Winner: Paul Hastings
The winner of SCI’s ESG Law Firm of the Year Award is Paul Hastings, for its deep expertise in the ESG field and its pioneering work to incorporate ESG factors into securitisation transactions.
Paul Hastings has worked over the years with a range of clients active in the structured finance space, such as LiveMore Capital - a sustainable lender founded with a social mission to provide mortgage finance for people in later life - and Kensington Mortgages, a more mainstream UK lender that issued the UK’s first green RMBS and the UK’s first social RMBS. Paul Hastings has also been at the forefront of ESG developments impacting European CLOs. Most notably, the law firm helped the CLO market make a step-change in its approach to ESG, with the Fidelity Grand Harbour 2021-1 deal.
The law firm has since continued to adapt and develop its ESG-related legal advice across the European and US markets, as ESG factors become increasingly part of the daily workflow of investors and CLO managers. “2022 was a year of incremental advancements, compared with the more substantive shift we saw in 2021,” comments Paul Hastings partner and CLO specialist Blake Jones. “2022 saw the tightening and expansion of ESG exclusion lists, with a number of investors now having expanded the criteria to be included in exclusions lists and developing more sophisticated house positions on the assets to be excluded.”
However, 2019 was a key milestone in the law firm’s ESG journey, when it worked with Swiss-based responsAbility Investments (now part of M&G). That year the impact asset manager securitised US$175m of loans to microfinance and SME finance institutions in emerging markets.
The CLO transaction, structured by JPMorgan, comprised three tranches (senior, mezzanine and junior) in a listed, transferable bond format. The underlying pool of assets were 26 newly issued senior loans to fast-growing microfinance institutions and SME banks of 17 different countries in Latin America, Africa and Asia, which on-lent the proceeds to 30,000 SME clients and 5.6 million microfinance borrowers, 81% of whom are women.
In 2021, Paul Hastings again advised responsAbility on a US$177.5m single-tranche social bond that bundled loans to companies which operate in the financial inclusion, healthcare and WASH (water, sanitation, hygiene) sectors, and that have a measurable, positive social impact. This bond had a broad impact across multiple Sustainable Development Goals contained in the United Nations’ Agenda 2030. The transaction was structured with a partial guarantee from the Swedish government that protected the issuer against the risk of loan defaults.
In the leveraged loan CLO sector, meanwhile, Paul Hastings was manager counsel on Fidelity Grand Harbour CLO 2021-1 and Fidelity Grand Harbour CLO 2022-1 - two transactions that broke the CLO ESG mold. Until these deals, CLO managers operated within a relatively limited framework, where the focus was mostly on which type of assets would be unsuitable to form the collateral of a CLO.
Fidelity Grand Harbour 2021-1, priced in November 2021, included ESG positive screening and was also structured to be the first deal in the CLO market to be "aligned" to Article 8 of the EU’s Sustainable Finance Disclosure Regulation (SFDR). “It included significantly more extensive ESG criteria than seen in the market up to that point, including being the first European CLO to include positive ESG metrics through scoring of assets and applying a minimum concentration limitation on the portfolio for assets with a certain ESG scoring,” explains Paul Hastings’ Jones.
Fidelity Grand Harbour CLO 2022-1, priced in August, replicated these ESG provisions. Paul Hastings has also assisted Neuberger Berman, Partners Group, PGIM and others in designing their ESG screening criteria for CLOs and credit funds. It was also the first law firm to be invited to join a CLO manager working group on devising a market approach to producing principal adverse sustainability impact reporting, in line with guidance in respect of Article 4 of the SFDR, which is a contractual obligation incorporated into some CLOs.
In the RMBS sector, Paul Hastings has advised multiple other mortgage lender clients on ESG requirements. With Kensington Mortgages, for example, the firm was again at the forefront of ESG developments.
Kensington’s Finsbury Square 2021-1 Green RMBS was a first, as it was aligned with the ICMA Green Bond Principles of 2018 and contributed towards meeting the UN Sustainable Development Goals. With the proceeds of Finsbury Square 2021-1 Green’s class A-Green notes, Kensington committed to originate £570m of green loans to fund the purchase of properties with a high energy performance rating. In the case of Gemgarto 2021-1, Kensington brought to market the first UK social RMBS, a transaction aligned to the ICMA Social Bond Principles.
Paul Hastings also works with LiveMore Capital, a lender founded in 2020 that provides mortgage finance for borrowers aged 50 and over. People in later life are too often underserved by high street lenders, note Paul Hastings’ partners Paul Severs and Victoria Morton. “This has been particularly material for clients that are earlier in the life cycle of their origination platform, where there is considerable scope for advice relating to the establishment of an ESG framework for reporting and tracking mortgage loans,” notes Morton.
For full coverage of SCI’s ESG Securitisation Awards, click here.