Private credit is beginning its ESG data convergence journey

Last week, the ESG Integrated Disclosure Project announced that credit rating agencies KBRA, Moody’s Investors Service and S&P Global Ratings had become the latest market actors to join the initiative’s executive committee.

It is a welcome development. Private credit has been behind the curve on ESG integration compared with other asset classes. The ESG IDP is jointly led by the Alternative Credit Council, the Loan Syndications and Trading Association, and the Principles for Responsible Investment, and seeks to harmonise ESG disclosures by providing a freely available template that can be completed by borrowers and shared with lenders across both the public and private lending markets.

Launched last year, publishing the template was the easy part, Nick Smith, managing director for private credit at the ACC, told us earlier this week. Getting traction in the market is another matter entirely. “The hard work starts now highlighting the different use cases of the template and supporting users,” as he put it.

There are reasons to believe that the ESG IDP has a good chance of becoming a widely accepted standard. For one thing, its founders have made a conscious effort not to rock the boat by coming up with new ideas. “We are not creating new standards. We’re including existing standards like TCFD,” Michael Kashani, head of ESG credit at Apollo, one of ESG IDP’s founding partners, told affiliate title New Private Markets.

The framework takes cues from the ESG Data Convergence Project, a private equity-focused initiative that has already gathered some momentum. An ESG DCP representative even sits on ESG IDP’s executive committee.

It has also already gained the support of many of the biggest private credit lenders. Apollo and Oak Hill were founding members, but the executive committee now includes the likes of BlackRock, Blackstone and KKR. The newly won support of the rating agencies is another step towards ubiquity.

That said, it is still difficult to assess how much momentum the initiative has built up. The template has been downloaded over 3,700 times, according to Smith, but ESG IDP does not currently publish a list of supporters. There are plans to do so in the future.

Kashani identified three potential uses for the template: core diligence, portfolio management and reporting to LPs or regulators. Users are free to choose whether to implement the framework in all three areas or some of them. That flexibility will no doubt increase overall adoption, but if harmonisation is the goal, consistency is key.

Private credit still has a long way to go before it arrives at a standard approach to ESG disclosure. ESG IDP looks like it is taking the industry in the right direction.

Write to the author at charles.a@pei.group