As regulators step up their fight against greenwashing and aim to support the transition to a low-carbon economy, European authorities are calling for improved disclosure of climate-related risks for structured products such as asset-backed securities.
The umbrella group of European financial regulators, which includes securities, insurance, banking and pension supervisors, issued a joint statement with the European Central Bank (ECB) calling for the development of harmonized disclosure standards for assets that are included in securitized products.
“Currently, there is a lack of climate-related data on the assets underlying structured finance products,” the regulators noted. This represents a challenge to identifying and managing climate-related risks, it added, and to properly classifying investment products under Europe’s sustainable finance rules.
“Securitisation transactions are often backed by assets that could be directly exposed to physical or transition climate-related risks, such as real estate mortgages or auto loans,” it said.
“Since the value of these underlying assets could be affected by climate-related events, the ESAs and the ECB share the view that the reporting on existing climate-related metrics needs to improve, and that additional metrics are necessary,” the regulators said.
In the statement, the regulators reported that the European Securities Markets Authority (ESMA) is working to enhance disclosure standards for securitized assets.
In particular, ESMA is reviewing the loan-level securitization disclosure requirements and considering the introduction of new targeted climate change-related metrics that, it said, will be useful for investors and supervisors.
At the same time, the regulators called on the issuers, sponsors and originators of these sorts of assets to start collecting “high-quality and comprehensive information on climate-related risks” during the origination process.
“While mandatory disclosure requirements are not yet in place, the ECB and the [regulators] are nonetheless calling on originators to already collect, at the time of loan origination, the data that investors need to assess the climate-related risks of the underlying assets,” they said.
The regulators noted that sustainable finance is a “key priority” and “further deepening the integration of ESG factors across their activities will be a focus for their action in the coming months and years.”
Additionally, improved disclosure requirements are essential to the ECB, it said, particularly as it further integrates ESG considerations into its monetary policy operations and supports the transition to a low-carbon economy.