As efforts increasingly prioritise the ‘S’ of ESG, enlightened credit fund managers are looking more closely at labour rights and the impact that failings in that area can have on a company’s reputation and valuation.
“Human rights has always been an important topic, but what has changed is the level of awareness about these issues and the availability of information,” Carmela Mondino, head of ESG and sustainability at Partners Group, told Private Debt Investor in May.
“We can now access information instantly from all over the world, so if there is a company in Asia that doesn’t meet minimum human rights standards, there will be an NGO or other organisation that can raise awareness of this.”
Labour rights are a key element of the UN Guiding Principles on Business and Human Rights (UNGPs). Due diligence obligations, as outlined by the UNGPs, are relevant for funds in every sector and jurisdiction, with modern slavery risks a global problem, for example.
One of the biggest challenges for lenders on ESG is maintaining adequate oversight of the actions of borrowers through the life of a loan.
Management oversight can take many forms, but needs to go beyond the most basic levels of reporting, according to Michael Curtis, head of private credit strategies at Fidelity.
“To really have an influence over ESG as a lender, it is about bringing something to the relationship with the sponsors and the companies and ultimately finding ways to help them on their journey,” says Curtis. “As part of that, we will seek to have an ongoing dialogue on how that journey is progressing, what milestones the company is reaching and what their challenges are. Management oversight really is a lot more than relying on a report every year.”
Curtis says it is also important that the company has independent verification. “You don’t really want the CFO marking their own homework. You want some independent oversight.”
Proposed solutions to global problems such as climate change typically involve tech and engineering. But what if the answers lie in harnessing the power of nature?
The World Bank defines nature-based solutions as “actions to protect, sustainably manage, or restore natural ecosystems, that address societal challenges… simultaneously providing human wellbeing and biodiversity benefits”. One example is coastal flood prevention – traditional approaches involve building expensive sea walls, but an alternative could be protecting or restoring mangrove trees in coastal areas to helps to guard assets and providing a habitat for certain species.
“The global community must shift from a mindset of extraction and depletion to one of regeneration,” Amit Bouri, CEO of the Global Impact Investing Network, told us last year. “Nature holds the answers to restoring the planet – meaning, starting immediately, we must drive more investment into nature-based solutions and treat nature with far more respect.”
Occupational health and safety
When Ares Management Corporation, the world’s largest private debt manager, completed the groundbreaking £1 billion ($1.2 billion; €1.1 billion) ESG-linked loan to UK-headquartered environmental and engineering business RSK Group in 2021, occupational health and safety featured heavily.
The RSK deal included an annual margin review based on the achievement of sustainability targets broadly focused on carbon intensity reduction and continual improvement of health and safety management and ethics.
Salma Moolji, European ESG lead at Ares, says: “The performance targets within a sustainability-linked loan should be relevant to the core business of that company and help drive positive change. For example, if health and safety is relevant for business operations, we find emphasising improved performance in this area can help drive positive outcomes from ESG and business perspectives.”
Permira Credit also highlights health and safety metrics as a priority for reporting ESG data. Permira’s head of ESG Adinah Shackleton explained last year how it works with companies on health and safety: “There have been times where issues have arisen during diligence, but instead of walking away from the deal, we have engaged with the company on addressing those issues. For example, there was a company facing a potentially material fine over a health and safety incident. We worked with the business to understand how it was responding and what improvements were being made to health and safety practices.”
While the public credit markets are some way ahead of the private debt markets when it comes to ESG data and reporting, there are many lessons to be drawn from knowledge-sharing across the two constituencies.
Michael Curtis, head of private credit strategies at Fidelity International, says: “As we have embarked on bringing ESG to the forefront of what we do in private markets, which is now very much part of our core strategy, we have been able to bring the same framework that we use in the public markets where we have had many years of experience and data to help us.
“That means our private markets ESG strategy has been accelerated, and while there are additional challenges around access to data in private markets, our ability to exert influence as a borrower in the private space is enhanced.”
Paul Woods, director of sustainability and ESG at Arrow Global, adds: “While there are good practices available in public market disclosures, it is imperative that the private credit markets meet investor expectations to ensure private debt continues to grow its allocation of investors’ portfolios.
“Clearly, there will be areas that are specific to individual firms and their operations; however there are also opportunities for asset management good practice that increase the reputation of the wider sector while helping to streamline and reduce the need for multiple similar reporting requirements. Convergence of reporting metrics whilst challenging is something the industry should aspire and work towards.”