secondary market trading.


Inspired by the successful US PACE scheme, four European countries and eight organisations have joined forces to create a European PACE platform. The city of Olot in Spain has been chosen as the pilot city to help develop a standard model which can be replicated across Europe. Joining Spain as the first partners in the EuroPACE scheme are Italy, the UK and Poland.

By 2025, the EuroPACE industry is expected to generate more than 45,000 jobs and €5b of capital in local economies, green improvements to more than 300,000 homes and energy savings of 3.5MWh-year (equating to CO2 savings of 1.8m tons).

For now the scheme is in its infant stages and it will take time before PACE securitization makes its debut in Europe. And while there have been several other regional and national energy efficiency schemes throughout Europe, none of them have lent themselves to any scalable standardisation or securitization.

Other industry initiatives

There is a strong movement to ensure that green ABS receives the most favourable conditions under existing regulations, and certain regulatory relief measures are being considered to stimulate the market, with proposals currently at G20 level.

One proposal at G20 level – green ABS be treated as sovereign paper for the purposes of central bank repo. The Bank of England has already said they will support that. If we get this, it's huge; it will underwrite the whole market and allow the private sector to invest with some confidence.

Also, disapplying some existing regulations currently standing in the way of this market at the moment. European Solvency 2 is stopping some of the natural buyers of clean energy ABS.

Road blocks and deviations

From changing regulations to confusion over what qualifies as 'green', multiple factors continue to impede the road to the greener side of ABS. 

What is green?

Taxonomy remains one of the biggest challenges. What makes an asset green? What activities can be classed as green? Do investors share the same understanding? 
There are essentially two types of green assets:

  • assets directly related to renewable energy and sustainability initiatives or products (such as solar panels or water conservation projects)
  • assets which are not green in themselves, but which come with a commitment to use the proceeds from securitisation for green purposes. For example, in 2014 Toyota (with TMCC) introduced the automotive industry's first ever asset-backed green bond, which supported the sale of environmentally friendly vehicles.

Creating a system for defining the attributes that make an asset green is seen as an essential step towards creating transparency for investors and establishing confidence in this evolving market. There is also a lot of discussion around third-party certification of green attributes and how investors should be updated about the use of issue proceeds.

Challenging PACE

PACE securitization requires a deep dive on the legal tax regimes in each state and county, as well as factors such as real estate tax delinquencies. 
Every county and state is different, so analysis and evaluation is done county by county. If and when EuroPACE is rolled out across different jurisdictions, from country to country, the diverse property tax system in Europe is expected to present even greater challenges. Experts believe, however, that the US experience should serve has a handy roadmap.
In the US, other analysis issues raised include questions over solar panel maintenance, owner obligations, warranties and performance guarantees. And while consumer protection has been increased after some aspects came under fire, the measures taken are viewed positively for the long term transparency and strength of the market.

Changing regulatory landscape

Regulations in both the finance and energy sectors continue to shift and change, making it difficult for the industry to get a strong foothold. Factors such as government involvement, rebates, changes to prices for solar energy returned to the grid and general electricity prices impact how schemes are evaluated.

In Europe, there is a strong movement to establish a regulatory framework that is supportive of sustainable finance. In March this year, the European Commission adopted a package of measures including proposals to improve taxonomy, introduce disclosure obligations relating to sustainable investments and sustainability risks, and create a new category of benchmarks comprising low-carbon and positive carbon benchmarks. Such measures would provide investors with better information on the carbon footprint of their investments.

Looking ahead

Ultimately, the biggest driver behind the scenes is necessity, as the world endeavours to tackle climate change. The United Nations has called for US$90tn to fund the infrastructure transformation needed to spur sustainable and climate safe growth. But in 2017, less than US$300b of structured investment went into climate positive projects.

Renewable energy securitizations in Europe are expected to take off in the future and there is a healthy and supportive environment for the development and diversification of green products. For example, German and Scandinavian banks have started to issue green cover bonds and Luxembourg has proposed a new law specifically related to such bonds. Experts believe this positive experience in the green cover bond space will benefit green ABS.

Talk to us

TMF Group has been involved with green securitization since the sector was established. We have administered large PACE deals in the US, and wind and solar projects originating from Africa to Asia and Latin America.

To learn more about this asset class, corresponding structures and our solutions for administering transactions and solving oversight challenges, please get in touch.

Don't let complexity hold you back – find out how our services help our clients reach new heights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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