ESG is on the agenda: But there are different reasons why

Relative to its peers in private equity and other asset classes, private debt is behind the curve on ESG. It is catching up, but with various approaches and motivations.

There is, it seems, no consistent view of how private debt managers should engage with ESG issues. At this week’s Capital Structure Forum in London, a panel on the topic featured three speakers with three distinct approaches.

One, represented by Peter Plaut, an executive director at the Wimmer Family Office, was driven primarily by the need to achieve a certain amount of yield for his family investors rather than whether the fund managers backed by the office were in the vanguard of ESG implementation.

This is not to say Plaut expressed indifference to ESG matters. As someone who looks with interest at opportunities in the metals and mining sector, among others, he said he would certainly not view with detachment the activities of a company guilty of destroying local habitats, for example – and he acknowledged the natural gravitation towards alternative energy sources.

But he also spoke of the balance between social impact and yield expectation. ESG may be important but is not the be-and-end-all. Achieving a certain level of yield and return is also very much front of mind.

Then there was the perspective of Ari Jauho, partner and chairman of Finnish fund of funds manager Certior Capital. He described how, when he worked previously at a Finnish insurer, the organisation imposed an exclusion on various industries such as gambling and military hardware. But, since launching Certior in 2011, he has seen the ESG criteria for investors in Certior’s funds becoming more and more strict.

“ESG is an investor need and we have to serve our clients,” said Jauho. In other words, while ESG is front and centre for Certior, the reason (or at least a major part of the reason) is that it’s an investor demand.

The third perspective came from Nicole Downer, managing partner at London-based fund manager MV Credit. For her, ESG is viewed as an intrinsic part of the investment process. While she acknowledged the importance of yield, she pointed out that another vital aspect of private debt investing is downside protection. She saw ESG as vital in this context – guarding against the possibility of lawsuits being brought or falling on the wrong side of new regulations.

The different approaches reflect the different demands of the organisations in question, and none of the three are right or wrong. There is, after all, no such thing as definitive best practice and perhaps what matters most is that ESG is on the agenda one way or another at each of these firms.

But it also hints at the lack of uniformity in an asset class that is relatively immature when it comes to the adoption of ESG practices. Debt providers, rightly or wrongly, have tended to be seen as occupying the back seat as investors while equity providers take their place at the front, helping to shape investee company strategy in all manner of areas, including ESG.

This view is changing, and debt financiers are gradually taking on more operational responsibility – including beefing up their workout skills to help steer companies through times of trouble. They will also no doubt move much more to the forefront in ESG – both by honing their own approaches as well as those of investee companies. But it’s still early days.

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