Using Securitisation to Unlock Private Investment for the EU's Clean Industrial Deal
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Given the estimated scale of investment required to deliver sustainable prosperity and competitiveness in Europe (up to EUR 800 billion in additional annual investment into new European technology and infrastructure according to the Draghi report[1]), the bulk of the financial effort must come from the private sector – which has historically been insufficiently mobilised. It is estimated that within European pension funds there are EUR 4.5 trillion in assets under management and EUR 4.6 trillion in insurance assets under management that are seeking attractive long-dated investments to match their liabilities to policy holders.[2]. Securitisation is an ideal structuring technique to bridge the Clean Industrial Deal financing gap.
Securitisation in its simplest terms pools and sells homogeneous income-generating assets such as loans made by a third party (often but not always banks) into a special purpose vehicle, which are paid for by the issue of securities in the international capital markets – primarily to pension funds and other institutional investors. The cashflows on the loans are used to make interest and principal repayments on the securities, which are secured on the underlying assets.
Securitisation works for green assets
In 2013, the UK’s Green Investment Bank (GIB) and Greencoat UK Wind PLC successfully used securitisation to unlock scaled capital markets investment into the offshore wind market. The GIB made a first direct equity investment in offshore wind through the acquisition of a 24.95% stake in Rhyl Flats Wind Farm Limited (Rhyl Flats) from companies owned by RWE AG for a cash consideration of GBP 57.5m[3].
The underlying assets had been fully operational since March 2010 and consisted of 25 Siemens 3.6 MW turbines with a total capacity of 90 MW. GIB acquired its stake alongside Greencoat UK Wind PLC, which also acquired a 24.95% interest from RWE. Greencoat UK Wind PLC had been established as a UK Investment Trust for the sole purpose of investing in wind farm assets and became the first renewable energy infrastructure fund to list on the London Stock Exchange.
By selling a minority stake in Rhyl Flats, the developer RWE freed up additional capital which it invested in other renewable energy projects in the UK. At the same time, the successful listing of Greencoat UK Wind PLC on the London Stock Exchange demonstrated the benefits of securitisation as a mechanism for bringing scale capital investment into the renewable energy sector.
Since then, there have been many other notable examples of the issuance of green securities linked to renewable energy projects – sometimes with public banks playing a cornerstone investor role. In 2016, FlexiGroup issued the first Climate Bonds certified green securitisation for AUD 50m (USD 39m) – a ‘green’ tranche of an AUD 265m (USD 204m) issue of securitised notes backed by loans for residential rooftop solar power systems. A second certified solar securitisation followed in February 2017. Both issuances received an AUD 20m cornerstone investment from the Clean Energy Finance Corp.
More recently in 2021, Australian fintech firm Brighte Green Trust issued the country’s first green asset backed security (ABS) with an AUD 190m (USD 147m) bond issue. Backed by Australian solar and battery installation receivables, the securitisation will finance solar and energy related assets. The securitisation was structured into seven tranches and as an inaugural issuer, having only been incorporated in 2015, Moody’s applied a ratings cap of Aa2 (sf) to the senior notes. Thirteen investors were involved, most of which invested in multiple tranches[4].
Why does securitisation need reviving in Europe?
The global financial crisis in 2008 was largely precipitated by the expansion of poor-quality subprime mortgage-backed securitisations and other analogous complex and opaque structures. As a result, the securitisation market became stigmatised and prudential regulation was brought in across Europe that limited its use. However, it is the quality of the underlying assets that drive the performance of a particular securitisation transaction, rather than the use of the technique itself. When properly structured and monitored, securitisation is a powerful technique that can drive scaled investment from institutional investors through the capital markets by creating funding platforms that develop new asset classes for investment: the key issue to address is to ensure the underlying assets are originated responsibly and generate an appropriate risk adjusted return to capital markets investors, who benefit from the portfolio effect created by asset pooling[5].
A number of commentators have made thoughtful observations regarding the need to address the stringent regulatory treatment of securitisation in Europe if it is to be rehabilitated as an effective financing tool to unlock much needed investment (REF FT ARTICLE BY HVS). However, there are additional barriers to address when developing scalable financing solutions for the nascent technologies and infrastructure transition required by the Clean Industrial Deal.
For insurance and pension fund investors to participate, the risk associated with the underlying assets in a securitisation should be able to be identified, monitored and managed appropriately in accordance with an investor’s fiduciary obligations under Solvency II (the ‘Prudent Person Principle’). In established renewable asset classes such as wind and solar, this is achieved by relying on long-term performance and default data. However, the newer technologies and business models that are needed to deliver the Clean Industrial Deal in Europe will require ‘wrappers’ in the form of guarantees that mitigate ‘first of a kind’ default risk and thereby enable institutional purchasers to meet their regulatory obligations under Solvency II.
While the Matching Adjustment (MA) requirement was introduced to encourage institutional investors to invest in long-dated assets (including infrastructure) – by expanding asset eligibility and allowing them to discount long-term liabilities at a higher rate than the standard risk-free rate – investors are still required to demonstrate compliance with the Prudent Person Principle. So, despite the incentivisation inherent in the MA for non-bank investors to invest in infrastructure, the lack of performance data for newer technologies initially limits their ability to do so. To mitigate this risk, public sector support in the form of guarantees or alternative credit mitigation may be required within the securitisation structure or on its underlying assets at the outset. However, it is worth noting that performance data on the underlying assets will be collected over time, so, while not necessarily met initially, as a securitisation programme matures the Prudent Person Principle can be satisfied, making the programmes self-sustaining (i.e. without public support) in the medium and long term.
The role of public banks in reviving securitisation in Europe
In his report, Draghi discussed the potential to set up a dedicated securitisation platform, as other economies have done, to help to deepen the securitisation market in Europe, especially if backed by targeted public support (for example, well-designed public guarantees for the first-loss tranche). The GFI, in collaboration with the UK’s Investment Delivery Forum (established by the Association of British Insurers), has been developing a series of proposals for green transition funds (GTFs) that are designed to support direct institutional investment into the green transition via securitisation.
The role of GTFs is to crowd-in private finance for green infrastructure projects that lack the performance data to attract private investors limited by their prudential investment mandates. Using capital from insurance and pension fund investors through their subscription for bonds issued in the debt capital markets, the GTFs are designed to make loans to critical infrastructure developers. Repayments under these loans, which are secured on the relevant infrastructure assets, are the primary source of repayment on the bonds.
During the early period of GTF operation, when long term performance data is accumulating, public support will play a crucial role in two ways. First, making sure that underlying assets satisfy a (qualitative) minimum standard; second, providing a financial guarantee or other form of credit enhancement to mitigate ‘first of a kind’ default risk. In Europe, the European Investment Bank (EIB) is a well-established entity with the relevant expertise and financial capacity to structure such solutions; in the UK the National Wealth Fund can also play a similar role. This public support is only needed in the first few years of a GTF programme – as the investments mature and performance data for good quality underlying assets becomes available, public support should no longer be required.
In summary
Designed well with full transparency on levels of risk taken by investors and/or appropriate mitigants such as guarantees, securitisation is a key means to mobilize private capital into Europe’s clean transition by aggregating smaller green projects to make it easier to raise the large sums of money needed to deliver this investment. By pooling capital and spreading risk across multiple projects securitisation makes green investments more attractive to investors who might otherwise be cautious about committing to high-risk or novel technologies.
Liquidity is key to success and further work is needed to increase market liquidity. Public banks have historically played a pivotal role in funding green projects and making markets in Europe: EIB-led GTF structures have the potential to significantly scale up private investment in Europe’s Clean Industrial Deal, in the way the Draghi report proposes, and thereby use public capital in the most efficient way.
This article was originally published in the June edition of Green Finance Quarterly. Read the full publication here.
[1] European Commission – The Draghi report on EU competitiveness (2024)
[2] Goldman Sachs – Europe’s Investment Drive Puts $4.9 Trillion of Pension Fund Assets in the Spotlight (2025), Solvency II Wire – Insurance asset allocation of Europe’s largest groups 2016 – 2023 (2024)
[3] The Green Investment Group – UK Green Investment Bank invests £240m in UK offshore wind sector (2014)
[4] Environmental Finance – Green bonds – asset-backed/asset-based bond of the year: Brighte Green Trust (2021)
[5] European Stability Mechanism – Reviving securitisation in Europe for CMU (2021)
