For too long there has been a sceptical mistrust in the integrity of some ESG labelled securities.  It is not surprising that the term ‘Greenwashing’ has become a word in everyday vocabulary.  That term seems to have become more acceptable rather than what is really being called out; “exaggerated, misleading or unsubstantiated sustainability-related claims about products.”

That’s why we used our platform at the Global ABS conference earlier this year to call for greater transparency of ESG factors within RMBS, including for reporting standards and mandatory disclosures.  It looks like 2023 is set to become the year when ESG reporting comes of age; we know investors who think this is not a moment too soon!

To its credit, the FCA has already taken significant steps to improve the way ESG is reported.  It issued a consultation paper and has also issued a feedback statement and a Primary Market Bulletin.  The regulator’s hands are tied to some extent as some of the recommendations require Treasury input, but it is clear it has no intention of losing momentum.  As examples, while waiting for government to catch up, recent FCA developments have included:

The formation of a group to create a voluntary code of conduct for ESG data and ratings providers.  The FCA has already appointed a secretariat (the ICMA and IRSG) and co-chairs (M&G, Moody’s, London Stock Exchange Group plus Slaughter and May).  With the Bank of England, the FCA, other relevant regulators and government departments as “active observers,” progress is eagerly anticipated.

The issue of a new consultation paper where the specific focus is maintained on tackling the damaging issue of greenwashing, which has become a regulatory priority.

While this is all very encouraging, there is no short-term fix.  Purchasers, holders, and funders of mortgage portfolios still need to deep dive ESG risks in portfolios.  We know that mortgage files are often data rich but the four ESG risks stretching the minds of our clients right now relate to EPC, flood, subsidence, and coastal erosion and identifying them from current records is a challenge; in some cases they simply don’t exist.

So, is 2023 going to be the year when ESG risk identification and mitigation come of age for you?  If you’d like to discuss our views, learn how we can help you improve governance, risk assessments and oversight, give us a call.

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