ESG gets the green light

Out of all the firms comprising our current PDI 50 ranking of the asset class’s largest fundraisers (the next version is just around the corner), 19 are signatories to the UN PRI (Principles for Responsible Investment), according to Archie Beeching, head of private markets at the organisation. It doesn’t take a mathematical genius to work out that this means 31 are not. He concedes that there is “some way to go” before private debt managers can be said to fully embrace ESG.

But Beeching, who was moderating a panel on the subject at our recent Capital Structure Forum, had not turned up at that event to admonish the GPs in the room. Instead, he was keen to acknowledge that much progress has been made. Five or six years ago, he confided, there was little pressure on debt providers to embrace ESG – debt investment was not really seen as something that happened outside of private equity deals, and it was up to the private equity firms to take ESG into account. If debt investors wanted to completely rely on PE firms’ due diligence, that was generally considered just fine.

Since then there has been a re-evaluation of the status of private debt as it has grown and diversified. Last week, for example, we reported that the IPEV Board was for the first time treating private debt investment separately from private equity in the latest proposed amendments to its valuation guidelines. Now, in ESG as in valuation, private debt managers are being viewed as independent entities with all the responsibilities this entails.

This clearly makes sense, not least because many private debt firms are no longer – if they ever were – mere back-seat drivers in private equity deals. As a direct lender to a non-sponsored company, it seems fair to assume you can exert at least as much influence over that business – including in relation to ESG – as any private equity firm. Moreover, Beeching said he has noticed that even those debt managers doing sponsored deals are increasingly taking PE due diligence as the starting point rather than final word. They will think independently about what other ESG considerations may be relevant, over and above what the sponsor has drawn attention to in their research.

There are many solid reasons why it makes sense to be ESG-savvy. Quite aside from the good that companies can do for the wider society and environment by taking it seriously, ESG can allow fund managers to have an enriched dialogue with the companies they are investing in and they can use it to help them map risks and opportunities. It is also, of course, an important consideration for many managers’ investors.

There is some way to go, but putting ESG on the radar is one of numerous ways in which private debt is now implanting itself firmly in the alternative assets mainstream.

Write to the author at andy.t@peimedia.com