Why ESG has to go beyond banner waving

Responsible investing goes to the heart of the single most important metric in the debt industry: risk.

Does responsible investing have something of an image problem? Think of environmental, social and governance issues and it is difficult not to picture someone waving a ‘save the planet’ banner and talking freely about their social conscience.

Boxes are ticked, metrics are measured, slogans are delivered. But what has really been accomplished? Not necessarily very much.

The fascinating thing about Private Debt Investor’s first-ever Responsible Investing report, which is published next week, is just how far removed this banner-waving motif is from those fund managers who give ESG the attention it deserves.

Forget the notion that responsible investing is just some sort of Green Party idea of what finance would be like in the ideal world. For ESG, at its roots, concerns some very real credit issues: loan documentation, due diligence, regulatory requirements, covenant stipulations… the list goes on and on.

And, as contributors to the report are quick to point out, responsible investing goes to the heart of the single most important metric in the debt industry: risk.

Whether it’s the risk that climate change poses to portfolios companies, the reputational risks caused by poor governance or those less easy to quantify issues like diversity and how this affects the bottom line (a lot!), there’s growing awareness that each of the individual components of ESG needs to be embedded within the credit selection process.

Covid-19 has, of course, only intensified the debate. “Covid has changed the way ESG is viewed by investors and managers, highlighting real vulnerabilities and social inequalities,” says Coralie De Maesschalck, head of ESG at fund manager Kartesia.

Or as Sonia Rocher, managing director in BlackRock’s European private credit group, argues, the pandemic has highlighted the vulnerability of a range of areas in healthcare and global supply chains. “It’s clear that the path to economic recovery will have to take full account of the ‘S’ for social in ESG,” she says. “There will be opportunities, for example, to invest in companies with sustainable business models using sup­pliers that are closer to home and cre­ate quality jobs. This will help drive the recovery.”

There remains some healthy scepticism about whether ESG and the impact investing strategies it has spawned can live up to some of the more overblown claims. But even the most hardened cynic would have to conclude that this investment movement is forcing the debt industry to reappraise the way it does business. Vive la revolution responsable!

Write to the author at Graeme.k@peimedia.com