SFA Advocates for Greater Transparency in GSE’s Social Index

Background:

On January 5, 2023, SFA submitted a letter to Fannie Mae and Freddie Mac in response to their Social Index, which is a methodology to score single-family MBS based on Social criteria of loans in the pool, which would then be disclosed to investors. In the letter, SFA commends Fannie Mae and Freddie Mac for their pursuit to improve ESG data collection and reporting. However, SFA investors strongly advocate for additional transparency and granularity in how existing Social metrics are reported to investors beyond this Social Index.

In its current form, the Social Index obfuscates data, and does not provide a sufficient basis upon which investors can satisfy their diligence and compliance obligations. Additionally, investors feel strongly that the Social Index must not serve as a de facto industry standard framework for how other structured finance issuers disclose and report Social data metrics in the future including the self-selected nature of the index.

SFA and our investor members recognize that there are challenges associated with reporting this data, including protecting borrower privacy. Given those challenges, SFA recommends that both GSEs continue to engage with investors on how best to report and disclose Social metrics within the context of ESG investing in a way that protects borrower’s interests while providing investors with the data necessary to make informed investment decisions.

Key Points

• SFA welcomes both the opportunity for investors to work with GSEs to prioritize disclosures, as well as the dialogue around the social factors within ESG. SFA also appreciates the challenges inherent in developing a uniform ESG reporting framework.
• SFA investor members believe it’s critical that the GSEs report metrics on an individual, disaggregated basis, noting that disclosure of individual metrics with sufficient transparency is fundamental to investors’ ability to independently assess the characteristics, risks and impact of any bond.
• While some SFA investors appreciated the preliminary steps made towards enhancing Social disclosures being published, others believe that the framework of an index that rolls up multiple discrete data points into a single score risks fatally undermining the ongoing development of ESG reporting.
• Investor members agreed that a Social Index should not serve as the de facto industry standard, either for the Agency or PLS market.
• Understanding the inherent challenges associated with uniformity in ESG disclosures and reporting, SFA investor members look forward to continuing the constructive two-way dialogue that both GSE have facilitated. For example, as part of future discussions SFA investor members would be happy to provide their consensus prioritization of fields most relevant and impactful for their investment analysis.