RESNET®’s HERS® Index Scores are increasingly being seen as a metric for finance and builder Environmental, Social, and Governance (ESG) reporting. The latest movement is for ESG disclosures for structured finance products. In September 2023, the Structured Finance Association (SFA) published its ESG Best Practices for Auto Asset-Backed Securities (ABS) and Residential Mortgage-Backed Securities (RMBS) Disclosures. SFA adopted principles-based approaches for securitization disclosures, reflecting consensus-based views from issuers, investors, rating agencies, data & analytics firms, and other securitization transaction parties. The SFA has been working on its ESG Disclosures Initiative to develop best practices for reporting decision-relevant ESG metrics across various asset classes since May 2022. Included in the best practices for RMBS is the metric of HERS® Index Scores. HERS® Index Scores are recommended for disclosure if HERS® rating is a material criterion of a Green Bond program. The report recommends that HERS® Disclosure should cover the number of loans in the pool with HERS® ratings and the HERS® rating threshold within a Green Bond program. Below is the HERS® reporting criteria: SFA’s ESG Disclosures Initiative seeks to establish best practices for the securitization industry to report and disclose decision-relevant ESG metrics across asset classes. The industry-wide working group developed a principles-based approach to guide the development of best practices for securitization disclosures, while the RMBS and Auto ABS working groups focused on specific disclosures within each of those asset classes. The resulting Best Practices seek to promote uniformity across data sources by drawing upon and aligning with existing ESG frameworks, where possible. A driving factor why SFA initiated its ESG Disclosure effort is that SFA estimates that $11.6 trillion – or $1 of every $4 invested in the United States – was invested under ESG investment strategies.The Best Practices also chart a path for future states of disclosure, identifying areas where market participants might look to develop ESG disclosures. As ESG continues to develop over time, the SFA ESG Disclosure Initiative will continue to work with market participants and policymakers to build off of the work that has been done to reflect best practices for ESG disclosures across the industry. SFA’s purpose is to help its members and public policymakers grow credit availability and the real economy in a responsible manner. The organization’s diverse membership includes accounting firms, broker/dealers, diversified financial intermediaries, investors, issuers, IT vendors, law firms, mortgage insurers, other financial institutions, rating agencies, servicers, and trustees that comprise the securitization industry. Its members include investment leaders such as Bank of America, Credit Suisse, J.P. Morgan Chase & Co., Barclays, Deutsche Bank, Morgan Stanley, Wells Fargo, Citi, Goldman, Sachs & Co., PNC Capital Markets LLC and Freddie Mac. To download the SFA report go to ESG Disclosures for Structured Products
