Independent review and analysis

ESG – the need for data

It is already a month since I spoke at the Global ABS, in Barcelona, on the need for transparency of ESG factors within RMBS.  Not surprisingly, we still await agreed ESG reporting standards and mandatory disclosures.  Talk about turning an oil tanker around? Such a manoeuvre would appear to be a short moment in time compared to the time the industry and regulators have been talking about compulsory ESG reporting.

In the absence of any current legal basis for disclosure, providers are undertaking their own preliminary work.  This is being driven by lenders, funders and investors wanting to understand the risks within portfolios, and the desire for more detailed knowledge goes beyond simple Pillar 3 type calculations.  There is a noticeable move by firms who are looking to strengthen their management of these risks.

Specifically, on ESG data within mortgage portfolios, we are seeing four main themes emerging, driven by a desire to quantify the value of a portfolio at risk:

  • EPC – The cost-of-living crisis and the cost of fitting energy efficient devices to older properties is driving increasing interest from prospective purchasers for this information.
  • Flood – Warmer wetter winters mean that we are seeing floods, which might have been risk assessed as 1 in 100-year events, happening more frequently and in previously immune areas. Increasing sea levels will put more properties at risk.
  • Subsidence – As we suffer the hottest summer in the last 125,000 years, drier warmer summers are leading to an increased incidence of subsidence.
  • Coastal erosion – Rising sea levels are increasing the pace of coastal erosion and, sadly, it is no longer economically viable to protect all coastal properties.

The four areas highlighted are significant; lenders and investors are not only concerned with assessing the value of a portfolio at risk, but there is a real anxiety that these issues will create new categories of mortgage prisoners.  This may be fine if borrowers keep up with their payments, but not if they just walk away from a valueless asset.  Any disorderly market behaviour or price adjustments could, in the worst case, lead to the failure of a portfolio investment.

While mortgage files sometimes contain ESG rich data, such as EPC ratings and flood risks, 9 times out of 10 that information is hidden in a valuation report rather than in the data file.  The challenge can be as simple as backfilling the data file, but often the information must be obtained afresh.  It is not surprising then that my colleagues are already helping several clients obtain the relevant information, populate data stores and analyse risk positions.

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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