What are some of the key trends in how private debt funds are trying to tackle climate change?
Investment policies and guidelines limiting or excluding investments in projects and companies that present increased environmental and climate risks are a good starting point. It is equally important for private debt funds and other lenders to have capacity to source and process relevant data and monitor performance of portfolio companies against targets or commitments in mitigating and reducing climate risks. These initiatives by private debt funds will result in behavioural change of borrowers if these investment principles are consistently deployed and compliance is mandated by lenders.
While sound legislative or regulatory frameworks, as well as incentive schemes for mitigation of climate risks, may not exist in emerging markets, lenders can certainly develop and deploy environmentally friendly lending principles with an aim to at least achieve carbon neutrality and work towards reduction of carbon emissions within their own investment universe.
How are you working with portfolio companies to mitigate/prevent climate change?
BlueOrchard’s investment policy and procedures require thorough assessment of products and services offered by potential investees. Post investment performance of portfolio companies is subject to regular monitoring throughout the life of investments.
Furthermore, BlueOrchard has developed its own proprietary ESG risk assessment tools and processes under the umbrella of its B Impact management and measurement framework. ESG risk scoring and impact assessment are both required for each investment. If the ESG score is below a certain threshold the loan will not be extended even if the credit risk is deemed acceptable. Such investment opportunity can be revisited only after ESG and sustainability risks contributing to the low score are mitigated or eliminated. This is often achievable when investees are committed to improve their ESG practices and we can support them by a close engagement and capacity building to get there.
To what extent can private debt funds work with sponsors to achieve climate targets in portfolio companies?
Private debt funds could benefit from technical assistance funds that can be deployed in conjunction with debt to investees.
In many cases and in particular with smaller companies, access to credit may not be sufficient to take a meaningful climate action as investees may not have required knowhow, required human resources and/or access to infrastructure or technologies. At times even a small, but properly directed technical assistance funding can make a material difference in outcomes if identified deficiencies in knowledge and access can be corrected.
How do you see this evolving?
With ever-increasing awareness and various pressures to take climate action it is reasonable to expect that both relevant regulation and legislation from the public sector and voluntary positive climate action from the private sector will continue to increase. Private debt funds have an important role to play in inducing positive change. It is also important to see that the pace at which climate related risk mitigation and change to renewable energy sources takes place exceeds population growth and increasing demand for energy and food.