ESG disclosures for STS securitisations: new regulatory technical standards

On 18th June 2024, Commission Delegated Regulation (EU) 2024/1700 supplementing Regulation (EU) 2017/2402 with regard to regulatory technical standards (“RTS”) specifying, for simple, transparent and standardised non ABCP traditional securitisation, and for simple, transparent and standardised on-balance-sheet securitization (together “STS”), the content, methodologies and presentation of information related to the principal adverse impacts of the assets financed by the underlying exposures on sustainability factors (the “ESG STS Disclosure RTS”), was published in the EU Official Journal. The RTS Regulation will come into force on 8^th July 2024.

The original Securitisation Regulation (Regulation (EU) 2017/2402) (the “Securitisation Regulation”) contained a provision in Article 22(4) requiring the disclosure of environmental performance information for the underlying assets. This disclosure requirement only applied to STS securitisations linked with three specific asset classes: residential loans, auto loans, and leases.

In 2021, Regulation (EU) 2021/557 incorporated significant amendments to the Securitisation Regulation, including:

• Principal Adverse Impact (“PAI”) disclosure option: whereby the Securitisation Regulation was amended to provide originators with the option to publish available information on “the principal adverse impacts of the assets financed by underlying exposures on sustainability factors”, as an alternative to the default environmental performance information; and
• Synthetic securitisation: the inclusion of an additional section replicating the traditional securitisation ESG disclosure regime applicable to on-balance sheet securitisations.

The Securitisation Regulation, as amended, assigns the EU Commission the task of drafting regulatory technical standards originators need to comply with if the originator opts to disclose PAIs in lieu of environmental performance information. The recently published ESG STS Disclosure RTS includes these pertinent disclosure templates.

ESG STS Disclosure Requirements

The information required to be disclosed by the ESG STS Disclosure is the following:

• Basic information: A summary of the transaction, the issuer`s legal entity identifier (LEI), the notes international securities identification numbers (ISIN) codes, the time period the disclosures relate to, and the principal balance of underlying assets.
• Climate and environmental indicators: Depending on the asset class, these indicators may include exposure to fossil fuels, energy inefficient real estate assets, vehicles not meeting emission or pollution thresholds, assets with a low recyclability ratio, and the recycling efficiency of batteries in electric cars.
• Social and governance indicators: Originators should report on at least one social or governance-related factor. This could relate to employee matters, respect for human rights, or anti-corruption and anti-bribery matters.
•   Historical comparisons: If at least one PAI statement has been previously provided, a comparative analysis against every previous reporting period (up to the last four periods) must be prepared.

The RTS will come into force on 8 July 2024, when originators may choose to report PAI instead of environmental performance, provided they can comply with the ESG STS Disclosure.

In complying with the disclosure requirements of the Securitisation Regulation, as amended, in accordance with the ESG STS Disclosure, originators and management companies need to bear in mind that:

• Quarterly reporting: Sustainability information regarding the underlying assets is part of the disclosure obligations under Article 7(1)(a) of the Securitisation Regulation, as amended, and therefore needs to be disclosed quarterly; and
• Availability: According to the STS securitisations’ transparency rules the sustainability information regarding the underlying is to be made available, upon request, to potential investors before the pricing of a transaction.

The ESG STS Disclosure is a key piece in the European Union’s broader strategy to encourage sustainable investment and direct capital flows towards sustainable activities. The EU`s regulatory framework on sustainability endevours to accomplish this is by incentivising the use of standardised sustainability disclosures in financial transactions, not only promote transparency, but to facilitate the comparison amongst products by investors. In debt capital markets this approach is also illustrated in the our Legal Flash | The EU Parliament and the Council approve the EU Green Bonds Regulation.

Cuatrecasas is leading the industry in ESG developments in capital markets and we regularly publish updates on this topic (please refer to the ESG section on our knowledge page in our website). For more information, please contact our debt capital markets team.