New template to give private creditors a ‘bigger voice’ on ESG

An initiative backed by Apollo, Oak Hall Advisors and industry associations aims to harmonise ESG data collection, helping lenders make 'proportionate and reasonable disclosure requests'.

A group of credit industry bodies has launched an ESG reporting template that it hopes will bring harmonisation to the market. The ESG Integrated Disclosure Project (ESG IDP) has released a freely available template – downloadable from the website – designed to be completed by borrowers and shared with lenders.

The lack of ESG data in a standardised, comparable format has long stood in the way of investors’ desire to integrate ESG factors into private markets investment decision-making. Even in private equity, where financial sponsors as majority shareholders exercise greater direct influence over their portfolio companies, there has so far been little consensus about how to report “extra financial” performance on factors such as greenhouse gas emissions, safety of working conditions and workforce diversity. In private credit, where a borrower can have a multitude of lenders, requests to portfolio company management for ESG data can be numerous, heterogenous and burdensome.

The aim of this template, said Jeffrey Cohen, head of ESG and sustainability at Oak Hill Advisors, in this video, is to promote “proportionate and reasonable disclosure requests that are uniform for companies to help prioritise that way in which they communicate ESG factors to lenders”.

The focus is in on financial materiality and the framework uses the SASB standards, said Cohen: “These standards are rooted in ESG factors that are both industry-specific and financially material.”

“The ESG IDP has taken the credit-relevant subset of these industry factors that are most likely to be considered meaningful and useful in the underwriting process,” Cohen said. “The outcome is between three and five factors that have demonstrated – through the evidence provided by the SASB standards – meaningful magnitude impacts in areas such as: cost of revenue, cost of capital, capex, extraordinary expenses, industry divestment risk and R&D.”

The associations behind the new initiative, which covers both the private and broadly syndicated credit markets, span a substantial part of the global credit market. They are: the Alternative Credit Council; the private credit affiliate of the Alternative Investment Management Association; the Loan Syndications and Trading Association; and the UN-supported Principles for Responsible Investment.

Oak Hill Advisors and fellow private credit manager Apollo Global Management are among the founding partners of the initiative and will “spearhead efforts to promote the adoption of the ESG IDP template across the market”, according to the official press release.

There are several ongoing projects to bring standardisation to the reporting of ESG data in private markets. One prominent effort is the ESG Data Convergence Initiative (EDCI) in private equity, whereby a small set of data points are being tracked by 149 general partners. These data points are then fed into a central repository to produce an industry benchmark. Eighty-three limited partners have signed up to his effort.

The new private debt template is endorsed by the EDCI. “The ESG Data Convergence Initiative supports the inclusion of EDCI metrics within the ESG Integrated Disclosure Project template,” said Catherine Isabelle, senior director at PSP Investments and lead of the ECDI’s private debt working group. “We believe that the technology-enabled disclosure of the EDCI metrics within the template will provide better information for both LPs and GPs to drive improvements over time on critical issues.”

Carmen Nuzzo, head of fixed income at the UN PRI, said the template will “allow private creditors to have a bigger voice during the investment process”.

“Its success now requires adoption, which we strongly urge, together with the other ESG IDP supporters,” said Nuzzo.