ESG integration in private credit is “more than a passing trend”, writes David Garcia, an investment consutlant at Lane Clark and Peacock in the UK, in a recent blog post. LCP gathered data from nine European mid-market private credit managers and pulled together the following datapoints:
- 25 percent of loans in European strategies include ESG-linked margin ratchets;
- Margin ratchets on average link to four different KPIs, each accounting for on average 7 basis points in margin reduction;
- The average cumulative discount amounts to nearly 30bps;
- Around 70 percent of these ratchets are “one-way”;
- 55 percent of the sample used third-party assessments to “evaluate margin ratchet strength and verify data”.
“Whilst it is possible to incorporate complex structures such as hybrid, reset and combination ratchets, we found that in practice simple ratchets are used: either binary ratchets that apply a fixed increase or decrease in borrowing costs based on meeting or failing to meet specific ESG targets, or tiered ratchets that adjust borrowing costs on a graduated scale according to ESG performance,” writes Garcia.