A-Z of ESG: U-Z

In our A-Z of ESG, here we cover Underwriting criteria, Vision, Waste reduction, eXit strategy, Youth and Zero emissions.

Underwriting criteria

Investors need to ensure that ESG is strongly embedded in their investment choices as investors and regulators intensify their focus on ESG.

AiZ of ESG - UnderwritingDavide Stecchi, managing director in underwriting at Arrow Global, says it forensically scrutinises every single investment for ESG-related risks to ensure these meet investor expectations. “In doing so, we take a holistic underwriting approach considering reputational, environmental and social considerations,” he says.

“We actively prioritise investments beneficial to the environment or local community, believing they will maximise value for our investors. Above all, we always treat our customers fairly.”

Ralph Hora, partner and chair of the ESG working group at Pemberton, says his firm’s approach to underwriting involves a three-stage process for all of its new direct lending funds: “First, we negatively and positively screen companies. Here, we rule out companies we won’t be working with, and in line with SFDR Article 8, identify those with positive ESG features. Then, we issue an 80-question questionnaire for companies, covering environmental, social and governance criteria metrics that is tracked over time, that helps us further understand the businesses we work with.

“Finally, if we want to proceed with a transaction, we will discuss how we can further encourage progress on ESG, such as by offering a margin ratchet if companies are willing to commit to six KPIs.”


Private debt firms require vision to invest in the future – to achieve this they can prioritise innovation and look towards sectors that will likely gain traction in the years ahead.

A-Z of ESH - VisionESG is on the rise amid growing concerns about climate change and social inequality. According to an Intertrust survey, 95 percent of CFOs view ESG as important.

Jon Patty, partner at the White Oak Impact Fund and managing director at White Oak Global Advisors, agrees: “We seek to partner with management teams who have been thoughtful about the ESG challenges facing their sector, who are aligned on taking specific actions on ESG issues, and who are open to ongoing dialogue with their financial partner about continuous improvement.”

Following the introduction of regulations surrounding ESG such as the EU’s SFDR, firms need to set their own targets when it comes to investing. “Investors are increasingly wanting to see transparency as to how ESG factors actually impact investment decision-making: both in terms of whether we make an investment or not, and then in terms of any follow-on portfolio management activities,” says Monique O’Keefe, executive director, governance and risk at Arrow Global.

Looking ahead, Dodson Worthington, principal, junior capital and private equity solutions at Churchill Asset Management, presumes that investing in ESG and DE&I will “become standard practice”.

Ultimately, having the vision to prioritise ESG and DE&I will only make private debt firms more equipped to handle volatility and generate better returns.

Waste reduction

The need to reduce waste has moved towards the top of the sustainability agenda – driven partly by outrage over single-use plastics and their impact on the world’s oceans.

A-Z of ESG - Waste reductionGood waste management is fundamental to effective environmental management. The improper disposal of waste can have disastrous effects on ecosystems, in extreme cases leading to large-scale damage to biodiversity and even impacting human health. Reviewing the environmental and waste management practices of borrowers is therefore an essential part of ESG due diligence.

But the gruesome consequences of ocean plastics have helped to draw attention to deeper questions around the wasteful consumption of the Earth’s resources and problems caused by improper waste disposal. The concept of a ‘circular economy’ – which challenges the ‘take-make-waste’ model of production – has grown in popularity.

This means that lenders increasingly look for evidence that borrowers have targets for reducing waste volumes, as well as increasing rates of recycling. Waste management metrics may be factored into sustainability-linked loans, ensuring incentives for improved performance.

Meanwhile, waste recycling companies are increasingly acquisition targets for private equity firms, reflecting the sector’s growth potential as consumer and governments demand better recycling options. Energy Capital Partners announced in September that it would acquire UK waste management company Biffa in a $1.4 billion deal. Private debt lenders can expect to see more opportunities to help finance transactions that support waste management the coming years.

eXit strategy

By prioritising ESG throughout the investment process, private credit funds can hope to secure better outcomes for their investors when exiting the investment.

A-Z of ESG - eXit strategyRichard Roberts, head of origination at Arrow Global, says: “For a responsible investor in non-core, stressed or distressed assets, exiting an investment in an ESG-compliant way can take many forms. In its ideal form, the investor has been able to work with the underlying borrower to rehabilitate their credit position such that we can be refinanced out on terms which are better for the borrower. In the period of our investment, we will have had a constructive relationship with the borrower and supported their goals. Amicable settlements are not only the right course of action for ESG, but frequently the economically best result too.”

He adds that ESG should also be a consideration when it comes to the sale of the asset: “To the extent we have invested in an asset versus a loan, our exit would come from the sale of the asset to a responsible new owner, committed to own and develop the asset in the medium to long term,” says Roberts. “In both examples above, the exit counterparty will have undergone ‘know your customer’ and anti-money laundering, compliance and other relevant checks.”

Nathan Brown, chief operating officer at Arcmont Asset Management, told Private Debt Investor last year: “Ultimately, ESG should be something managers think about all the way through from due diligence to exit, with the most mature funds using quantitative metrics and encouraging good ESG behaviour among their borrowers.”


Giving more of a platform to younger employees will benefit the industry as they hold the future of the asset class in their hands.

A-Z of ESG - YouthYounger people can give fresh perspectives, which can enable firms to make better decisions. Marisa Hall, co-head of the Thinking Ahead Institute at Willis Towers Watson, says: “You are highly unlikely to achieve strong cognitive diversity and hence good collective decision-making when everyone has a uniform set of experiences. Representative diversity is also very important. It isn’t enough to say we may all look the same but we are cognitively diverse.”

However, it is often the case that younger people are misrepresented, particularly at a board level. Nuveen’s chief executive of real assets and real estate Mike Sales believes the representation of youth is one of the biggest missed opportunities on boards. “The accepted way is to have boards dominated by experienced custodians, but for me that youthful perspective is important.”

Focusing on youth is another way firms can ensure gender diversity becomes part of company culture. For instance, entry level recruitment is arguably where most of the progress is being made when it comes to hiring diverse talent – in 2021, women made up 56 percent of EQT’s new hires at an entry level basis.

Gail McManus, managing director and founder of Private Equity Recruitment, says: “Massive strides have been made in the recruitment of entry-level women.” This is promising and suggests that youth may have the power to change the make-up of the asset class.

Zero emissions

Net zero is the North Star of the responsible investing movement. A vast institutional architecture has emerged to put the financial sector on a course to net zero – and private debt firms are expected to play their part.

A-Z of ESG - Zero emissions“It used to just be private equity sponsors that were driving the agenda, and portfolio companies had the option to say they didn’t want to implement certain initiatives, and private debt investors were more dependent on the sponsor to effectuate change,” Adam Heltzer, global head of ESG at Ares, said last year. “Today, that is no longer the case.”

As well as developing instruments such as sustainability-linked loans to incentivise emissions reductions, private debt firms have focused on building in-house capabilities on ESG over the past few years. This is boosting their ability to measure and monitor progress towards net zero.

But the journey is more complicated than it first appears. For one thing, what if the aim of building a net-zero portfolio actually conflicts with progress in reducing real world emissions?

“When we look at divesting from fossil fuels, it is tempting to pursue companies that are already green to bring down CO2 emissions in the portfolio,” Claus Fintzen, CIO and head of infrastructure debt at Allianz Global Investors, told Private Debt Investor in August. “But there is some merit in saying we should invest in ‘dirty’ companies and invest to allow them to make their business cleaner, as this would have the effect of reducing overall emissions within the economy.”