Leveraged finance markets are struggling with a lack of good quality data on environmental, social and governance issues for issuers, according to research by the European Leveraged Finance Association.
A survey of 100 investors active in high-yield bonds and leveraged loan investing found 49 percent believe there is not enough information about ESG factors that may affect an issuer’s creditworthiness.
ELFA said most firms are reliant on purchasing ESG research, but leveraged finance markets contain a large number of privately owned and small-cap issuers for which there is very limited public information.
This shortage of information could pose a serious problem for firms, as 78 percent said that their investors ask them about ESG frequently, meaning an inability to prove their portfolio’s ESG credentials could lead to them losing potential investments.
ELFA said that to fill the gap in ESG information from some issuers, many firms are engaging in proprietary research or using bespoke company ESG questionnaires. However, this can result in significant extra work for investors and issuers as firms are often receiving different ESG questions from different parties.
Investors said establishing ESG benchmark indices, increased awareness and education on ESG and expanded coverage by third-party ESG scorers are among a number of potential reforms which could make it easier for investors and issuers to get to grips with ESG. They also called for greater standardisation in ESG definitions and approaches taken by asset owners, credit managers and ESG data vendors.
ELFA said it is working with issuers, private equity sponsors, deal arrangers and the UN-supported Principles for Responsible Investment to seek out a collaborative approach to tackling ESG issues. It plans to hold a roundtable as part of a joint initiative with the Loan Market Association with selected credit analysts and leveraged finance issuers and follow up with an additional roundtable with credit rating agencies later this year.
Market participants who wish to join in with ELFA’s initiative or find out more should contact Sabrina Fox at email@example.com.