ESG in private credit becomes ‘business as usual’

Most private debt lenders say they now consider ESG for all their investments, with almost half adding that sustainability best practices are a value-add to their investments, according to an industry survey released on Wednesday.

Fifty-seven private credit managers representing a combined $600 billion of assets were polled in a report highlighting ESG integration “underpinning the development of private credit”. Financing the Economy 2021: ESG and Private Credit was published by industry group Alternative Credit Council in partnership with the law firm Allen & Overy.

“Our research shows that, for private credit managers, ESG is also increasingly ‘business as usual’, with the majority having already implemented changes to integrate ESG considerations across their strategies,” the report stated. “These changes are being positively received by investors, but our findings indicate that they also expect more to be done.”

Nearly three-quarters of responding private credit managers said they consider ESG considerations as “an integral part” of their lending strategy, with Europe leading the way.

When it comes to how ESG is being included in private lending strategies, most investors said they are fully integrating, or plan to integrate, ESG considerations into their investment processes. Negative screening is the most popular specific measure at 55.6 percent, while investing using thematic funds is the least popular, at 13 percent.

Responses were mixed on what managers considered to be the biggest value-add of private credit when it came to ESG. Nearly half of private lenders said providing advice and guidance to borrowers through bilateral relationships was the biggest value-add, while 32 percent said it was the ability to control outcomes through flexibility and negotiation of loan agreements. Twenty percent responded by saying the biggest private credit strength was providing fresh capital rather than trading existing securities on secondary markets.

In continuing to build out ESG integration, respondents highlighted areas such as front office underwriting, compliance and regulatory reporting, and increasing investor engagement as the areas they will focus on the most over the next three years.