ESG Integration in Global Credit
The field of Environmental, Social, and Governance (ESG) has long been a focus for equity markets, but in the past few years we’ve seen its growing importance for credit markets, alongside a heightened focus on ESG from other credit market participants, such as management teams and financial sponsors.
In our Global Credit business, we use differentiated data sets that provide us with the information needed to make better decisions—we have found that ESG data are increasingly one of those differentiated tools. However, credit presents unique challenges for good ESG integration. When compared to private equity, credit frequently has higher deal volume, shorter diligence windows, less access to management and data, and fewer high-quality ESG tools to analyze investments. Based on the foregoing, we knew we needed a systematic approach that could integrate into our fundamental credit investment processes, and which would help us efficiently and effectively identify and analyze material ESG issues for a given investment.
Led by a cross-platform ESG working group, we rigorously surveyed the field of available ESG resources for our Global Credit platform, but couldn’t find existing tools fit for our purposes. Over the course of 2020, we built a proprietary ESG materiality analysis tool using the Sustainability Accounting Standards Board (SASB) standards, which helps us focus in on an industry and sector’s most material ESG issues. Launched across most of our Global Credit platform in January 2021, the tool also integrates several country-level ESG risk data sets for geographies where an asset has major operations or supply chains. This gives additional color on issues such as corruption, anti-money laundering, and the physical risks of climate change.
Credit research analysts use our tool as an input to their fundamental diligence to help efficiently understand a company’s or asset’s exposure to material ESG risks, as well as determine how well risks are managed. Using the SASB data and our own proprietary inputs, the tool also guides credit research analysts through potential engagement topics and questions and offers tailored metrics tied to material ESG issues. As of January 2021, this ESG materiality analysis is performed for each new investment our Global Credit Investment Committee considers, and a summary of the ESG analysis is included in the Investment Committee memorandums1. We constantly refine our proprietary tool as we gather feedback from our investment professionals and incorporate new data sets and emerging thought leadership.
While we have traditionally evaluated many of these risks during our diligence process, this new proactive and systematic approach helps pull to the forefront of the investment process some of the less obvious, but potentially significant risk factors for a new investment. Integrating ESG data and analysis gives us the ability to properly price deals and ensure we are compensated as investors for the associated risks, and in certain cases determine not to make an investment. We believe this approach, paired with our dedicated internal ESG expertise, provides us with a consistent and advantaged footing to assess, monitor, and manage these highly relevant risks, and ultimately make better investment decisions.