We recently wrote about ESG-labelled securitisations, highlighting that the ABS market is still behind the curve in supplying ESG products. However, year-to-date we have now seen three deals, a material increase from a low base. Following on from Kensington’s social RMBS in February and Obvion’s Green RMBS earlier this month we now have Brass 10, a social prime RMBS deal sponsored by Yorkshire Building Society (YBS).
When we analyse any ESG deal, we try to answer specific questions: Why has the deal been labelled as social? Has the lender altered their lending strategy, or is the deal a mere replication of previous issues? If so, was the lending strategy already socially responsible, and is this just a well-earned medal?
YBS is the third largest building society in the UK with £44bn of assets. With origins tracing back to 1864, over the years YBS has built a business model that focuses solely on the borrowers, who, in a mutual business, are both the customers and the owners of the lender. As a result we view building societies de facto as possessing greater social credentials. According to our analysis, RMBS deals sponsored by YBS have consistently scored highly from a social perspective due to their prime lending nature, outstanding performance and constant presence in the mortgage and ABS market, as well as other positive ESG factors.
Taking the above into account, the latest YBS deal being labelled socially responsible is unsurprising. But what does the label actually mean? YBS has developed a Social Bond framework which is aligned with the ICMA social bond principles and contributes towards meeting the United Nation Sustainable Development Goals (SDG). The net proceeds of any bonds issued under this framework will finance a pool of owner-occupied loans to address specific social issues. The positive social impact comes from its direct contribution to improving access to banking services, socio-economic advancement and empowerment through equitable access to and control over assets, including target populations in niche mortgage product segments underserved by high street lenders.
We see a few differences from previous deals here. The first is the focus on customers currently poorly served by the market. YBS over the past two years has increased lending rates to these applicants and adapted its policies. It was also one of the first lenders to relaunch 95% mortgages in the mainstream market following the latest UK budget. We believe there’s a big difference between a 95% LTV offering from a prime lender and one from a specialist lender. Second, despite not setting any prescriptive targets in this deal, YBS does have an objective to achieve 75% of purposeful lending by the end of 2024, directed toward underserved applicants such as the self-employed, Help to Buy, high LTV, and first-time buyers. The objective is an ambitious goal for a prime lender. Last but not least, by issuing bonds under a social framework YBS has committed to disclosing the progress and impact of its deals, and has selected a set of social impact indicators to quantify its performance.
In terms of execution, it is difficult to assess any ‘ESG premium’ in Brass 10 given the overall strong demand, and in our view it’s still early to weigh the importance of a ‘social’ label for ABS investors.
In summary, the latest Brass issue might not radically differ from previous transactions. However, as investors, we see YBS’ commitment as positive momentum. We might see social responsibility becoming the norm in the future and issuers reluctant to adapt could find themselves paying a premium to finance their deals. Once the market sets standards, issuers can raise the bar, and we will be able to assess who succeeds and who doesn’t. For the time being we welcome the ESG momentum and will continue to monitor developments in this area closely.