Sustainability was on the agenda at affiliate title Private Debt Investor‘s Europe Summit in London this week. The event took place under the Chatham House Rule, meaning speakers could not be identified. Here are some sustainability-related takeaways:

ESG integration speeds up

Private debt, having historically been considered an asset class lagging on ESG integration, is covering a lot of ground very quickly. Said one expert who had worked in ESG across multiple asset classes before joining the world of private credit: “I have never seen the acceleration of the level of advancement of sustainable investing that I am seeing in this asset class. We are going to see a levelling up across asset classes in the next couple of years.”

While the access to reliable data continues to be a hurdle (as in many asset classes), they said this cannot be allowed to get in the way of progress: “We don’t have time for the data to catch up; both the regulators and our clients have set the bar high in terms of what they require of our asset class on ESG integration, product offerings and regulatory reporting,” they said, noting TCFD requirements in the UK and the EU’s SFDR requirements in particular.

Sustainability-linked loans

When it comes to sustainability-linked loans, best practice according to industry guidelines includes seeking external validation of a borrower’s performance against its ESG targets. This is a bridge too far for some companies. “With mid-market companies, we felt it was too burdensome to require external certification on all of the KPIs,” said one lender. Also: if you want to prompt better engagement from borrowers, make your KPIs sector-specific.

Financial value

There is little room for doubt over the financial value of ESG initiatives, at least according to one fund manager. “It’s not just about screening and filtering; it’s about engagement; it’s about stewardship; it’s about consultancy,” they said. “It’s really about helping them become more valuable companies at the end of the day. If you do that right, you are going to lower the cost of financing, you are going to attract customers and you are going to have counterparts that are attracted and want to work with them.”

‘Big demand’

There is “big demand” for impact in private debt, according to multiple speakers, in particular from European investors. The challenge is ensuring robust measurement of outcomes, but this is surmountable. “In 10 year’s time I believe most private debt firms will have some form of impact-driven strategy,” said one speaker.