Investors often overlook securitised assets as a way to manage ESG exposures in a fixed income portfolio, a Brown Brothers Harriman (BBH) study has found.
The study forms part of the firm’s comprehensive ESG assessment framework for securitisations which expands on its corporate ESG analysis and introduces a framework with three pillars for analysing any securitisation.
The pillars question the linkage to corporate risks at the collateral originator or servicer; the ESG risks that relate specifically to underlying loan or lease collateral; and the governance risk related to any legal or structural weakness in the securitisation trust.
Using this framework, the Brown Brothers Harriman study found that ESG risks for securitisations are generally low when compared with the corporate bond universe, with few exceptions.
It also evidenced that during severe ESG incidents, securitisations insulate investors from material price declines that impact a company’s corporate bonds and equities.
As part of the study, nine US corporations were examined during sever ESG incidents identified by third-party research provider Sustainalytics. The results showed that the securitised notes of these companied had none or small price declines.
By comparison, the equity and bond pricing at the same corporations during the same incidents fell by a media 16% and median 3%, respectively.
According to the study, securitisation sectors that have the strongest linkages to their corporate sponsors, such as timeshare ABS, FFELP student loan ABS, collateralised loan obligations, and whole business ABS, tend to show more elevated environmental and governance risk exposures.
Neil Hohmann, managing director and head of structured products at BBH Investment Management, said: “Our conclusion from the heat map is that ESG risk levels across the securitisation market are generally low, particularly for Environmental and Governance risk. In contrast, ESG risk exposure for corporate bonds can range from low to severe.”
He added, however, that diligent navigation through the few problem sectors and issuers, securitised note investments “can deliver a meaningful improvement in ESG risk profile relative to the profile of a broad credit index”.