A-Z of ESG: Q-T

In our A-Z of topics to illustrate what a socially responsible approach to credit markets should embrace, here we cover Quality outcomes, Renewables, Social responsibility and Transparency.

Quality outcomes

Private credit funds are under pressure to demonstrate to investors and regulators that they are not only prioritising ESG during investment processes, but also demonstrating quality outcomes as a result of their work.

A-Z of ESG - Quality outcomeMichael Curtis, head of private credit strategies at Fidelity International, says his team is able to bring a unique perspective to measuring outcomes: “By having a broad view across the global markets we can understand what good looks like, because we see a whole range of companies from large-listed businesses to the medium-sized privately-owned.”

He adds: “We have the ability to really help our borrowers set appropriate targets and goals in a holistic way, and in the long run that will lead to a much more sustainable business model for the company in question – stability in earnings and cashflows, and ultimately a higher valuation. It is not just about de-risking the company, it is about de-risking us as lenders and generating enhanced outcomes for all stakeholders.”

Paul Woods, director of sustainability and ESG at Arrow Global, says data has a key role in demonstrating outcomes: “The need for data and quantitative assessment of ESG characteristics is increasingly evident. This is not simply about meeting regulatory requirements but to intelligently articulate assessment of ESG risks and opportunities – and impact where appropriate – in a meaningful way that demonstrates progress for all stakeholders.

“In all cases, the need for better quality data gathering, clear definition and timely reporting is paramount,” he adds.


Due to the energy security crisis, in 2023 the chance for private credit to back green energy in Europe will be in the spotlight for funds and their investors.

Hugo Thomas, head of credit research at Sienna Private Credit, says: “Europe plans to install 85GW of new PV power plants and 50GW of onshore wind farms by 2025, requiring €50 billion of investment needed per year. Renewable energy represents an exceptional market opportunity, driven by increasing European energy independence ambition, and global transition towards clean energy.”

These renewables energies are becoming increasingly competitive and there is a shift in renewables revenues from feed-in tariffs towards bilateral contracted or merchant exposure. Thomas says: “This comes with reduced bank-driven senior debt gearing and an increasing need of equity or subordinated debt injections. This triggers a growing demand to private debt funds that can cope with more volatility to sustain the growth of greenfield renewables projects and provide at a higher yield the much-needed extra leverage through junior or unitranche structures.”

Jerome Neyroud, head of infrastructure debt at Schroders Capital, told Private Debt Investor in October that concerns around security of supply had created opportunities on the generation side, especially as Europe seeks alternatives to fossil fuels in the form of renewables: “We continue to see a huge opportunity in energy storage, but remain cautious around retail due to its exposure to price volatility, and around newer technologies like hydrogen where business models have not been tested yet.”

Social responsibility

While lenders initially focused on environmental and governance considerations in ESG as being easier to understand and track, there is growing commitment to social responsibility as the conversation matures.

A-Z of ESG - Social responsibilityRalph Hora, partner and chair of the Pemberton ESG Working Group, says: “We take a similar approach to addressing the ‘S’ as we do the ‘E’ and ‘G’, with a comprehensive questionnaire for new direct lending deals that tracks 20 ‘S’ questions across key metrics, such as a company’s equal opportunities policy and its employee performance tracking process. This helps us both screen potential risks, and track progress over time.

“We are seeing improvements in scores and have had feedback that tracking helps those we work with focus on these issues and raise it up their agenda.”

It’s a similar picture at European fund manager Arrow Global, where Paul Woods, director of sustainability and ESG, says social responsibility matters to both long-term commercial success and the ability to attract and retain key talent.

“An inability to properly understand and action concerns around the ‘S’ factors of ESG is more than likely going to result in the manifestation of some reputational risk for the business or the portfolio,” he says.“An ability to look at how the company has performed over time, and record that change, demonstrates the right culture and management controls.”

Woods recommends seeking external input to shape internal thinking: “It is easy to think you are doing a great job and it can be difficult to open up to scrutiny from a third party. However, if done correctly it can enhance understanding, develop collective leadership commitment and drive real change across an organisation,” he says.

François Lacoste, managing partner in private debt at Eurazeo, says lenders have the potential to make a big difference if they get this right: “A GP like Eurazeo can help bring about a multiplier effect to encourage a more inclusive society because it can act on both its direct and extended perimeter through the 530 companies in its portfolio – this is the extra-financial leverage effect.”

Laure Villepelet, head of ESG at Tikehau Capital, agrees that private credit has a responsibility to step up and make a change: “Asset managers have a social responsibility to actively participate in ensuring the transition towards low-carbon, more circular and resilient models,” she says. “This transition is critical and necessary, but there are barriers because the value chain is fragmented and shared between different actors, which is due to many actors focusing on the short-term cost rather than the long-term investment in the energy transition.”


Investors and regulators alike are demanding greater transparency from lenders on the ESG performance of their portfolio businesses, driving a requirement for data that is trickling down to borrowers.

A-Z of ESG - TransparencyWhile most companies are getting on board with what is needed, achieving transparency still presents challenges. Ralph Hora, partner and chair of the ESG working group at Pemberton, says the fund manager expected a degree of pushback when it expanded its ESG questionnaire from around 30 questions to 80. The reaction has, in fact, been positive, with companies keen to measure and understand where they sit in relation to their peers and their sector more broadly, he says.

But it is not all smooth sailing. “One of the challenges is when dealing with smaller companies who may not be tracking Scope 2 or Scope 3 indirect emissions,” he says. “In the first instance, we will work with companies and introduce them to consultancies to help measure these. If companies are still unable to source this data, we work with specialists to identify a proxy, based on a company’s likely Scope 2 or 3 emissions, that we will use to track.”

Hugo Thomas, head of credit research at Sienna Private Credit, says transparency has become a prerequisite under disclosure regulations being implemented across jurisdictions. “Meeting these requirements is a major challenge in terms of data collection for private debt investors managing more demanding Article 8 and 9 funds [under the EU’s SFDR regime] and dealing with non-listed corporates not subject to corporate sustainability reporting requirements.

“To improve data collection campaigns, investors may assist their counterparts in measuring their ESG KPIs, or incentivise them by rewarding transparency efforts on ESG matters.”

Laure Villepelet, head of ESG at Tikehau Capital, shares a similar view: “Transparency is essential for the asset management industry and when it comes to ESG disclosures, we recognise the key role that regulators play. The challenge we face with sustainability is that we need to implement standards, while not limiting innovation and progress towards the energy transition.”

Antoine Peter, manager at Arendt, cautions that transparency can be a bit of a double-edged sword: “On the one hand, many asset managers want to inject more transparency into their fund offering documents in order to protect themselves against mis-selling claims and make sure that they are meeting the expectations of their investors. Everyone has a different definition of what ‘sustainable’ is, and so greater transparency helps fund managers avoid some of this confusion.

“But, on the other hand, increasing transparency also risks exposing fund managers to greater levels of scrutiny and criticism.”