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Securitization

Nuveen Green Capital on the compelling case for ESG in securitization

Alexandra Cooley Greenworks Lending by Nuveen Photo.png

CIO Alexandra Cooley is optimistic on the expansion of the C-PACE market and growth of the greenium in ABS deals

Alexandra Cooley co-founded Greenworks Lending, a C-PACE (commercial property-assessed clean energy) capital provider, in 2015. The firm completed the first securitization in the asset class in 2017. Global investment manager Nuveen acquired Greenworks in 2021, and Cooley remains chief investment officer of the rebranded entity, Nuveen Green Capital.

With market participants saying that the US securitization industry is still working out how best to integrate ESG standards and protocols, Cooley spoke to GlobalCapital about what needs to happen to drive more green ABS deals, the attractiveness of C-PACE securitizations for issuers and investors, and her optimism that the “greenium” will grow in structured finance.

GlobalCapital: What are the roadblocks to having more green securitization deals in the US?

Alexandra Cooley, Nuveen Green Capital: The market for green bonds is relatively new and growing fast. Tesla issued its first green ABS bond less than 10 years ago and the World Bank estimates that green bond issuances have grown at 49% each year from 2016 to 2021. The sector is able to absorb such extraordinary growth because investor demand vastly outstrips supply of green bond issuances. Green or sustainability indicators will become an important aspect of bond classifications as the market scales for sustainable investment themes.

Three things need to happen to generate more green securitizations: the development of underlying assets that qualify as “green”; standardisation of these assets; and the development of a market for the underlying ABS issuance.

Demand for green financing products is growing, owing to a combination of energy cost inflation, a greater focus by consumers, customers, and investors on sustainability as a key indicator, and a reduction in green technology cost. This will create opportunities for new ways of financing those activities across sectors.

However, in order to package those financial products into bonds, issuers need to invest in educating market participants: banks, rating agencies, [and] investors.

We started Greenworks Lending (now Nuveen Green Capital) in 2015, before there had been any C-PACE securitizations, and we completed the first ever securitization of the asset class in 2017. With the current volatility levels in the markets, the significant market education required to launch a new ABS product may mean new, green products temporarily favour less structured alternatives to the ABS market, like the bank market, further limiting supply of green bonds.

GC: What do you think about the lack of framework in ESG standards in the US?

Cooley: Consistent information and a standardised framework will allow stakeholders to compare opportunities fairly and effectively on the measures that matter to sustainability.

Several available standards can proactively identify a bond issuance as “green”, but the industry hasn’t solidified around the critical indicators yet. Recently, driven by investor demand, there are efforts under way in the CMBS and structured finance space to ensure that investors are getting consistent information around the sustainability of the underlying transaction assets.

Nuveen Green Capital has received green evaluations from S&P on all of our securitizations to date. We chose to receive the evaluation because investors valued the third party label and consistency of our green rating across issuances.

GC: What are some ESG-friendly asset classes that might increasingly make their way into the securitization market in the coming years?

Broadly, estimates for investment required to sufficiently upgrade our real estate and infrastructure with clean energy, resiliency and energy efficiency are staggering. The White House estimates that without further investment, climate-driven events could cost the government $2tr per year by 2100.

Greening other types of bond issuances will be key to mitigating and adapting to climate change. Real estate, municipal or infrastructure-backed debt lends itself well to green ABS issuances, can create green investment opportunities that investors demand and can shift some of the cost burden away from the public sector.

We have seen this play out in the C-PACE space, as the commercial real estate sector has sought out alternative financing clean energy upgrades and resiliency on their properties. The investor interest in green bonds is key to our ability to meet this demand. Despite the recent volatility in the capital markets overall, term investor interest in C-PACE has grown steadily as future 144A market transactions will enhance liquidity in the asset class, bringing greater interest and demand for C-PACE bonds, and demand for high-quality, counter-cyclical, ESG assets has only increased because of the macroeconomic and political environment.

These complementary dynamics of growing borrower and investor demand have meant that C-PACE is a relatively attractive form of financing and more buildings are being upgraded.

What is your projected path of growth for C-PACE deals in the US?

The C-PACE market has grown more than 50% year on year since 2017. We expect to see this growth continue and accelerate because of three factors.

First, shifts in the macroeconomic environment — rising rates and labour/materials cost inflation — have disrupted many commercial real estate projects. C-PACE continues to provide an alternative source of fixed-rate, low-cost, long-term financing, which enhances green commercial properties’ ability to weather market volatility. Because of other sources of financing becoming more expensive and increased investor interest in securitized ESG assets, C-PACE has become one of the most attractive sources of financing available for commercial building projects that include energy efficiency or renewable energy.

Second, stakeholders — tenants, investors, and governments — are demanding greener buildings, driving more need for financing mechanisms like C-PACE. A report that JLL published in January 2022 estimated that green certifications result in a 6% rent premium and a 7.8% sales premium on commercial real estate.

Third, we expect the IRA to accelerate growth because it puts billions of dollars in tax credits toward clean energy manufacturing and tax credits for solar and battery storage. This means commercial building owners and developers can realise significantly more operational savings.

At the same time, these technologies benefit the environment and the sustainability of their properties at a time that sustainability is becoming increasingly important to their own tenants and investors. Along with C-PACE’s low-cost, long-term, fixed-rate capital, this bill will result in more renewable energy and energy efficiency projects making financial sense for more commercial building owners.

Do you see any deals having better pricing owing to ESG labels?

“Green bonds” fit into more investment mandates, and enjoy lower supply levels than other bonds, so that logically drives larger orders and more participants in green bond issuances. This means that green bonds typically price at the tighter end of guidance and have more demand than non-green labels.

In fact, the Federal Reserve put out a paper in June that discussed how increasing investor demand, inclusion in green indices, and oversubscription is driving a “greenium” in the corporate markets.

The ABS markets are regularly seeing green bond issuances enjoy larger orders and more frequent oversubscription, and it tends to lag the corporate market, so we are optimistic the “greenium” will continue to widen as more deals hit the market.