ESG integration remains a standard component of private credit investing, particularly in Europe and among Nordic institutional allocators, but its momentum has slowed. Conversations with Nordic institutional investors suggest that while ESG considerations have receded in priority behind return objectives, they remain deeply embedded in the “credit story” rather than serving as a separate overlay.
Finding the Middle Ground
Kenneth Norling, recently appointed Chief Investment Officer at Swedish pension provider SH Pension, observes that the overall attitudes toward ESG have shifted markedly in recent years. “We have come from a period when ESG considerations were top of mind across the industry. Today the term ESG is receiving renewed scrutiny, even though the commitment to sustainability and the ongoing green transition remains strong,” he notes. “The focus on ESG has swung from one extreme to the other, but going forward, we need to find a balanced middle ground,” says Norling. “Most people agree it remains crucial, it’s hard to look away from that.”
That balance is particularly relevant for private markets, including private credit, where transparency and ESG scrutiny have traditionally lagged behind public markets. “Even though private markets have not been as closely scrutinized as public markets, they will be going forward,” says Norling. “From our point of view, it makes no difference, whether we invest in public or private markets, investments should be sustainable.”
“From our point of view, it makes no difference, whether we invest in public or private markets, investments should be sustainable.”
Kenneth Norling, CIO at SH Pension.
Assessing ESG factors in private markets can be more challenging due to limited visibility into underlying holdings and differing levels of ambition among managers. Despite this, SH Pension aims to apply the same sustainability principles across its entire portfolio. “The same look-through approach and principles we use in the liquid space, we strive to apply in the private market space as well,” Norling emphasizes. “Both parts of the portfolio should align at the end, sustainability is a key consideration throughout.”
ESG as Part of Credit Underwriting
Anders Ellegaard, Head of Fixed Income at Industriens Pension, points out that ESG has always been embedded in credit investing, even before the term itself became mainstream. “I started my career at Standard & Poor’s in 2004, and already then we always assessed a company’s ability and willingness to meet its obligations, with ability including assessing the risk of stranded assets risk, pollution or health and safety related insurance claims, and willingness being driven by corporate governance among others,” recalls Ellegaard.
“It has always been part of credit underwriting, long before it was called ESG.” From his perspective, understanding these factors is essential to sound credit analysis. “When we want private credit managers to understand credit, they also need to understand what can go wrong and ESG is part of that.”
“In that sense, ESG integration is already embedded in much of what the asset class represents.”
Anders Ellegaard, Head of Fixed Income at Industriens Pension.
Looking at how ESG considerations manifest within private credit, Ellegaard notes that sustainability is often inherent to the asset class itself. “While some legacy infrastructure assets may not be good for the environment, the vast majority of sponsor-backed, asset-light portfolios tend to have a low carbon footprint,” he explains. “In that sense, ESG integration is already embedded in much of what the asset class represents.” ESG aspects are also naturally included in all investment decisions across asset classes at Industriens Pension, he adds.
Europe and the U.S.: Diverging ESG Paths
While the U.S. remains more innovative and dynamic in terms of product development, Europe has taken a clear lead in embedding ESG principles into regulation, corporate governance, and capital allocation. Under the current U.S. administration, the divide has widened further, as growing political resistance has amplified the backlash against ESG initiatives and slowed their broader adoption.
Petri Lehtola, Lead Portfolio Manager for Private Credit at OP Financial Group, observes this divergence firsthand. “In Europe, ESG integration in private credit has become quite mainstream. Many managers are already doing everything you could reasonably expect from them,” says Lehtola. “They are highly aware of these aspects and, in some cases, even include ESG-linked provisions in their loan pricing, so that if a company improves, for instance, on environmental metrics, it can benefit from a lower margin.”
“In Europe, ESG integration in private credit has become quite mainstream. In the U.S., it’s more difficult, especially under the current administration.”
Petri Lehtola, Senior Portfolio Manager at OP Financial Group.
Across the Atlantic, however, the situation looks quite different. “In the U.S., it’s more difficult, especially under the current administration,” notes Lehtola. “The trend has moved in the opposite direction. What we can typically expect from U.S. managers is compliance with the minimum ESG criteria rather than meaningful progress, as they must cater to both their local investor base and their European clients.”
Anders Ellegaard of Industriens Pension views this development with concern. “If we find that a manager doesn’t respect basic ESG criteria or avoids addressing it out of fear of the U.S. political climate, we don’t believe they would be the right fund for us,” he cautions. “That would be a matter of concern for us.”
From Idealism to Pragmatism
While ESG’s prominence in private credit investing has moderated in recent years, it remains deeply embedded in the underwriting and credit assessment processes of institutional investors. Among Nordic allocators, ESG is no longer viewed as a marketing label or a regulatory checkbox, but as an integral part of prudent risk management and long-term value creation.
The conversations suggest that the pendulum has swung from idealism toward pragmatism: ESG is no longer prioritized above returns, yet it is firmly recognized as essential to sustaining them. As regulatory expectations tighten and transparency in private markets improves, both investors and managers appear to be converging toward a more balanced, enduring view: sustainability is not a separate agenda, but an intrinsic element of credit quality and resilience.
