Asset owners, GPs drive private debt ESG scrutiny as data tools mature
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Private debt investors are deepening their environmental, social and governance (ESG) analysis as the development of more data tools and standards enables them to drive meaningful engagement with portfolio companies and private equity sponsors, say industry executives.
A growing number of ESG frameworks for the private credit market is helping investors and their portfolio companies to identify and produce decision-useful sustainability data.
Accordingly, asset managers are ramping up their ESG-related engagement around private debt assets, noted Liza Jansen, head of responsible investment at British insurer Prudential, which operates life insurance businesses in Asia and Africa.
“And if we engage alternative asset managers, they're getting more mature on this topic,” she told AsianInvestor.
Since alternative asset managers tend to be closer than their public-market peers to their investments, they inherently have strong influence and substantial engagement already, said Jansen, who is based in Kuala Lumpur.
“So, they can take a more tailored approach,” she added. “They should be asking more questions on sustainability, pushing portfolio companies to do at least ESG disclosures and impact assessments – and some managers are doing that.”
The global private credit market is now estimated at $1.5 trillion in size, up from $1 trillion in 2020, shifting the focus from whether investors assess ESG risks in this asset class to how they can do so effectively, said Claire Hedley, head of ESG at London-based private credit manager 17Capital.
She made the remarks during a panel of the British Venture Capital Association’s (BVCA) ESG Conference last month.
Last month, the Institutional Investors Group on Climate Change published guidance for investors and portfolio companies on the approach for engagement and reporting.
This adds to guidance from Initiative Climat International to encourage measurement of greenhouse gas emissions and the ESG Integrated Disclosure Project set up by the Alternative Credit Council.
One example of rising engagement is Ares, a private market investment firm with some $428 billion under management.
LENDERS' INFLUENCE
Ares is often the single lender to a portfolio company, and while the sponsor holds more sway over the company as the equity owner, the lender can still have substantial influence, said Salma Moolji, European ESG lead at Ares, on the same BVCA panel.
In the last several years, the firm has taken steps to increase the influence of lenders on its borrowers' ESG business practices, she said. "I think one of the best ways of doing this ... is to work with the sponsor [as well as the portfolio company]."
What's more, being a very large investor helps Ares strengthen its engagement, Moolji said, because it is able to gather sufficient ESG data to deliver a benchmark back to its portfolio companies. This serves as an incentive for them to participate in the data collection programme.
The sponsors have largely been supportive of Ares’ work with portfolio companies, she added. “I think that's because we work with them really closely if they have an action plan.”
"More than 140 companies have given us data this year, just in Europe,” Moolji said. “So, we can learn lessons from such a big portfolio and use that to support the underlying portfolio companies through engagement and through tools like ESG-linked loans.”
ESG-linked loans are one tool through which to have a positive impact on investee companies in the direct lending space, she added.
“But they are really challenging to get right, to make sure that the KPIs (key performance indicators) are robust, the management is fully committed, and the sponsor is really well aligned.”
Such instruments are also key for Tikehau Capital, a French alternative asset manager with around €44 billion ($47.9 billion) under management, some $20 billion of which is in private debt assets. Two-thirds of its transactions currently include sustainability-linked loans, according to Vincent Lemaitre, head of ESG for private debt.
DATA TOOLS
To engage with companies on these loans, Tikehau needs to collect a sufficient amount of suitable sustainability data, said Lemaitre during the same panel. That is a big challenge, and one for which Tikehau uses various tools.
One is the S&P Global Corporate Sustainability Assessment (CSA), an annual evaluation of a company’s sustainability practices. “The CSA is a tool for listed companies, but we work with S&P to adapt it to the private markets,” said Lemaitre.
Similarly, while 17Capital is in contact with private equity firms rather than their portfolio companies, it does look at the underlying portfolio companies, Hedley said.
The firm specialises in NAV (net asset value) financing for private equity firms. It utilises a tool called RepRisk to screen potential ESG issues.