WEBVTT 00:00:09.000 --> 00:00:22.000 Hi, everyone. Good morning, afternoon, evening, wherever you're joining us from and welcome to the third webinar in our series where we deep dive into the PCAF methods and guidance that are up for consultation today. 00:00:22.000 --> 00:00:33.000 So if we go to the next slide, I'll walk us through our quick agenda. My name is Shannon McLean. I am your PCAF Standard Development Lead, and I have the pleasure of being your moderator today. 00:00:33.000 --> 00:00:41.000 So first, what we'll do is we'll go through under and loan commitments. Then we have a specific time blocked out for a Q&A for that topic specifically. 00:00:41.000 --> 00:00:47.000 And then we'll go into securitization and structured products as well, followed by a specific Q&A. 00:00:47.000 --> 00:00:52.000 With that, we'll jump into some housekeeping on the next slide and then we'll kick us off. 00:00:52.000 --> 00:00:57.000 So as I mentioned before today, we're going to be discussing securitization and structured products. 00:00:57.000 --> 00:01:06.000 As well as undrawn loan commitments. Just a few housekeeping items. The purpose of today is really to deep dive into the methodologies. 00:01:06.000 --> 00:01:16.000 Not a feedback collecting session. So feedback presented methodologies will only be received via the consultation survey that will be found on our website. 00:01:16.000 --> 00:01:25.000 All attendees are in listen-only mode. We encourage you to ask any questions via the Q&A function. We will address them all during the Q&A session after each presentation. 00:01:25.000 --> 00:01:34.000 If you're experiencing any technical difficulties, we kindly ask you to please reach out in the chat function and the member of the PCAC secretariat will be in touch to resolve your issue. 00:01:34.000 --> 00:01:40.000 This webinar is also being recorded. The recording will be available on the PCAF website following the event. 00:01:40.000 --> 00:01:47.000 If there are any additional questions or comments, please do reach out to info at carbonaccounting.com and we will be in touch. 00:01:47.000 --> 00:01:51.000 So if we go to the next slide, I'm happy to present our panelists for today. 00:01:51.000 --> 00:02:04.000 So today we have Monica Filkova of Aviva and Malaya Figgins of TCW, who will be TCLW group, who will be presenting securitization and structured products. And then we have Lena Frum, a member of our PCAF Secretariat. 00:02:04.000 --> 00:02:17.000 Who will be diving into undrawn loan commitments. So with that, I will pass the floor over to Lena to kick us off with Underan loan commitments. 00:02:17.000 --> 00:02:26.000 Great. Thank you very much. Yeah, welcome everyone. I'm really happy today to present you the methodology of unknown loan commitments. 00:02:26.000 --> 00:02:45.000 Maybe a short introduction to myself. My name is Dina Fromme. I'm part of PCAF. I'm lead of the policy and regulation work at PCAF and our aim is to ensure interoperability between pick up an online standard and this is basically how all we found this gap in interoperability between 00:02:45.000 --> 00:02:50.000 I for S2 and the PCF standard. I represent our methodology today. 00:02:50.000 --> 00:02:57.000 On behalf of and as lead of the working group on Andron Loans, consisting of several of our signatories. 00:02:57.000 --> 00:03:14.000 I want to get started with giving you a short background on why we have developed this guidance so Yeah, why we have this need for additional guidance here. So I assume most of you are already familiar with IFRS S1 and S2. 00:03:14.000 --> 00:03:22.000 But by way of introduction The International Sustainability Standards Board, so ISSB, was founded in 2021. 00:03:22.000 --> 00:03:30.000 Reconsolidation of several reporting standards and it centralizes sustainable disclosure initiatives into one global standard. 00:03:30.000 --> 00:03:43.000 And the standard is called IFRA sustainability standard um yeah it requires reporting on ESC performance and sustainability related risk and opportunities. It is divided into two standards, so S1 and S2. 00:03:43.000 --> 00:03:50.000 As one is covering governance strategy, risk management and further metrics and targets. 00:03:50.000 --> 00:04:04.000 Whereas S2 is focusing on specific requirements for specific requirements sustainability risk and opportunities focusing here on physical and transition risk, scenario analysis, financial effects of them. 00:04:04.000 --> 00:04:08.000 And metrics and targets. And we can go to the next slide. 00:04:08.000 --> 00:04:24.000 The reporting of metrics and targets of IFRS S2 includes the disclosure of scope three category 15 admission and this is where PCAP also comes in so The PCF standard enables reporting entities to disclose The required metrics for scope three category 15, 00:04:24.000 --> 00:04:34.000 Which is part of the information on transition risk. So if we take a closer look at those metrics and targets on the next slide. 00:04:34.000 --> 00:04:43.000 Thank you. It is stated that for commercial banking and insurance industry disclosure recommends an IRS S2. 00:04:43.000 --> 00:04:52.000 That the disclosure of scope three category 15 requires the disclosure of finance emission by the following asset class you see on the slide on the left. So loans, bonds, equity investment. 00:04:52.000 --> 00:05:10.000 Project finance and untrawn commitments. So when matching those IFRS as two asset class categorization to our PCAP asset class categorization you see that basically all asset classes can be matched except for untrawn loans. And these are several reasons why 00:05:10.000 --> 00:05:15.000 Antron loans hasn't been included in the PCAF standard so far. 00:05:15.000 --> 00:05:29.000 And there was a complication we are facing in we are facing while we want to align on trend loans with the PCAF methodology and I think it's super important to understand this complication and I will quickly go through them 00:05:29.000 --> 00:05:38.000 Before we focus on the methodology itself. So complication one Andrew Long commitments cannot be added to the drawn loan amount. 00:05:38.000 --> 00:05:49.000 This is due to their different nature so drawn Loan commitments need to be distinguished from unshorn long commitments. 00:05:49.000 --> 00:05:59.000 And also measured and repotted separately This is due to drawn loan commitments being directly seen on the financial institution's balance sheet. 00:05:59.000 --> 00:06:18.000 Once they have been activated, while undrawn loan commitments, this is different. You only see on the balance sheet a distinct capital reserve usually percentage of total untrue known commitments And consequently applying the same methodology in adding those up is not reasonable. 00:06:18.000 --> 00:06:35.000 So the second complication we faced that and from long commitments are not a backward looking metric. So PCAF is built upon the principle of what has been financed will be measured. So everything that has been financed is on the balance sheet and has already occurred. 00:06:35.000 --> 00:06:53.000 So for under loans, this principle is not applicable. Antron loans can be drawn outside of the past reporting period on fence requiring a future perspective. This leads to uncertainty, for example, in projecting the emission from And for long throughout the upcoming period 00:06:53.000 --> 00:07:00.000 Because we also don't know when and what how much of the Andron loan will be drawn. 00:07:00.000 --> 00:07:19.000 And this also leads us to complication number three. That the amount of untrue loan commitments is variable. So we don't know when and whether And how much of the entrance loan commitment will be drawn Further clients can draw and repay an untrue long commitment basically anytime they need to. 00:07:19.000 --> 00:07:30.000 And this may not be accurately reflected on the balance sheet, which leads to under or over reporting of emissions associated with Andron loan commitments. 00:07:30.000 --> 00:07:38.000 I will come to this complication later again in more detail, but let's continue with complication number four. 00:07:38.000 --> 00:07:42.000 And from long commitments are not an asset class per se. 00:07:42.000 --> 00:07:56.000 They are often mistaken as a separate asset class, but rather they are a state of loan and looking at them as a separate asset class gives the wrong interpretation of the explanatory value dysantron loan commitment has. 00:07:56.000 --> 00:08:15.000 Especially when it comes to emission trajectory over time. Last but not least, complication number five, there's no clear industry-wide definition of untrawn long commitments this really became clear to us when we've been speaking to several financial institutions about untrained loan commitments, everyone having slightly different definitions. 00:08:15.000 --> 00:08:21.000 And father, also there's no definition given in IFRS as 1 nor S2. 00:08:21.000 --> 00:08:33.000 And how to define unrelated known commitments just creates another difficulty for grading methodology because a common understanding is necessary to ensure harmonization and comparability. 00:08:33.000 --> 00:08:43.000 Pf is not in a position to define internal loans for the global financial industry. However, we need to draw some lines. And with this, I would like to go to the next slide. 00:08:43.000 --> 00:08:53.000 Where I would like to introduce you to our proposed definition of untrue loans, the scope of guidance and our reporting recommendation and requirements. 00:08:53.000 --> 00:09:08.000 So during the process of developing this methodology, we have defined unfront loans as a Commitment has been made to a client with a set credit limit and a set period in which the client can borrow and repay funds any number of times 00:09:08.000 --> 00:09:20.000 Like they need to And we further define it as the maximum available amount to be drawn by the client, which is noted on the contract. 00:09:20.000 --> 00:09:37.000 And again, we see entrance loans rather as an umbrella term for a state of loan And hence we also stay rather awake in our definition. This makes it especially important that financial institutions disclose their definition of unknown loans in their reporting 00:09:37.000 --> 00:09:55.000 And also disclose whether they have excluded any parts of loan commitments from the calculation. So this really needs to be reported transparently to ensure that untrained loans still enable stakeholders to compare and understand the reported emission numbers. 00:09:55.000 --> 00:10:02.000 So we have to find that all asset classes, as mentioned in the part A of the PCAF standard, are in scope. 00:10:02.000 --> 00:10:16.000 That fit into the concept of unturned loan commitments. However, we also found several cases in which And the underlying commitment is not applicable for our given understanding of the unknown commitment. 00:10:16.000 --> 00:10:36.000 Out of scope are uncommitted unknowns as these have an even higher uncertainty of being realized. 00:10:36.000 --> 00:10:48.000 And further, we defined non-revolving loans as out of scope, which only function as pay down facilities such as mortgages out to recycle loans and term loans. 00:10:48.000 --> 00:11:08.000 Lastly, we have also excluded Antron Patch's commitment to Fox For instance, individuals. So before finally coming to the calculation methodology, I want to quickly cover our defined reporting recommendation and requirements. Generally, again, saying this is an additional guidance to part a so we 00:11:08.000 --> 00:11:25.000 Follow all reporting requirements and recommendations As mentioned in part a and further also all scopes so scope one two and three are covered according to the respective asset class that is in line with the emission scope requirements of the same ethnic class 00:11:25.000 --> 00:11:37.000 As mentioned in the PCAF standard A. If you have an unknown loan commitment for a business loan, you follow all requirements for business loans in Part A. 00:11:37.000 --> 00:11:51.000 Further, we require financial institutions to report at a fixed point in time in line with financial reporting so This is also in line with the IFRS sustainability standard. 00:11:51.000 --> 00:11:58.000 And finally, I want to mention here again that it's crucial that the merchant from Antron loan commitments were reported separately. 00:11:58.000 --> 00:12:05.000 To Tron Loan Finance Emergency. Okay, let's take a look at the proposed calculation methodology. 00:12:05.000 --> 00:12:11.000 So the methodology is basically straightforward and aligned with the PCAP. 00:12:11.000 --> 00:12:24.000 Part A. So again, we have an attribution factor, as always, and a company admission so If we take a look at attribution factor, it is both as the same way as it is for part A for drawn amount, a loan amount. 00:12:24.000 --> 00:12:34.000 So we have two different attribution factors depending on whether the unknown loan commitment was made to a private company or to a listed company. 00:12:34.000 --> 00:12:46.000 We have for private companies Antron long commitment divided by total equity plus debt. And for our listed companies, EVAC divided by evac so enterprise value including cash. 00:12:46.000 --> 00:12:56.000 For the numerator, this unknown loan commitment is um calculated as a total loan commitment minus the drawn amount. 00:12:56.000 --> 00:13:16.000 For the company emissions, you basically use the same emissions as you use for drone calculations so as usual for part a Again, different data quality options here, ideally reported emissions, but also physical activity based or economic activity-based emissions are possible. 00:13:16.000 --> 00:13:23.000 Okay, let's dive a bit deeper into why we have decided to recommend this calculation methodology on the next slide. 00:13:23.000 --> 00:13:29.000 Thank you. So we have discussed several calculation options for untrum loan commitments. 00:13:29.000 --> 00:13:39.000 And would like to introduce you to our reasoning today. So the proposed option I've just presented to you is in alignment with Part A. 00:13:39.000 --> 00:13:51.000 And only the numerator is changing. That requires, of course, less new data collection And increases harmonization and reporting. We came to the conclusion that this is the most realistic approach. 00:13:51.000 --> 00:14:06.000 As it reflects most accurately the expected emissions and shows that the financial institution has made an active commitment to provide this finance in case it will be drawn Of course, there's also disadvantage to this approach. 00:14:06.000 --> 00:14:12.000 Because it is closely linked to one of the complications that I mentioned in the beginning. 00:14:12.000 --> 00:14:26.000 If an internal commitment has only been agreed on for safety and liquidity reason this is of course overstating its true impact on emission especially if the loan was never meant to be drawn. 00:14:26.000 --> 00:14:37.000 To think about this issue, we also have looked into a different capillation options that sees or that looks at untran loans commitment more from a security perspective, similar to Part C. 00:14:37.000 --> 00:14:57.000 Insurance associated emissions. Others you can also see in the formula, you see the reference to Part C. So we have the commitment fee And for the insurance industry we have the premium here So we have to commit monthly fee divided by the revenue times the emission. 00:14:57.000 --> 00:15:05.000 And the advantage here is that the attribution is reflecting the nature of unknown loans as a security or guarantee for liquidity. However. 00:15:05.000 --> 00:15:21.000 This is understating the emissions associated to it as a commitment fee is way lower than the client's revenue so we calculated with with ATR and this is a huge understatement of the purpose that IFRS is seeing in this value. 00:15:21.000 --> 00:15:30.000 So both the numerator and denominator would require additional new data collection and also decreasing harmonization and comparability. 00:15:30.000 --> 00:15:41.000 Additionally, how high the commitment fee is depends on the risk categorization of the borrowing company which again is different from financial institution to financial institution. 00:15:41.000 --> 00:15:48.000 So this is the reason why we have decided against option two for option three. 00:15:48.000 --> 00:16:00.000 We had approached basically to see okay Patrol loans, we take a look at the balance sheet and go from there and we thought, okay, let's do the same for internal loans. What can we see on the balance sheet so what we 00:16:00.000 --> 00:16:09.000 You can see is the reserve loan commitment. And this is also in the formula then in the numerator. 00:16:09.000 --> 00:16:17.000 And then it is also followed part a so the same attribution denominator and the same emission data. 00:16:17.000 --> 00:16:25.000 This, of course, again, enables an easier calculation because the same data sources are used And it ensures comparability. 00:16:25.000 --> 00:16:35.000 However, why we decided against this option is Because once the reserve loan commitment varies significantly between financial institution. 00:16:35.000 --> 00:16:52.000 Depending on the FI's internal risk criteria and its size. And also from conversations we had with financial institutions, the feedback we received was that This information may not be available on asset level nor by contract or data item. 00:16:52.000 --> 00:17:04.000 As a general amount will be usually set aside. So this is the main reason why this calculation option was not feasible or is not feasible. 00:17:04.000 --> 00:17:13.000 Okay, before opening up for questions And maybe to already address some of your questions i want to come Back to one of the reporting requirements. 00:17:13.000 --> 00:17:24.000 I'm on the next slide. Thank you, namely the alignment of untra known reporting with the one point in time reporting as required in the PCAF Part A standard. 00:17:24.000 --> 00:17:34.000 So again, we again have discussed different options here. Which can be grouped into one point in time versus average over the year. 00:17:34.000 --> 00:17:51.000 For the one point in time reporting, I quickly give you our reasoning. Again, it is aligned to part a And it shows a snapshot of the balance sheet. So this also means that if we take one point in a time and we see okay how much of the commitment of the total commitment we've made 00:17:51.000 --> 00:18:02.000 Is drawn and what is drawn undrawn so not drawn yet it will always reflect the complete total commitment that a financial institution has at that one point in time. 00:18:02.000 --> 00:18:12.000 So it shows the whole picture. However, what it does not show, of course, is the fluctuations that have been happening throughout the year. 00:18:12.000 --> 00:18:29.000 To address this issue, one could think of an alternative. So there is the alternative of either using an end of month monthly average so you take a snapshot every end of month make an average or you take a 12 month monthly average so an average of the month 00:18:29.000 --> 00:18:41.000 And then an average of every month average. So just with underlying the fluctuating nature of an unknown. So we consider this as well. 00:18:41.000 --> 00:19:00.000 However, we found the aspect of having a complete snapshot way more useful for this reporting purpose and um Yeah, so it would also if you choose an average over the year it would also lead to changes in Part A. 00:19:00.000 --> 00:19:13.000 And yes, with this being said, I think we can open the flow After questions, let me check the Q&A. 00:19:13.000 --> 00:19:23.000 Lena, we have our first question is Can you please explain again why drawn and undrawn loan commitments cannot be combined to get the full commitment. 00:19:23.000 --> 00:19:44.000 Yeah, for sure. So what we meant by that is that you can't really added together. So you can't have one total commitment number because one is more backward looking and the other one is more forward looking and that's The reason why it's important to have this distinction between 00:19:44.000 --> 00:20:03.000 The reporting to have it as separate states of loans reported And as I just mentioned at the end of the presentation is that Of course, both together form the whole picture of the total commitment but as their nature is different, they just cannot be added up. 00:20:03.000 --> 00:20:08.000 I hope this answers it. 00:20:08.000 --> 00:20:37.000 Thank you. And I encourage everyone else to please add any questions they do have in the chat. One reminder is that this is not where we would like your feedback. We'd love your feedback via the consultation survey. 00:20:37.000 --> 00:20:45.000 All right, another question for you, Lena. Is this methodology applicable to Lombard loans specifically? 00:20:45.000 --> 00:21:12.000 To be honest with you, I'm not aware of Lombard loans. I would need to get back to this question throughout the time of this webinar. 00:21:12.000 --> 00:21:16.000 We'll do a last call. Oh, there we go. Got another question then. 00:21:16.000 --> 00:21:23.000 Shouldn't under unloan emissions be using a lower attribution factor since it is just a commitment? 00:21:23.000 --> 00:21:51.000 Yeah, that's basically referring to the different calculation options we just went through so Every option has every option an advantage and disadvantage as you've seen because it's just a super complicated case and you cannot just simply reply or you cannot simply apply the same methodology as for part a so of course in theory as it is not being realized of course 00:21:51.000 --> 00:22:11.000 It could have a different impact or you could weight it differently. However, coming from the augmentation that the financial institution made an active agreement to come on like an active commitment We see it rather as a separate timeline kind of, but we um 00:22:11.000 --> 00:22:31.000 Found that if we see it as an insurance, this is understating the emissions and its value also coming always from this IRS as to always angle or classes now 00:22:31.000 --> 00:22:40.000 Perfect. All right. With that, we will end the Q&A session. Lena, thank you so much for your expertise and your time to present us. 00:22:40.000 --> 00:22:51.000 This methodology. With that, I will turn it over to Monica and Malaya, the co-chairs of securitization and Structured Products Working Group. 00:22:51.000 --> 00:22:54.000 Monica Malaya, the floor is yours. 00:22:54.000 --> 00:23:01.000 Thank you, Shannon. Let me give it one second to see if Monica's mic works. 00:23:01.000 --> 00:23:02.000 Monica, if you're there. All right, great. 00:23:02.000 --> 00:23:11.000 Hi. So I've got a bit of a cold. I'll spare you the coughing. So Malaya will take it away. 00:23:11.000 --> 00:23:24.000 Thank you. Okay, so I think so. During the webinar today, we want to go through the key aspects of the securitized and structured products methodology. 00:23:24.000 --> 00:23:29.000 But I would also start by just saying a big thank you to Monica, my co-head. 00:23:29.000 --> 00:23:41.000 Who has just been incredible throughout this entire methodology, writing, and then also to all of the working member, sorry, working group members who we could not have done this without. 00:23:41.000 --> 00:23:56.000 So maybe just as a quick agenda. Today, we're going to cover the products that we've included in scope and then securitized products that are going to be out of scope of this methodology. We'll also cover data availability. 00:23:56.000 --> 00:24:12.000 Provide some general guidance around accounting for GHG emissions in terms of financed and facilitated emissions, we will then go through a worked example that is the same example that is part of the consultation draft. 00:24:12.000 --> 00:24:35.000 Here, we're just going to walk through that in the webinar. So hopefully that provides some context. And then finally, we will touch on Some additional guidance that's part of our technical appendix So this is unique to the structured products methodology. It is in fact part of the methodology. It's just we created this kind of 00:24:35.000 --> 00:24:41.000 Secondary document to go through some of these structural features and nuances that are unique to securitized products. 00:24:41.000 --> 00:24:52.000 So starting with the introduction and background. We really want this methodology inclusion and guidance to help support emissions. 00:24:52.000 --> 00:25:03.000 Estimates and financed emissions calculations for the financial institutions that are involved across the value chain for securitized products. 00:25:03.000 --> 00:25:21.000 And so while we do leverage the data and guidance from the existing PCAF standard Part A, it was necessary to develop a standalone methodology for securitized and structured products Just because the underlying complexities and nature within this asset class. 00:25:21.000 --> 00:25:32.000 So this methodology will cover finance emissions calculations, which again is the extension of the PCAF standard. And what do I mean by that? 00:25:32.000 --> 00:25:48.000 Because PCAF does provide existing data for things like mortgages and motor vehicles, that actually translates really nicely to some of the collateral that backs these securitizations. So things like residential mortgage backed securities or RMS. 00:25:48.000 --> 00:25:56.000 Or auto ABS, auto asset backed securities. So we really do leverage the existing guidance that PCAF already has. 00:25:56.000 --> 00:26:03.000 As kind of the initial start to how we produce this methodology. 00:26:03.000 --> 00:26:22.000 It's also worth touching on that we do cover financed emissions in our methodology and we will touch on facilitated emissions, but PCAF does not currently have guidance for facilitated emissions. So we will probably wait for that at a later date, but we do incorporate that into our methodology. 00:26:22.000 --> 00:26:43.000 And then in terms of methodological considerations. We really do just want to go through the process of securitization and working our way through how emissions are attributed at each stage of securitization. So from the loan to the collateral pool 00:26:43.000 --> 00:26:49.000 Full level tranche level. And then to the end investment or allocation level. 00:26:49.000 --> 00:27:03.000 So while that process is typical for securitization, it's not always straightforward just due to the diversity of the collateral and then some of the structural differences that we see within securitized products. 00:27:03.000 --> 00:27:08.000 Which we will get into. So moving on to the next slide. 00:27:08.000 --> 00:27:30.000 So we'll start with the structured products in scope. When we started the conversations around which products to include and which products to not include, we always want to look for hard assets where we have look through to the underlying data. So data is really the key here. 00:27:30.000 --> 00:27:47.000 And the way that we think about data is in line with PCAF Part A. So again, using that existing methodology and then building upon that. We didn't want to reinvent the wheel here. We wanted users of this data to be able to leverage the existing guidance and then build on top of that. 00:27:47.000 --> 00:28:09.000 And so what we did, like I said, we really worked kind of asset class by asset class so residential mortgages, sorry, the residential mortgage data set that PCAF has mapped really nicely to RMBS residential mortgage backed securities The commercial real estate data set maps nicely to CMBS, so commercial mortgage backed securities. 00:28:09.000 --> 00:28:20.000 The business loans and unlisted equities data set maps nicely to CLOs or collateralized loan obligations and then Lastly, the motor vehicle data set maps to auto ABS. 00:28:20.000 --> 00:28:29.000 And so we really kind of worked asset class by asset class and included all of those where it does make sense and where there already was existing data. 00:28:29.000 --> 00:28:44.000 When we moved into what's not covered, again, Securitize has such diverse collateral And what you see here is not here Sorry, what you see here isn't limited to the asset classes that are in or out of scope. Again, it really depends on 00:28:44.000 --> 00:28:59.000 On what data is available. And then as Securitize continues to evolve and new collateral types are added, again, looking to the underlying data to figure out if emissions calculations make sense for that asset class. 00:28:59.000 --> 00:29:06.000 I think we'll just continue to evolve over time. So thinking about the asset class that are out of scope. 00:29:06.000 --> 00:29:16.000 Again, these are going to be asset classes where PCAF does not have data for at this time. So things like aircraft, solar, and a rail car. 00:29:16.000 --> 00:29:28.000 We do understand that in certain cases. The issuer or the, sorry, I should say originator may have access to the emissions data for that asset type. 00:29:28.000 --> 00:29:37.000 In which case. Should be calculating financed emissions if you have the data. It's really kind of as we're thinking about the end investor. 00:29:37.000 --> 00:29:45.000 That may not have access to that data in every circumstance, that's where those asset classes would be out of scope. 00:29:45.000 --> 00:29:59.000 Also where emissions don't really make sense yet. So things like in the consumer ABS space. So credit cards, student loans, home equity loans, et cetera. 00:29:59.000 --> 00:30:09.000 We don't really have the capacity to calculate scope one and two for those assets at that time. Again, sometimes it doesn't make sense. Sometimes it's a data availability issue. 00:30:09.000 --> 00:30:16.000 So again, as this evolves, we hope that the methodology will too. But for now, those are going to be out of scope. 00:30:16.000 --> 00:30:34.000 And then lastly, it's just worth quickly touching on covered bonds. So there are certain types of covered bonds that are mortgage back that would be included. But then other types of covered bonds like forest, et cetera, where those would not be 00:30:34.000 --> 00:30:46.000 Covered at this time. Again, the methodology could evolve and guidance could evolve to where those are scoped in. But at this time, public sector covered bonds would not be. 00:30:46.000 --> 00:31:03.000 Included. It's also just quickly worth touching on the note that we added on the bottom here. We got this question previously. So when we're thinking about data availability, we always want to make sure that we are using the most actual 00:31:03.000 --> 00:31:21.000 Ported level emissions data for each of the underlying assets. That's going to depend the access of data that you have access to will depend on where you sit in the value chain. And so you should always be using the most granular data that you have available in order to calculate financed emissions. 00:31:21.000 --> 00:31:44.000 This is in line with the data quality score table that PCAF has in the Part A standard. And so we apply the same methodology here And in that case, it should always be reported on which Sorry, which level of data you are reporting on. In our methodology, we also have a decision tree. 00:31:44.000 --> 00:32:02.000 That helps with that data availability. So hopefully that helps users as they're considering which data to use. We also include some on using external data sources. So again, that's all covered in the methodology and follows PCAF Part A. 00:32:02.000 --> 00:32:16.000 But the main thing that we want to state here is just making sure that as you're reporting emissions, you're also reporting the data quality and data source associated with the emissions calculations you're reporting. 00:32:16.000 --> 00:32:25.000 Next slide. Okay, thank you. And I would also say, Monica, I know you're not feeling well, but feel free if I forget anything to hop in at any point. 00:32:25.000 --> 00:32:32.000 Okay, so next we jump into the just general approach to to securitization in the process. 00:32:32.000 --> 00:32:42.000 At the most basic level within structured products, you collateral pool backed by assets, which back the securitization. 00:32:42.000 --> 00:32:51.000 And so typically you have multiple borrowers that will take out loans. Those loans are provided by the originator. 00:32:51.000 --> 00:33:00.000 The originator then transfers those loans off their balance sheet into an SPV or a special purpose vehicle. 00:33:00.000 --> 00:33:10.000 And the SPV is effectively a portfolio of loans. And that serves as the collateral pool that will back the securitization. 00:33:10.000 --> 00:33:20.000 From there, the SPV is divided into tranches. And that's typically based on investor appetite for things like risk, yield, and maturity. 00:33:20.000 --> 00:33:32.000 And so from there, depending on the investor allocation, investors can estimate the financed emissions based on their allocation across tranches. 00:33:32.000 --> 00:33:39.000 And so when we're thinking about securitization and we start kind of at the bottom at the loan level. 00:33:39.000 --> 00:33:51.000 We want to think about the We want to start by looking at the underlying loans and the emissions associated with the asset that is backing those loans. 00:33:51.000 --> 00:34:03.000 And then we think about the portfolio of loans or the collateral pool and the sum of the emissions that then back that collateral pool. 00:34:03.000 --> 00:34:11.000 Then we work our way up again and think about how those emissions back the entire deal. 00:34:11.000 --> 00:34:32.000 And then from there, once that's sliced up into tranches, we think about how each investor, sorry, each allocation is then, sorry, how the underlying emissions are then transferred to the investor based on the underlying investment in each tranche. 00:34:32.000 --> 00:34:38.000 Sorry, there's a lot of layers here. 00:34:38.000 --> 00:34:45.000 I know that that was a lot and I know that securitization can be a bit confusing, especially since there's a lot of boxes on this page. 00:34:45.000 --> 00:34:55.000 But again, kind of what we just want to reinstate here is really starting at the loan level and then working our way up. And then we think about how the emissions are attributed. 00:34:55.000 --> 00:35:04.000 Depending on, like I said, one, where you are in the investment chain and then your end allocation as an investor. 00:35:04.000 --> 00:35:16.000 Okay, I think we can move to the next slide. Okay, so this will also provide a bit more clarification and I'll touch on some of the things that I had already touched on in the previous slide. 00:35:16.000 --> 00:35:35.000 So accounting for GHG across accounting for GHG emissions across the value chain, I think it's important to start with two things. So again, the securitization process and how the underlying loans and therefore emissions change hands depending on where you sit. 00:35:35.000 --> 00:35:40.000 And then also the parties that are involved and responsible for reporting those emissions. 00:35:40.000 --> 00:35:52.000 And so this chart will tell us who is responsible for reporting the emissions at any given time and whether those emissions should be reported as financed emissions or facilitated emissions. 00:35:52.000 --> 00:35:58.000 So kind of to bring this to life a little bit and go through some of the parties within the securitization process. 00:35:58.000 --> 00:36:04.000 We start with the loan originator, also called the lender or the sponsor. 00:36:04.000 --> 00:36:13.000 And the originator is the one that originates the loans and holds loans on balance sheet. And so as long as those loans remain on the originator's balance sheet. 00:36:13.000 --> 00:36:38.000 The originator is responsible for reporting those as financed emissions. And then as we touched on the previous slide, in preparation for securitization, the originator may then work with an investment bank To set up a warehouse in order to house the loans until there are enough loans to fund a securitization. And so as the loans are moved off of the originator's balance sheet and into the bank warehouse. 00:36:38.000 --> 00:36:47.000 Or onto the bank's balance sheet. The finance emissions will also move from the originator or the investment bank While the warehouse is being ramped. 00:36:47.000 --> 00:36:53.000 So any loans that remain on the originator's balance sheet should still be accounted for as financed emissions. 00:36:53.000 --> 00:37:03.000 Once the warehouse is fully ramped, the loans are then moved Intuit SPV, the special purpose vehicle, and then divided into tranches and sold to investors in the primary market. 00:37:03.000 --> 00:37:19.000 And that as investors purchase those bonds, investors would be responsible for the financed emissions associated with their investment allocation. It's important to note that loans can also be sold directly to investors outside of that SPV. 00:37:19.000 --> 00:37:25.000 In which case we would still follow the same methodology for financed emissions. 00:37:25.000 --> 00:37:33.000 Also, investment banks can act as investors if they choose to retain bonds on their balance sheet and should also account for those as financed emissions. 00:37:33.000 --> 00:37:39.000 However, it is typical for an investment bank to act more as an arranger or an intermediary. 00:37:39.000 --> 00:37:45.000 And where they trade in and out of the bonds, particularly in the secondary market. 00:37:45.000 --> 00:37:53.000 In that case, bonds that are being traded in and out from the investment bank would be treated as facilitated emissions. 00:37:53.000 --> 00:38:05.000 Which again, we don't have particular guidance for. So while this covers kind of your standard securitization process, it should also avoid double counting. 00:38:05.000 --> 00:38:14.000 But there are going to be additional nuances that we'll talk about kind of later in the webinar that are also available in the methodology. 00:38:14.000 --> 00:38:22.000 So maybe now we can move to the next slide. And Monica, I'll pass it to you to go through the worked example. 00:38:22.000 --> 00:38:37.000 Thank you. So in the guidance to bring all of this to life, we included a worked example and we're just going to walk through it. So in this example, we've got a lone pool of five mortgages. 00:38:37.000 --> 00:38:42.000 And that loan pool secures a deal which has three tranches. 00:38:42.000 --> 00:38:52.000 So if you look at the tables, the first the blue table is the mortgage view and aggregating emissions to the pool level. 00:38:52.000 --> 00:39:00.000 The orange table is the tranching view, which takes the pool level emissions, allocates them to tranches. 00:39:00.000 --> 00:39:18.000 And as part of that table, we'll look at how investors can figure out how much of the emissions are allocated to them Now, most of the mortgages in this particular example are amortizing. 00:39:18.000 --> 00:39:22.000 So if you look at the first table, there is two segments to it. 00:39:22.000 --> 00:39:30.000 Left-hand side is the original loan amount, property value associated emissions. 00:39:30.000 --> 00:39:45.000 And the right hand side gives you the current amount and attribution of emissions. So if you just compare numbers, mortgage one initially 550,000, and then it becomes 500,000. 00:39:45.000 --> 00:39:56.000 Through amortisation. Because there's amortization, what's effectively happening here is the loan amount outstanding is reducing. 00:39:56.000 --> 00:40:00.000 But the property value stays the same. The emissions stay the same. 00:40:00.000 --> 00:40:14.000 So what happens to emissions is that a smaller portion of the emissions are attached to that loan amount, in other words the emissions. 00:40:14.000 --> 00:40:34.000 That are associated with the debt reduce. Because as part of amortization the debt reduces And the equity portion or the equity attribution of emissions would increase. We're not doing the equity side. We're focusing on the debt side because that's what goes into the deals. But that's really the logic of it. 00:40:34.000 --> 00:40:45.000 Now, the other feature of this transaction is that The amortisation needs to pass through the securities in this example. 00:40:45.000 --> 00:41:00.000 We decided that we'd apply a fully sequential amortisation waterfall, which basically means that all of the amortization from the pool is applied to the most senior tranche of notes. 00:41:00.000 --> 00:41:12.000 So if you look at the bottom table under original amount the senior starts off somewhat higher. The current amount is somewhat lower. 00:41:12.000 --> 00:41:26.000 The difference being the amount of amortization and the mortgages. For the other two tranches, there's no difference because those are not amortising or wouldn't amortize until the senior is repaid. 00:41:26.000 --> 00:41:48.000 So in similar vein to the mortgages, if the amount of debt attached to a tranche goes down but the underlying emissions don't than the level of attribution goes down. So if you look at original investment financed emissions. 00:41:48.000 --> 00:41:54.000 16.4 for senior goes down to 14.7. The others are approximately the same. 00:41:54.000 --> 00:42:12.000 That's as a result of less debt being outstanding against the emissions produced by the underlying assets. So what's happening here is you've got at the mortgage level. 00:42:12.000 --> 00:42:22.000 The outstanding amount and the property value. This allows you to calculate an attribution factor that's exactly as per PCAF methodology in this case. 00:42:22.000 --> 00:42:30.000 For mortgages, the attribution factor is used to scale the collateral emissions. 00:42:30.000 --> 00:42:37.000 So for mortgage one, actually I'll pick mortgage two. Mortgage two is 10. 00:42:37.000 --> 00:42:44.000 If the attribution factor is 0.83, then the financed emissions are 8.3. 00:42:44.000 --> 00:42:50.000 As amortisation is applied, that goes down. Likewise. 00:42:50.000 --> 00:42:58.000 For, as I said, for the tranches, there is an attribution element. 00:42:58.000 --> 00:43:03.000 But what's happening with the tranches, the approach to attribution is slightly different. 00:43:03.000 --> 00:43:10.000 So whilst we've got a total for the poor, so initially this 53.2 goes down to 50. 00:43:10.000 --> 00:43:23.000 That needs to be allocated. To the tranches, the way we allocate to the tranches is by reference to the size of the tranche to the overall site of the deal. 00:43:23.000 --> 00:43:30.000 So… in this particular example, the senior represents just over 60%. 00:43:30.000 --> 00:43:40.000 Of the deal. So it gets an allocation of 60% or just over 60% of the emissions. 00:43:40.000 --> 00:43:47.000 Whilst in credit terms, there is a difference between senior mezzanine subordinated in terms of risk levels. 00:43:47.000 --> 00:43:51.000 Because all of those tranches are backed by the same collateral. 00:43:51.000 --> 00:44:02.000 You don't really distinguish between the attribution. So it is proportional to the size of the debt that's associated with a tranche. 00:44:02.000 --> 00:44:12.000 And then in terms of investing in this particular example, our investor is holding 50% of the deal across all of the tranches. 00:44:12.000 --> 00:44:18.000 So we've allocated 50% of the transmissions. 00:44:18.000 --> 00:44:36.000 But if the investor was just holding 50% of the senior there will be numbers there for mezzanine and support United since they're not holding anything, it would be zero. So it's relatively straightforward once you get to the collateral pool. 00:44:36.000 --> 00:44:40.000 It's essentially based on the size of the tranche and the holding of the investor. 00:44:40.000 --> 00:44:55.000 And the underlying collateral pool leverages PCAF guidance for guidance for mortgages, businesses and motor vehicles, as Malaya said. 00:44:55.000 --> 00:45:02.000 I think we can go on to the next slide. 00:45:02.000 --> 00:45:17.000 Thank you. Okay, so moving on to our final slide. Again, this is a appendix to our methodology document that is going to be specific to securitized products. 00:45:17.000 --> 00:45:27.000 And this is where securitized really gets kind of that complex nature. And so we will get a bit technical here. 00:45:27.000 --> 00:45:33.000 The list that you see on the screen is not exhaustive. This is just some that we've chosen to discuss. 00:45:33.000 --> 00:45:48.000 In the webinar, but you can find a pretty lengthy technical appendix in the methodology and so wanted to create this appendix, like I said, one, because of the complexity and two, to just kind of go through some of the 00:45:48.000 --> 00:45:54.000 Nuances and structural features that came up as part of our ongoing working group discussions. 00:45:54.000 --> 00:46:06.000 And some comments that we actually receive kind of in our initial I guess what you would call it is a consultation. And so starting with some of the structural nuances to go over here. 00:46:06.000 --> 00:46:18.000 One of them was static versus dynamic tools. So typically you see these in CLOs where a static pool of the underlying loans don't change, but in a dynamic pool. 00:46:18.000 --> 00:46:29.000 You do have kind of a revolving door of loans. And so both of these are going to be in scope. They're going to be calculated for the pool at the time of reporting. 00:46:29.000 --> 00:46:40.000 Static is pretty straightforward. And then if you do have a dynamic pool, you're just going to use whatever the portfolio of loans looks like at time of reporting. 00:46:40.000 --> 00:46:52.000 Another one to talk about is SRT, CRTs, and synthetics. Those are also in scope for both funded and unfunded tranches that reference the given collateral pool. 00:46:52.000 --> 00:47:06.000 And so while the risk is being transferred transferred in the synthetic, the assets still remain on balance sheet. And so the reporter of those emissions should be reporting based on that underlying collateral pool. 00:47:06.000 --> 00:47:15.000 Also, master trust. So we typically see these in US, CMBS and ABS. 00:47:15.000 --> 00:47:36.000 Uk, CMBS, but mostly in the us and so This methodology includes, well, master trusts are in scope, but the methodology does include master trust for both a revolving portfolio and then also where assets do appreciate in value and additional securitizations are issued off of those appreciating assets. 00:47:36.000 --> 00:47:41.000 So master trusts are going to be in scope of this methodology. 00:47:41.000 --> 00:47:51.000 Moving into some very exposures to touch on, one of the big ones that came up were the IO and PO tranches, interest only and principal only tranches. 00:47:51.000 --> 00:47:56.000 And this actually did create some interesting discussion within our working group. 00:47:56.000 --> 00:48:06.000 But the best way to ensure that both were accounted for is just going to be to equally allocate emissions across both the IO and PO strip. 00:48:06.000 --> 00:48:18.000 Again, we realize that they're depending on where you're invested. There are going to be certain things that will create double counting, but in terms of thinking about interest and principle only. 00:48:18.000 --> 00:48:34.000 Equally allocating across both was what we came up with. Next, to talk about is over collateralization. Again, included, this is treated as a separate tranche backed by the same collateral. 00:48:34.000 --> 00:48:44.000 Lastly, things like X notes, residuals, and then I'll separately reserve and liquidity funds are going to be out of scope of this methodology. 00:48:44.000 --> 00:48:51.000 Next, I think it's important to touch on risk retention. So this was something that came up in the working group. 00:48:51.000 --> 00:49:03.000 And while this is, while risk retention is jurisdiction dependent and typically we see this more in European and international securitizations. 00:49:03.000 --> 00:49:12.000 We do start to see some US issuers that are also complying with the EU securitization regulation. 00:49:12.000 --> 00:49:23.000 And so for risk retention, originators are required to retain a portion of the loans or invest in some of the issued bonds in order to have what they call skin in the game. 00:49:23.000 --> 00:49:31.000 And so in the case of risk retention, the holder of the retained bond should be reporting those as financed emissions. 00:49:31.000 --> 00:49:38.000 If the bonds are treated as a repo agreement and the originator chooses to use something like a financing party. 00:49:38.000 --> 00:49:43.000 The River Counterparty will not be responsible for accounting for emissions. 00:49:43.000 --> 00:49:56.000 However, if the bonds are resold back into the market. The subsequent purchaser of the bond should treat that as a normal investment and report that as financed emissions. 00:49:56.000 --> 00:50:02.000 Lastly, we'll touch on PDLs. So principal write downs and defaults. 00:50:02.000 --> 00:50:09.000 Both are in scope of this methodology, obviously in a perfect world, all loans are repaid. 00:50:09.000 --> 00:50:17.000 In the tranches equally pay down. However, that's not always the case. And so when assets do take losses. 00:50:17.000 --> 00:50:23.000 There may be excess revenue to clear the PDL, in which case no adjustment is needed. 00:50:23.000 --> 00:50:32.000 However, if the bonds do take losses, emissions will be calculating using the current outstanding amount of the bond less the PDL. 00:50:32.000 --> 00:50:44.000 And in the event of a default, emissions can be calculated using the current outstanding amount and asset value at origination until the loan is written down and removed from the pool. 00:50:44.000 --> 00:50:48.000 Like I said, these are kind of just a few that we wanted to talk about. 00:50:48.000 --> 00:51:00.000 In this webinar because they came up in conversations within the working group, but it is not exhaustive. And if there are further questions and structural features that you don't see on here. 00:51:00.000 --> 00:51:15.000 You should be able to find them in the technical appendix. However, if you don't and there are additional structural features that were not included, please let us know in the consultation so that we can make sure to include them and provide additional guidance on them. 00:51:15.000 --> 00:51:21.000 I will stop. There and open it up for Q&A. 00:51:21.000 --> 00:51:42.000 One point, sorry, now that I'm thinking about it before we open it up, one point that I did want to make, and Monica, I'm sorry I should have jumped in on the worked example slide is just kind of the attribute, the amortization of loans. So we did have a note on that slide that said that the amortization of loans do not equ 00:51:42.000 --> 00:51:57.000 To real world decarbonization efforts. So this is important, I think, specifically as we think about Well, I sit on the investor side. But just because the loans are amortizing down and appear to be reducing because they are, those emissions 00:51:57.000 --> 00:52:20.000 Being transferred more to the borrower versus the investor or I guess end asset owner. And so we just want to make sure that any time that you are thinking about a decarbonization strategy, those decarbonization efforts are coming from green upgrades, using renewable energy sources, et cetera, not just from loans in the pool amortizing down. 00:52:20.000 --> 00:52:30.000 Okay, sorry, I just wanted to make sure that that was uh that was clear. So I will open it up to questions If anyone has any. 00:52:30.000 --> 00:52:32.000 Thank you. 00:52:32.000 --> 00:52:47.000 Perfect. Thank you both. We have a few questions already coming in in the chat and I encourage everyone else to add any more in. So first question for you both. For out of scope, does home equity loans refer to reverse mortgages slash equity release? 00:52:47.000 --> 00:52:59.000 And if so, why is mortgage subchactored not applied as for RMBS? 00:52:59.000 --> 00:53:06.000 Yeah, so we didn't include home equity loans and reverse mortgages. 00:53:06.000 --> 00:53:20.000 And I'm sorry, I'm reading the question. And if so, why is mortgage subchapter not applied for RMBS? So we do apply the what's in the mortgage subchapter. But I don't fully understand the question. So Monica, if you want to take a stab. 00:53:20.000 --> 00:53:42.000 I think what it's getting at is isn't it like a residential mortgage? And the short answer is Often it isn't whilst there may be a home or a mortgage involved the structure of home equity loans. 00:53:42.000 --> 00:54:01.000 An equity release is different. So for example, equity release may include accruals the property reverts to when does it revert to that entity very often the use of proceeds, and that's the most important thing. 00:54:01.000 --> 00:54:06.000 It's not quite clear. So it can be used for anything. 00:54:06.000 --> 00:54:15.000 Which makes it difficult to apply the PCAF principle or follow the money. So technically, you could potentially say it looks like a mortgage. 00:54:15.000 --> 00:54:33.000 But given the use of proceeds is not clear, it's not clear therefore how you allocate emissions to the associated debt or not completely clear and that's why it was excluded at this point in time. 00:54:33.000 --> 00:54:41.000 I might take the next one as well, our insurance linked securities out of scope? Yes, they are. 00:54:41.000 --> 00:54:58.000 It was easy. Okay, so next one, will the newly developed standard be mandatory to use for GHG accounting? I think that's a PCAF question, not a… Monica and malia questions. So maybe Shannon, I don't know if you want to take that one or if you want us to skip to the next one. 00:54:58.000 --> 00:55:14.000 I'll just give a more broad answer, I think, for them With all PCAP methodologies, we have good guidance within to specify whether it is a should, shall, or may as to how you report it. And so I think we will, let's 00:55:14.000 --> 00:55:22.000 Defer that one until we finalize a post-consultation and a final methodology. So more info to come on that one. 00:55:22.000 --> 00:55:32.000 Sounds good. Okay, so next question. If the loan origination and loan warehousing happen within the same fiscal year with the finance commissions. 00:55:32.000 --> 00:55:45.000 Be double counted between the originator and the warehouse bank, as both would show the assets on balance sheet over the same fiscal year. Could a weighted to could a time weighted discount factor be applied? 00:55:45.000 --> 00:56:01.000 So maybe I'll take a stab and then Monica, feel free to jump in. But there are there will be instances of double counting in this methodology. I think in this case, if the double counting happens between the originator and the warehouse bank. 00:56:01.000 --> 00:56:08.000 We are not as upset at that because we want to always take the conservative route with reporting emissions. 00:56:08.000 --> 00:56:20.000 And so if there is overlap. Then the originator would still report those as financed emissions if held on balance sheet and the investment bank would report as financed emissions if in the warehouse. 00:56:20.000 --> 00:56:35.000 The only thing I would add to that is that emissions should be taken at a point in time and the debt should be taken at a point in time. So for argument's sake, let's say the originator held all of the lows for the first half of the year. 00:56:35.000 --> 00:56:41.000 And then sold, I don't know, half of the loans to a warehouse for the second half of the year. 00:56:41.000 --> 00:56:57.000 Then the originator no longer would have all of the loans at the end of the year when they're doing their reporting. So some of it should sort itself out by factoring in the point in time inventory view what are you actually holding 00:56:57.000 --> 00:57:02.000 As of the date of reporting. 00:57:02.000 --> 00:57:22.000 Perfect. So unfortunately, we are out of time in terms of questions. So Monica Malay, I want to thank you both for your expertise and your time today. If we move to the next slide, just some quick wrap up items. Consultation, a reminder, the consultation is open until February 28th, the end of the month. 00:57:22.000 --> 00:57:30.000 Please do get all your feedback in. It's going to be a very in-depth, thorough process that we integrate the feedback into the final methodologies. 00:57:30.000 --> 00:57:37.000 There's also an offline version of the questions if you so wish to use it that can be found on our website along with all the other information. 00:57:37.000 --> 00:57:45.000 And any questions, comments, please do let us know at info at accounting. Carbon AccountingFinancials.com. 00:57:45.000 --> 00:57:49.000 Thank you all for your time today. I do wish you a pleasant day. 00:57:49.000 --> 00:57:56.000 Day, afternoon, or evening, wherever we find you. Bye-bye.