Stockholm (HedgeNordic) – Asset managers seem to be becoming increasingly frustrated with the lack of standardized and comparable environmental, social, and governance (ESG) data. As sustainable reporting becomes mandatory, measurement is both necessary and inevitable. Quantifying the ESG impact of private market investments is uniquely challenging due to limited and inconsistent ESG data.

In the private credit markets, the responsibility for building consistency in ESG data disclosure has fallen to a group of alternative asset managers and industry bodies in the private and broadly syndicated credit markets. An industry initiative has brought together leading alternative lenders and industry bodies to promote greater harmonization and consistency of disclosure of key ESG indicators by borrowers.

This industry-led initiative is carried on through the ESG Integrated Disclosure Project (ESG IDP), which has designed a template for ESG-related disclosures for both private companies and credit investors. The ESG IDP is led by the Alternative Credit Council, which is the private credit affiliate of the Alternative Investment Management Association (AIMA), as well as the Loan Syndications and Trading Association (LSTA), and the United Nations-supported Principles for Responsible Investment (PRI).

“SMEs and mid-market businesses require a more proportionate approach to ESG disclosure than large public corporates,” argues Jiří Król, Global Head of the Alternative Credit Council. “By simplifying and harmonising existing market practices, this new industry-led initiative will reduce the burden on borrowers while improving the materiality and comparability of ESG disclosure for investors.”

“Investors and regulators have made it clear that the status quo is untenable, and the credit market recognizes the need for harmonized ESG reporting.”

The entire ESG ecosystem has been moving towards greater harmonization on the topic of disclosure, and the private credit space is no exception. “Investors and regulators have made it clear that the status quo is untenable, and the credit market recognizes the need for harmonized ESG reporting,” confirms Tess Virmani, Executive Vice President and Head of ESG at LSTA. “Harmonization is the critical next step in improving the availability of consistent, reliable ESG information and furthering the responsible growth of ESG in credit markets.”

Overlapping Standards and Frameworks

The increasing interest in ESG among investors and asset managers alike has similarly intensified regulators’ focus on the ESG space. The number of ESG disclosure standards and frameworks continues to grow, seemingly complicating the journey toward achieving a globally-recognized set of standards and a unifiedframework. The PRI, one of the world’s leading proponents of responsible investment, has created an ESG Factor Map that outlines substantial overlapping of many competing ESG standards and frameworks. According to Carmen Nuzzo from the PRI, the ESG Integrated Disclosure Project represents one more step towards achieving harmonization in the private credit space.

“Taking the cue from the PRI’s ESG Factor Map, which pointed out the substantial overlapping of many competing ESG standards and frameworks, this new template will allow private creditors to have a ‘bigger voice’ during the investment process,” says Carmen Nuzzo, Head of Fixed Income at the PRI. “It will streamline ESG information collection, whilst providing opportunities for meaningful conversations with borrowers,” she continues. “Its success now requires adoption, which we strongly urge, together with the other ESG IDP supporters.”

The Asset Managers

The ESG Integrated Disclosure Project (ESG IDP) has also brought together leading lenders in the private and syndicated credit markets to promote this greater harmonization and consistency of ESG indicators. Founding partners of this initiative include Apollo Global Management and Oak Hill Advisors who, along with the ESG IDP’s Executive Committee, will spearhead efforts to promote the adoption of the ESG IDP template across the market.

“The ESG IDP represents an important step in addressing ongoing ESG disclosure challenges in the private credit markets,” argues Michael Kashani, Head of ESG Credit at Apollo and the inaugural Chair of the ESG IDP. “We believe that this harmonized approach will increase the availability of ESG disclosure for both LPs and GPs.”

“The ESG IDP represents an important step in addressing ongoing ESG disclosure challenges in the private credit markets.”

Jeff Cohen of Oak Hill Advisors goes on to emphasize that “the ESG IDP applies a credit lens to the globally-recognized SASB standards to prioritize the subset of ESG factors most likely to be core to a company’s operations and, as a result, beneficial to lender underwriting.” According to Cohen, who is Head of ESG & Sustainability at Oak Hill Advisors and the inaugural Vice Chair of the project, “the ESG IDP aligns with sponsor interests and addresses questionnaire fatigue felt by companies.”

The ESG IDP is also supported by a coalition of market stakeholders including CDP, the ESG Data Convergence Initiative, and the Loan Market Association. “Reliable and accurate ESG information is vital in order for investors to channel capital into sustainable activities and companies,” concludes Gemma Lawrence-Pardew, Head of Sustainability, Director – Legal, Loan Market Association. “The ESG Integrated Disclosure Project provides a clear and transparent approach for the disclosure of ESG information, and provides clarity to companies regarding the information investors need.”

This article features in HedgeNordic’s “ESG & Alternative Investments” publication.