Why ESG Matters (Last of a Series)

We noted last week how various asset classes incorporate aspects of environmental, social and governance elements in their risk analysis of a business or manager. We wrap up our special series by examining how private credit integrates ESG into its various strategies.

Credit managers are typically not involved in the direct management of businesses they finance. An exception is impact investing. According to a recent Private Debt Investor article, private debt represents 34% of all impact investing AUM, with real assets and private equity at 22% and 19%, respectively. Noteworthy areas include healthcare, renewables, and housing.

Similarly sustainability-linked loans (SLLs) compel borrowers to reach given ESG goals. SLLs are a small but growing category within the overall $732 billion (per BloombergNEF) sustainable debt market. That suggests momentum for investors to seek green private debt alternatives as well.

Nevertheless negative screening is a powerful tool for lenders. The European Leveraged Finance Association (ELFA) reported 90% of managers surveyed had “passed on, reduced or sold out of a credit investment entirely due to ESG reasons at least once.”