January 16, 2020 - We all saw the increase in media coverage last year of the implications of ESG (Environmental, Social and Governance) factors in the financial markets and that trend has only been accelerating. Indeed, ESG has hit the mainstream. Perhaps nowhere was that as clearly on display as in Larry Fink’s CEO Letter this week. While Blackrock has been a leading voice on the rising importance of ESG factors in investing, Fink’s message this week has certainly gone one step further. He writes that “companies must be deliberate and committed to embracing purpose and serving all stakeholders – your shareholders, customers, employees and the communities where you operate.” Therefore, going forward Blackrock will be placing sustainability at the center of its investment approach. These statements are significant – and also pick up on the sentiments expressed by in the Business Roundtable’s Statement of the Purposes of a Corporation last August.

Fink’s letter also squarely hit a topic that the LSTA has been recently addressing with members – ESG disclosure. “[Blackrock] believes that all investors…need a clearer picture of how companies are managing sustainability-related questions. This data should extend beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data.” This is not a singular view.  About a year ago we started hearing directly from our buyside members that the number of ESG questions they were receiving from end investors was increasing, and consequently, these members were now routinely required to answer to their investors on how ESG factors inform their investment decisions. In fact, ESG is quickly becoming the dominant issue in discussions with investors.  The trouble – perhaps felt more acutely in the private, corporate loan market – is that obtaining reliable ESG information about companies can prove difficult.

To address emerging ESG disclosure issues in the loan market, last year the LSTA convened a working group, including several LSTA Board members, to tackle this issue and see what the association could do to help. To that end, the LSTA has developed a set of standard ESG diligence questions. The questionnaire 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.  In developing this questionnaire, the working group was mindful of several considerations. First, it was decided that the questionnaire should be drafted so that it is applicable to any borrower (in any industry). Second, the questions should be drafted in a manner that encourages responses, particularly for borrowers that may only be beginning to think about how ESG factors impact their businesses. Third, in recognition that a new(ish) practice is being introduced to the market, this initial version has strived to be manageable in scope.  The idea being that as the LSTA can monitor its usage and incorporate the feedback we receive and future developments in ESG in subsequent iterations. The LSTA has published the questionnaire as an exposure draft and we plan to publish the document in final form on February 3, 2020.

In addition to a quest for ESG-related information about the companies to which they lend, investors have pushed to have greater transparency into how ESG factors affect credit ratings of these companies. While acknowledging that analysis of material ESG factors is not new – and in fact has been a part of credit analysis for a long time – the credit rating agencies have heard the request from investors and have worked to make that information more accessible. The LSTA has invited its three credit agency members to outline what that means in a three-part webcast series. The first webcast was presented by S&P Global Ratings and is available here. The second webcast was presented by Moody’s Investor Service and is available here. The third webcast was recently presented by Fitch Ratings (with a summary to follow next week). For further information, please contact Tess Virmani.