As one of the largest causes of greenhouse gas emissions in the UK, road transport needs to transition away from the internal combustion engine (ICE). The UK government has already committed to end the sale of new petrol and diesel vehicles by 2030, but as petrol and diesel cars sold today can be expected to be on the road for another 12-15 years, the transformation will be gradual. Transition finance has a critical role to play in unlocking the money currently held in ICE vehicles and redirecting it towards electric vehicles (EVs), accelerating the transition and reducing emissions from road transport.
Securitisation to drive green investment
Securitisation – the process of bundling together loans/debt into one financial product that investors purchase in return for interest payments – can be an incredibly powerful tool for facilitating capital deployment because it enables lenders to recycle capital to make new investments into the economy.
If carefully managed, securitisation can play an important role in delivering the estimated US$35 trillion (£28.7 trillion) of investment needed over the next decade to reach net zero emissions. For example, multiple EV loans could be bundled together and sold to investors. If proceeds are reinvested into EVs or charging infrastructure, this creates a positive feedback loop that enables additional investment and can reduce costs for consumers.
One challenge today is that insufficient EV loans have been made to deliver a wholly EV loan-based securitisation. Transition finance could hold the answer by using the remaining years of ICE car sales to supercharge EV adoption.
Transition finance and electric vehicles
Transition finance involves investing in sectors with higher emissions, but using the proceeds from those investments exclusively to reduce the sector’s emissions.
In the automotive sector, transition finance could be used to redeploy capital from ‘brown’ ICE vehicles into EVs through a ‘use-of-proceeds’ bond. Taking this approach could maximise the role securitisation can play in the transition while ICE sales are still dominant, and while we wait to reach a critical mass of EVs in the market.
However, there is currently no official framework for this type of sustainable securitisation, meaning it can be more vulnerable to claims of greenwashing.
What can be done to help?
The Green Finance Institute’s Coalition for the Decarbonisation of Road Transport is working with industry to unlock the barriers to green and transition securitisation, and we are already beginning to move in the right direction. Earlier this month, we convened leading figures from finance and industry to discuss the barriers to bringing ‘green’ auto securitisation to market, and found that lenders are more willing than ever to commit future spend on EVs.
Progress in classifying this type of finance as ‘green’ is being made across the market. For example, earlier this year the International Capital Markets Association updated its internationally recognised green bond framework to include securitisation, with a ‘use-of-proceeds’ approach now being called a ‘secured green standard bond’.
Despite this, more needs to be done. We are calling on the EU to lead the way in creating a thriving sustainable securitisation market to support EV uptake by adopting the European Banking Authority’s recommendation for a wording change to the EU Green Bond Standard; expected later this year. This would allow its definition of a green ‘use-of-proceeds’ bond to be extended to cover securitisation.
Until the market reaches consensus on this view, many investors will continue to be unwilling to call this type of deal green. There is a huge amount of money tied up in ICE vehicles – it’s time we redirected it towards a cleaner and greener future of road transport.
