Our scopes of work, when considering due diligence and AUP reviews, are more regularly containing a requirement to consider and comment on the ‘greenness’ of a mortgage portfolio. While cynics suggest investors aren’t really interested in the ESG aspects of a portfolio and are only asking because they think they should, that is not our experience. Investors are genuinely becoming more ESG focused.
As a result of the increased awareness, a new term is emerging – ‘greenium’, a premium for a green transaction, with some suggesting that is typically worth 5-10bp when comparing an ESG compliant portfolio with a non-compliant one. The theory is that ‘green mortgages’ are less risky and therefore a better investment. This position is supported by analysis contained in a Bank of England Working Paper which considered whether mortgages against energy-efficient properties were less risky. That paper concluded that there was a beneficial relationship between the energy efficiency of a property and mortgage arrears.
So, there is a real and measurable demand from investors for green mortgages, but there remains a significant knowledge gap as to what makes a mortgage ‘green’. Our analysis shows that mortgages are usually labelled as green when either the underlying collateral is already an energy efficient property, or where it is not, the proceeds of the loan will be used to improve the property’s energy efficiency. We believe that only adopting this measure is too narrow, and more aspects need to be considered. Although trades of green portfolios represent a small portion of RMBS volumes at present, investors are asking us about them more regularly now.
However, our analysis also shows that the lack of clear, unified standards continues to hold back a wider adoption of green RMBS. These failings are compounded by the fact that lenders do not collect and record enough data at individual loan level as it has not previously played a part in the credit risk assessment. If green RMBS are ever going to match the investor demand, lenders need to address the current weak ESG data collection processes and regulators should consider wider disclosure requirements to increase the quality and quantity of data held.
If you’d like to discuss our findings and see how we can help with your portfolio assessments, give us a call.