March 5, 2020 - It is undeniable that investor focus on ESG has been building in the U.S. leveraged finance market – a trend that seems to be growing with increasing momentum.  The U.S. may be the latest jurisdiction to grapple with what this means for leveraged finance, but certainly not the first. Europe has been at the forefront of the ESG and sustainability movement. Be that as it may, Europe faces the same ESG disclosure challenges as those faced in the U.S. – and those which the LSTA’s ESG Diligence Questionnaire is aimed at mitigating. In a similar vein, the European Leveraged Finance Association (ELFA) recently announced that it is launching an initiative to streamline ESG disclosure and analysis.

In connection with the launch of the initiative, ELFA recently conducted a survey of 100 credit investors on the topic of ESG integration. The results clearly indicate that 1) the ESG integration by managers has truly taken hold and 2) current ESG reporting is inadequate. 72% of institutions surveyed responded that 50-100% of their firm’s HY, leveraged loans and private credit assets under management incorporate ESG considerations.  Respondents indicated that in addition to an internal move to act proactively, ESG integration has been in response to calls from end investors. More than a third of respondents indicated that ESG questions come up in almost every meeting (with another 42% indicating that these questions arise “usually”). Against this backdrop of increased ESG focus, the survey indicated dissatisfaction with current ESG reporting. Nearly half of respondents indicated that they do not feel that their firm has enough ESG information with respect to a company’s creditworthiness. It was also noted that external vendors lack meaningful coverage of high yield issuers and leveraged loan borrowers. To address these issues ELFA is partnering with the LMA to create a working group of market participants to develop a standard set of material ESG disclosure topics on which issuers and borrowers can report publicly.  The ELFA survey and the launch of the initiative is covered in detail in Refinitiv LPC’s February Loanly Planet.

Likewise in the U.S., as previously reported, the LSTA has already responded to increasing investor calls for reporting with its ESG Diligence Questionnaire. The hope is that having this Questionnaire available will be a first step toward introducing an ESG disclosure hygiene in the market. (For further information, Fried Frank recently published a client alert summarizing the ESG disclosure developments in the U.S. and Europe.) 

What the ESG push will mean for the loan market on a long term basis is unknown. In its inaugural monthly ESG newsletter, Fitch Ratings looked at the potential corporate financing risks that the continued ESG focus from asset managers may cause (click here to sign-up to receive the newsletter). That remains to be seen, but the call for ESG disclosure to become regular practice for companies is certainly getting louder. This topic will be explored in a dedicated session, “ESG Integration – The New Era of Responsible Investing,” at the LSTA/LMA Conference in London next Wednesday.

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