Private Finance ESG Monthly – 21 October 2021

21 October 2021

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ESG Private Capital Market Overview

ESG across Alternative Investments has grown in the past 10 years and by 2020 stood at US$525bn, accounting for c.42% of all committed capital across alternative investments according to Preqin-Pro. Private equity continues to dominate with a balanced spread across infrastructure, real estate, and private debt; making up the balance, natural resource is limited and there is a small upward trend for venture capital. ESG Private Capital funds closing in 2020 were c.3 times larger on average than non-ESG private funds. This is partially attributed to the fact that the largest alternative managers such as Blackstone, Apollo Group Management and Carlyle have put ESG mandates across the majority of their funds.

ESG Committed Private Capital Assets Under Management (AuM)

Source: Preqin-Pro

ESG Syndicated Lending Market Overview

Sustainable lending across syndicates totalled €247bn during the first half of 2021, the highest half year on record. Q2 of 2021 registered an increase of 70% compared to the first quarter of 2021, which provided further evidence for the growth in appeal of sustainable lending. In total, there were 383 sustainability-linked loans and 100 green loans recorded in H2 2021, of which 121 were private finance related. Europe and North America remain the largest market for sustainable lending accounting for 85% of the total activity since Q1 2020. Green ‘use of proceeds’ loans have also been more prominent outside of Europe and North America. North Asia, in particular, has had a strong preference for these loans, accounting for 80% of all sustainable lending activity.

ESG Syndicated Lending

Source: Dealogic, 20/09/21

ESG Deal Activity

Sustainable financing activity in the Financial Institution (FI) space has largely been driven by Europe and the Americas in the past couple of months. The largest Key Performance Indicator (KPI) linked facility agreed was Prudential in North America for $4bn (€3.4bn) – a refinancing of a prior facility – that linked the borrowing costs to the company’s greenhouse gas (GHG) emissions targets and initiatives to increase the diversity of senior leaders. ESG activity has also been growing outside of the loan space with Deutsche Bank issuing two variations of repo in August and September – one linked the repo rate with ESG KPIs, whilst the other allocated cash proceeds from the transaction to green activities. Securitisation activity included BPCE’s inaugural green French prime Residential Mortgage-Backed Securities (RMBS) in September. NatWest also led and coordinated the €2.3bn KPI-linked umbrella facility for Carlyle Europe in August, which incorporated a range of ESG KPIs aligned to the execution of their sustainability strategy across their fund range.

ESG Pulse – Industry Sentiment

Source: 2021 ESG Report - LGT Capital Partners, Preqin-Pro
Source: PwC Global PE Responsible Investment Survey 2021
Source: PwC Global PE Responsible Investment Survey 2021, 2021 ESG Report – LGT Capital Partners, EcoVadis, Dealogic
Source: 2021 ESG Report – LGT Capital Partners, New York Life Investment

Latest Climate and ESG Announcements

  • Benefit Street Partners (Franklin Templeton owned) and Malk Partners. Published a white paper on ESG integration of the private credit investment process. Due to the limited level of control of private debt managers, most ESG strategies seek to manage ESG risk downside instead of promoting ESG characteristics. Read more.
  • Amundi. Amundi launched in September a private debt vehicle with €650 million of funding that will target impact investments. The Amundi Senior Impact Debt IV will invest in private senior corporate debt, in mid-cap French and wider European firms that have a “proven pre-Covid-19 performance and resilience”. Read more.
  • Mirova. Mirova, an affiliate of Natixis Investment Manager, has launched an impact-focused private equity fund, seeking to raise €300m from investors. The vehicle is expected to have a first close early next year and a final close in December 2022. The strategy will allocate approximately 80% of its capital to companies in Europe in five key sectors; including agritech and smart mobility. Read more.
  • Nordea Asset Management (NAM). NAM, who is a minority shareholder in the fund manager Trill Impact – supplying it with analysis and other services – has announced it has raised €900m for Trill Impact’s first fund. Read more.

Government and Regulatory Updates

2 August, EU. Delegated legislation, that integrates sustainability into UCITS Directive, AIFMD, MiFID II (Regulation and Directive), Solvency II and IDD, were published in the Official Journal of the EU and will apply in 2022. November (MiFID II) and August (the rest).

2 August, Germany. German Federal Financial Supervisory Authority (BaFin) published a draft guideline for sustainable investment funds for public consultation. The guideline sets out how certain German investment funds must be structured so that they qualify as “sustainable” or can be marketed as “sustainable” in Germany. The minimum investment ratio in sustainable assets set out in the draft is 75 percent. Read more.

3 August, EU. The European Commission’s Platform on Sustainable Finance published for consultation its preliminary recommendations for technical screening criteria, under the EU taxonomy for the four environmental objectives; water, pollution prevention, biodiversity, circular economy. Read more.

8 September, EU. EFRAG (European Financial Reporting Advisory Group) published a prototype of European climate related disclosures (under the new EU Corporate Sustainability Reporting Directive) as an intermediary milestone towards its final proposal to be delivered to the European Commission mid-2022. Read more.

15-20 September, Global. The Basel Committee discussed climate-related financial risks, as it aims to assess whether the current Basel framework adequately mitigates such risks, and will consult on the next steps later this year. Read more.

20 September, UK. The Competition and Markets Authority (CMA) has warned businesses that they have until the New Year to make sure their environmental claims comply with the consumer law. To help businesses understand how to communicate their green credentials, while reducing the risk of misleading consumers, the CMA has published the Green Claims Code. The CMA will carry out a full review of misleading green claims, both on and offline (e.g. claims made in store or on labelling), at the start of 2022. CMA’s powers extend to financial services too. Read more.

20 September, EU. The European Court of Auditors issued a report on sustainable finance which makes a number of recommendations for the European Commission. The European then published a response. Read more.

22 September, EU: The European Central Bank (ECB) has published the results of its economy-wide climate stress test. The results show that firms and banks clearly benefit from adopting green policies early on, to foster the transition to a zero-carbon economy. The exercise also reveals that the impact of climate risk is concentrated in certain regions and sectors of the euro area. In particular, firms located in regions most exposed to physical risk could face very severe and frequent natural disasters, which would, in turn, affect their creditworthiness. Read more.

ESG Data & Market initiatives

  • Science Based Targets initiative (SBTi) has launched a public consultation to help private equity firms to take a science-based approach to reducing greenhouse gas emissions. The draft guidance outlines best practice in science-based target (SBT) setting and providing methods, criteria, guidance and tools to reduce the barriers to adoption and implementation. Read more.
  • International Capital Market Association (ICMA)'s European Repo and Collateral Council (ERCC) publishes summary report following market consultation on the role of repo in green and sustainable finance. Having the choice between Green collateral, Green Use of Proceed and KPI-linked repo, the majority of responses agreed that “green collateral repo” is relevant to them and that it is the most straightforward concept to implement. Nevertheless, “greenwashing” remains the main concern for market participants. Read more.
  • 2° Investing has launched a new project to develop a climate database on SMEs. Operationally, the project will develop an open-source, climate-related database covering at least 200,000 SMEs across the European Union by 2022. The aim is to encompass at least half of all European mid-sized companies, expanding to 1 million SMEs across Europe as well as 1 million SMEs internationally, by the end of the project (subject to further funding). The three-year, €1 million project is funded by, amongst others, the EU LIFE Programme and supported by several major international banks, including ING, Société Générale, and BBVA. The data developed by this project will also inform a stress testing exercise by a large G20 central bank in 2022. Read more.
  • The GRESB ESG benchmarks expand in 2021 to cover $6.4 trillion of assets under management. Participation in this year’s GRESB assessments grew by 26% to 2,227 real estate and infrastructure entities. Read more.
  • International Swaps and Derivatives Association (ISDA) published two white papers. ISDA published two papers, one that provided guidelines on KPI’s for sustainability-linked derivatives (SLD) and another that covered accounting analysis for ESG-related Transactions, and the Impact on Derivatives under US GAAP. Read more. Guidelines and Accounting analysis.
  • The Global Financial Markets Association (GFMA) Global FX Division published a white paper on “ESG and FX”. The white paper addresses the relevance of the FX Global Code and in embedding ESG factors into currency strategy and FX products offerings. Read more.
  • ICMA published a summary on the EU sustainability disclosure regime. The summary provides an overview of various and complex ESG disclosure requirements introduced in the EU over the last few years, how they interact with each other and what they mean for as issuers and investors. Read more.

Upcoming Webinars

  • Private Equity Wire will hold its first Global ESG Live. A one-day event, on 2 December, dedicated to the evolving ESG landscape. Register here.
  • GRESB Infrastructure will provide insights into the ESG performance of infrastructure portfolios in EMEA on 25 October. Register here.

For those looking to discuss any of the above further, please reach out to our authors:

*For any unfamiliar terms used within this article please refer to our Insights glossary.

ESG
ESG/Sustainability


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