Papa Saliou Diop  EY Luxembourg Banking & Capital Markets Partner, Securitization Leader  Vanessa Müller  EY Luxembourg Consulting Partner, ESG Services Leader  Fabio Rocha  EY Luxembourg, Manager Crédit: EY Luxembourg

Papa Saliou Diop  EY Luxembourg Banking & Capital Markets Partner, Securitization Leader  Vanessa Müller  EY Luxembourg Consulting Partner, ESG Services Leader  Fabio Rocha  EY Luxembourg, Manager Crédit: EY Luxembourg

Net zero requires increased sustainable investments and public-private engagements. Structured finance and securitization will help finance this green transition. The European Green Deal (EGD) estimates around €914 billion per year in investments from the public and private sector by 2030. Will the implementation of fiscal incentives by public bodies boost current investment trends?

Green structured finance

Green finance provides investors with opportunities to support environmentally conscious projects while earning a financial return. Securitization vehicles investing in green finance can have their underlying assets consist of portfolios of bonds, loans or other financial instruments linked to renewable energy, low-carbon infrastructure projects, decarbonization projects and other environmental areas.

Market opportunities

By the next decade (2021-2030), to meet the €914 billion estimate, an additional €520 billion in green investments is expected, on a yearly basis, only at the EU level. Below is an estimation, per area, of foreseen investments:

- Industrial (industry, residential, transport) – €335 billion

- Energy – €56 billion

- Pollution Control – €46 billion

- Water Control – €36 billion

- Resource Efficiency – €35 billion

- Research & Development – €7 billion

- Biodiversity Protection – €7 billion

By improving liquidity in the green market, securitization vehicles will attract a range of investors, leverage exposures to a more diversified portfolio of green assets, and allow issuers to free up capital to enhance the continuous flow of capital needs into the green sector.

Securitization and structured finance could contribute to the overall development of the sustainable finance market while encouraging the standardization of green bond criteria, and reporting and fostering transparency and comparability across issuers.

Challenges and considerations

The emergence of green finance presents exciting opportunities:

- Development of a standardized practice for green assets is crucial to ensure transparency and clarity for investors. This will require establishing clear criteria for project selection, performance reporting and verification of the environmental impact.

- Regulators may require a robust assessment of environmental risks associated with green assets including a better understanding and disclosure of potential risks to investors, like impact of climate change, etc.

- Securitization often involves cross-border transactions which means complying with relevant regulations across different jurisdictions within the EU. This can be complex, since all proceeds of European green bonds will need to be invested in economic activities that are aligned with the EU Taxonomy for sustainable activities.

The convergence of green bonds and securitization opens up new possibilities for sustainable finance, enabling the expansion of green investments while offering investors increased liquidity and diversification. By securitizing, issuers can tap into a broader pool of capital and promote the development of sustainable projects. As the market evolves, it will be crucial to address challenges, establish robust standards, and educate investors to unlock the full potential of green finance and securitization in driving environmental sustainability.

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