CO2 emissions data reporting among auto loan lenders is likely to be crucial to classifying auto loan securitisations as ‘sustainable’ or ‘green’ to tap demand from ESG-orientated investors, Fitch Ratings says.
Our discussions with lenders suggest that creating the basis for detailed CO2 emissions reporting is challenging as the relevant information is typically stored in different systems from those used by the lender. For captive lenders, this means the related manufacturer’s systems. For non-captive lenders financing a wide range of car brands, accessing information would be even more cumbersome and will partly depend upon dealers correctly inputting vehicle emissions data at the point of sale.
Some captive lenders have begun feasibility assessments on reporting their asset portfolio’s emissions by connecting their own systems and those of their related manufacturer, often in response to investors requesting ESG-related information, including emissions data. But others have not started work on such integration projects.
For auto ABS transactions, disclosure of the portfolio’s CO2 emissions is likely to be key in attracting ESG-orientated investors and non-green deals may ultimately see lower investor demand. Fitch expects this to significantly influence auto loan lenders’ efforts to introduce reporting disclosures.
Emissions reporting will be further incentivised by European regulators’ response to the European Commission’s call for advice on disclosure by credit institutions of economic activities that qualify as environmentally sustainable in accordance with the draft EU Taxonomy.
In March 2021 the European Banking Authority (EBA) and European Security Markets Authority (ESMA) said credit institutions should disclose their green asset ratios, including vehicle loans, in their banking books. To be considered ‘green’, an auto loan will have to fall under the category of ‘funding taxonomy relevant sectors’, as set out in the draft EU Taxonomy’s first two defined objectives on climate change mitigation and adaptation.
The Technical Annex by the EU Technical Expert Group on Sustainable Finance, published in March 2020, does not explicitly define the requirements for a green vehicle loan. However, various elements in the report are linked to the EU Clean Vehicle Directive, which provides clear guidance for low- and zero-emission vehicles (LZEV). Until end-2025, vehicles emitting less than 50g/km CO2 will be considered LZEV, but from 2026 only zero-emission cars will qualify. Fitch expects this to form the basis for the definition of a green auto loan that could be considered in a bank’s green asset ratio.
Furthermore, the ECB has indicated that sustainable debt will be favourably treated in its refinancing operations. By November the EBA will draft a proposal for the integration of sustainability aspects into securitisation regulation, which should add clarity on originators’ reporting requirements and other factors for securitisations to be considered sustainable. This could eventually result in favourable capital treatment for sustainable securitisations, although, we do not expect such change soon.
Data-based evidence of performance differentials between loans for internal combustion engine vehicles and plug-in hybrid or battery-electric vehicles (PHBEV) is limited, but should become more widely available given the recent increase in PHBEV sales. Observations from the US market so far suggest differences in cumulative net loss performance are not significant, while a shift towards PHBEV financing would not alter the drivers of expected default risk, assuming lenders do not alter their origination strategies.
This means that a shift of auto ABS portfolios towards more loans financing PHBEV would probably be credit neutral. We will monitor such data as they become accessible via public sources or from originators to assess any performance differentials. Where CO2 emissions data are available, we intend to disclose this in our presale and new issue reports.
