Securitization Comment

Is finance about to break out of the cocoon in which it has pupated for decades, and become a completely different life form?

The European Commission launched on Tuesday a second big wave of regulation that will soon be controlling more aspects of sustainable finance more tightly. There is a tendency to think anything with the word “sustainable” attached to it is good. But capital markets specialists must ask themselves: will the regulations be helpful?

When the Federal Reserve shocked the capital markets in June with news that it is bringing forward potential rate hikes to 2023, ABS bonds didn’t budge. With the 2013 taper tantrum and new perspective on inflation behind us, it’s going to take more than words to cause a pull back in the red hot securitization market.

Accusations of greenwashing have been infrequent in the 14 year old green bond market, which mainly sticks to uncontroversial assets, such as renewable energy and railways. The sustainability-linked bond market is only a toddler, but already a much more difficult child. No wonder: it is handling tougher material.

A lion walks the streets of Rome, an owl shrieks in the marketplace at noon.

Does the world need another taxonomy of what is green?

As inflation indicators across the globe begin to point to a period of sustained growth, equity investors have fretted over where to put their money instead of tech stocks, whose valuations have reached gargantuan multiples. There is a compelling argument to be made for rotating into Greece, specifically its banks, which will have to finance a new wave of economic growth.

Securitization investors are divided over whether to open up their ESG portfolios to mortgage-backed securities that are marketed as virtuous because of their socially beneficial use of proceeds, as opposed to their green collateral. Issuer transparency will be essential if this burgeoning market is to thrive.

Mental health is moving to the forefront in the discussion of what action lenders should take when people are no longer able to pay back their debts. One lasting legacy of the pandemic could be that repossessing a home becomes a last resort rather than a first response and that will have consequences for investors in mortgage-backed products.