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Driving forward on ESG, but acceleration needed

Private debt managers have made considerable progress but, particularly in North America, there is more to be done.

Today any private debt manager underplaying the importance of environmental, social and governance issues might expect short shrift from investors they approach for capital. However, it wasn’t necessarily always that way. Travel back in time five or 10 years and you might have found a receptive audience for the argument that debt providers could reasonably expect to sit passively in the back seat, allowing the likes of company management teams and private equity firms to deal with tricky issues like ESG from their position in the operational front seat.

That view seems old fashioned now, and many would say, rightly so. Plenty of private debt firms have made ESG central both to their own operations and to the loans that they provide for investee companies. Linking margins to the achievement of ESG-related targets is now reasonably commonplace. A recent survey from PineBridge Investments found that 94 percent of private market managers – including, but not limited to, those with private debt funds – boasted what was described as an “established ESG approach”, up from 78 percent last year.

However, the survey also revealed there is plenty of room for improvement. While nearly half (49 percent) had signed up to the UN Principles for Responsible Investment – arguably the most obvious first step for those keen to prove ESG credentials – 35 percent said they had not yet committed to any specific standards. Reasons why they had not done so included a lack of internal resources to track any policies committed to, and not enough clarity on the processes and requirements involved.

The survey contained a clear wake-up call for North America-based managers, finding that only 39 percent of managers based in the region had committed to “some international standards that promote responsible investment practices” versus 78 percent in Europe and 63 percent in Asia. An LP source recently expressed the opinion to Private Debt Investor that European investors – especially those based in the Nordic markets – may increasingly withhold capital from North American funds for failing to measure up when it comes to ESG. The survey appears to provide added weight to the claim that these funds are falling short. It does not seem inconceivable that they may be hit in the pocket as a result.

Write to the author at andy.t@peimedia.com