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A securitization is broadly defined as the conversion of assets into tradeable securities. This definition should be differentiated from the narrower concept of traditional bank-related securitization as defined by the Securitization Regulation or the Capital Requirements Regulation (CRR), which involves creating different risk and return profiles through tranching, among other mechanisms. In a broader sense, any ordinary bond or bearer bond referencing an underlying asset can also be considered a securitization. For example, green bonds, which securitise profits from the expansion of sustainable business models, fall under this broader definition.

Such sustainable securitizations have historically been challenging. Without a generally recognised standard, issuers were required to independently prove the sustainability of their products - a significant hurdle, particularly in cross-border sales. This was typically achieved through a Green Finance Framework, which outlines the sustainable purpose for which the funds raised are to be used. This document also provides details on the project selection and evaluation process, ensures the proper use of funds, and includes regular reporting. After drafting, an external certifier verifies whether the described conditions meet the requirements of one of the current international standards. The gold standard in this regard has long been the ICMA Green Bond Principles. However, the new EU Green Bond Regulation now presents significant European competition.

Creating such a framework is inherently complex and will remain so, as issuing under the EuGB Regulation also necessitates the filing of a prospectus. This requirement is likely to continue deterring SMEs from considering sustainable securitization - a regrettable outcome, as this alternative financing method can provide the liquidity they urgently need for their sustainable transformation. Project-based and with variable interest, it promises better terms compared to traditional bonds. Additionally, the initiator of such financing can highlight the sustainability of its business model, thereby enhancing its public image and negotiating position with institutional investors. This is particularly beneficial as the EU Disclosure Regulation mandates that institutional investors disclose the proportion of their taxonomy-compliant financing. Consequently, every genuinely sustainable product aids banks, insurance companies and other regulated investors in meeting their self-imposed sustainability targets.

What the EuGB Regulation also fails to address, despite its merits, is a strong emphasis on environmental issues. The Regulation’s name explicitly includes “Green”, reflecting its focus on the “E” in ESG. The other two components - Social and Governance - have so far played a minor role in the bond market. In the Social sphere, the quality of data is often too poor to be measurable, which is a disqualifying factor for traditional bonds. Similarly, Governance issues have not gained traction due to stringent requirements and a limited investment universe. However, these problems are less pronounced in the securitization environment, as the data - unlike with Article 9 funds - do not necessarily have to come from an external data provider, potentially lowering costs.

Despite some minor weaknesses, the EuGB Regulation’s focus offers significant advantages. It establishes a much-needed level of conformity in the securitization market, providing a Europe-wide standard that could potentially be adopted globally. This standardisation is expected to professionalise the market, increasing the range of potential service providers related to EuGB-compliant issuances. Consequently, it should become easier for all transaction parties to find suitable partners.

These and other possibilities give me hope that the introduction of the EuGB Regulation will send a valuable signal to the entire securitization industry and establish a solid foundation for contributing to the European Green Deal. By complementing the range of green financial instruments, including the Article 8 and Article 9 funds that have been under discussion for years, the Regulation paves the way for significant advancements in sustainable finance.