February 5, 2020 - Over the last twelve months, the LSTA has focused on the impact of ESG (environmental, social and governance) considerations on the corporate loan market. Generally, it is known that companies and their investors across the financial markets are increasingly focused on how ESG factors impact their businesses. This trend is equally true in the loan market. For many investors and lenders, being aware of the ESG risks a company faces – and the way in which these risks are being addressed – is 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 fact, according to a 2018 UNPRI report, 86% of asset owners are considering ESG/active ownership when selecting asset managers – a 31% increase from 2017 – and 78% when monitoring their asset managers – a 25% increase YoY. Moreover, over 80% of investors have sustainable, impact or ESG policies.
The LSTA has responded to the emerging ESG issues for the loan market primarily in two ways. The first has been the development and launch of the LSTA’s inaugural ESG Diligence Questionnaire. The second has been the offering of a webcast series dedicated to the impact of ESG in credit ratings. These initiatives, discussed in turn below, are the start of what looks set to be a growing and evolving area of focus for the LSTA.
ESG Diligence Questionnaire
As noted above, the need for ESG-related information about borrowers is on the rise – a trend that looks likely to grow. While obtaining reliable ESG information about companies is something investors struggle with across asset classes, the fact that many borrowers in the loan market are not public companies exacerbates the challenge. For this reason, at the request of, and in collaboration with, buyside members, the LSTA developed the ESG Diligence Questionnaire. The Questionnaire is designed to be completed by a 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. In developing the Questionnaire, the LSTA was mindful of three main considerations: 1) it should be applicable to any borrower in any industry; 2) recognizing that many companies are just beginning to conduct an “ESG review” of their businesses, a borrower should be encouraged to share any early concepts that it has identified; and 3) this initial version should be manageable in scope as this is a nascent diligence request. The LSTA believes the Questionnaire offers borrowers a streamlined method to communicate their ESG story to their lenders.
The LSTA intends to monitor usage of the Questionnaire and sees the evolution of the Questionnaire as an iterative process. We welcome member feedback on the Questionnaire going forward. The LSTA remains deeply grateful to the ESG Working Group that worked diligently to bring the Questionnaire to life. It is an important step forward for our market and the LSTA looks forward to working with our membership on this topic as ESG continues to evolve.
Click here for the ESG Diligence Questionnaire
Click here for the accompanying FAQs
Click here for the press release
ESG and Credit Ratings
It is acknowledged that ESG factors have long been a part of traditional credit analysis, but the time has come to have transparency into how exactly those ESG factors are embedded in credit ratings. Indeed, investors have been calling on credit rating agencies to systematically incorporate ESG characteristics into their issuer ratings. S&P, Moody’s and Fitch have all worked to give investors visibility into how ESG plays into credit ratings, but each firm has approached the task differently. The LSTA has hosted each of these three credit rating agencies to explain their process and ESG tools. For summaries and replays of these webcasts, see these links: Fitch Ratings, Moody’s Investors Service and S&P Global Ratings (S&P also describes their new ESG Evaluation which is a separate, holistic ESG assessment of an issuer/borrower). For more information on the LSTA’s ESG initiative, please contact Tess Virmani.