February 5, 2021 - The LSTA recently hosted a webcast on “The Dawn of a New Era for ESG” moderated by Arleen Nand (Greenberg Traurig) and presented by Marilyn Ceci (JPM), Sabrina Fox (ELFA), Charlotte Peyraud (CACIB) and the LSTA’s Tess Virmani. A central theme of the presentation was the need for reliable ESG information on borrowers in the loan market. With US SIF tracking $16.6 trillion in US-domiciled assets at the beginning of 2020 held by firms that incorporate ESG criteria in their investment analysis and portfolio selection, the market need for ESG data is readily apparent. The panel further pointed out that the Biden administration has been clear that ESG disclosure is a key point of focus – and recent SEC picks underscore that message – so regulatory pressure will soon join the chorus of market voices. Both in Europe and the US the need for increased and more consistent ESG disclosure is shared by investors. Private markets undoubtedly present unique challenges when it comes to ESG disclosure, but trade associations and loan market participants have been collaborating to offer disclosure tools. Market participants just need to use them! The LSTA offers an ESG Diligence Questionnaire (“DDQ”) to be completed by borrowers. It is recommended that the LSTA’s DDQ is completed at the diligence stage of any capital transaction and that completed questionnaire should be posted to the public side of the data room for the benefit of all prospective lenders. (This is not to say that the DDQ cannot be used in other contexts, but it should be noted that the DDQ solicits responses at a single point in time.) Further information can be found here. Despite the sophistication of Europe with respect to ESG, similar efforts are underway to improve ESG disclosure. The European Leveraged Finance Association (ELFA) is paving the way for consistent ESG disclosures by levfin borrowers/issuers. ELFA published an industry-agnostic ESG Disclosure Fact Sheet and is in the process of publishing industry-specific fact sheets through a collaborative process with the PRI. Further information can be found here.
A standard ESG disclosure hygiene will also allow for continued innovations in sustainable finance and ESG products. The panel highlighted the many sustainability-oriented structures that have emerged in fixed income. Green bonds, sustainability bonds and social bonds, which grew exponentially during the pandemic, are now well established and likely to continue to break volume records. Those structures are supported by the frameworks maintained by the ICMA. Sustainable finance structures have also become popular in the global loan market – particularly sustainability linked loans which have now crossed over to the bond market. The LSTA, together with the LMA and APLMA, supports these structures with their own growing set of loan frameworks and guidance documents. Click here for the webcast slides and the replay.
