In February, Toyota issued its first ABS in Europe, dubbed Koromo Italy. The deal was not labelled green, but it still shows the path forward if Europe's green securitization is to expand beyond sporadic deals.
Koromo Italy was the first ABS in Europe where the collateral only contained loans on alternative fuel vehicles (AFVs). This could well have qualified the deal to be certified as green, as the straight hybrid vehicles that comprised over 98% of the loans will meet the EU’s green bond standard until 2025.
However, Toyota opted against a green label. Straight hybrids have higher emissions than plug-in hybrids or electric vehicles (EVs), and the company is understood to be opting to wait for certification until it has a deal with greener collateral.
Yet investors still praised Toyota's approach. They said the issuer had been refreshingly open and transparent about its collateral, and was very responsive when it came to offering emissions data — something investors say other issuers try to dodge.
It is this prioritising of transparency and data over an ESG label that makes Toyota an example to follow.
Sure, a label may have drawn better headlines and looked more impressive to a casual observer. But the growth of the green ABS market requires true investor engagement, and ABS buyers like little more than digging into the nuances of a loan portfolio.
The key to achieving growth in green ABS is therefore for issuers to be honest about what they know — and what they do not know — when it comes to the ESG credentials of their collateral at the aggregate level. This means it is crucial that issuers structure deals with transparency in mind.
At present, one of the big problems for green ABS in Europe is a lack of appropriate collateral. It could be tempting to find more collateral by building deals with loans from multiple jurisdictions.
However, sourcing only loans from a single jurisdiction — as Koromo Italy did — simplifies the process for investors. They then only have to understand how green ratings and regulation works in one country.
Toyota waited until it had enough collateral in Italy alone to bring the deal. The company then openly explained the nature of the collateral to investors, rather than try to simply slap a label on and hope they wouldn't ask questions.
Building trust
Amid this difficulty in finding enough green collateral to securitize, alternative types of green securitization — such as use of proceeds commitments — are often talked up. This may have a place in ABS, too, but it should not deter efforts to focus on assessing the collateral.
Securitization investors are sophisticated. There is a high bar for entry into the asset class, and to be successful investors have to be familiar with looking at details of the collateral.
This is an opportunity for the securitization industry to distinguish itself, by offering investors the prospect of purchasing loans that they know are green. After all, every other debt market already has use of proceeds deals.
As the green ABS market takes shape, regular issuers will need to be trusted on disclosure. It is in issuers’ interest to build trust on green deals with investors, in the same way that they currently look to build investor relationships by pricing deals in ways that keep the buy side happy.
Investors will reward issuers that try to help them understand the deals, particularly when they have limited information or the deals are not dark green.
It is a crucial moment for the European green securitization market. Toyota has already kicked things off with Europe’s first AFV ABS, and sources suggest this is likely to be followed by the first solar ABS later this year. Those first few deals should set the standard for how the market will operate.
Toyota have shown the way. Hopefully others will follow.