August 13, 2020 - It is undeniable that companies and their investors across the financial markets, including the loan market, are increasingly focused on how environmental, social and governance (ESG) factors impact their businesses. For many investors and lenders, being aware of the ESG risks that a company faces – and the way in which these risks are being addressed – is now critical to understanding a company’s broader risk profile. Moreover, end investors are regularly requiring asset managers to illustrate how ESG factors inform their investment decisions.

In response to this trend, the LSTA published an ESG Diligence Questionnaire in February aimed at soliciting ESG information from a borrower. We are delighted to hear reports that the Questionnaire has indeed been used in a number of transactions since February and we look forward to this diligence practice continuing to take hold. The LSTA’s Questionnaire offers borrowers a streamlined method to communicate their ESG story to lenders and is designed to be completed by the borrower during the due diligence phase of the loan origination process. If completed, it is intended that the responses be posted to the relevant public side data room for review by prospective lenders.

It is clear that the calls for ESG information will only grow more numerous (and insistent) and this is certainly a space to watch. It is also important to note that the COVID-19 crisis, while being temporarily disruptive, may prove to be a longer term catalyst for further ESG integration in investment decisions.  A recent Moody’s research report remarks that the coronavirus crisis will accelerate credit-relevant ESG trends and meaningful management of ESG risks will prove to be a key differentiator. Companies are recognizing that there are links between a company’s reputation and the way it addresses ESG risk factors generally, with a new acknowledgement by governmental, companies and investors of the relevance of social considerations. We encourage members to educate themselves about the Questionnaire and we have recently updated our set of Frequently Asked Questions to support that education process.

For more information, please contact Tess Virmani.

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