November 10, 2022 - The LSTA is thrilled to announce today’s launch of the ESG Integrated Disclosure Project (ESG IDP). The ESG IDP represents a year-long industry collaboration to harmonize ESG reporting to address the key challenges in the private credit and syndicated loan markets. The Template developed by the ESG IDP establishes a baseline of ESG information on borrowers that covers both qualitative and quantitative data on those ESG factors that lenders consider most material to them. We encourage you to familiarize yourself with this initiative through its website – www.esgidp.org – and check out the FAQs and Resources available there.

I want to warmly thank those LSTA members who dedicated hours of their time, insights and patience to bringing this Project to life. Many of these firms are acknowledged here. I also would like to acknowledge the contributions of my Project colleagues Nicholas Smith of the Alternative Credit Council (ACC) and Carmen Nuzzo of the UN-supported Principles for Responsible Investment (PRI) for their tireless work.

Who is the ESG IDP?
The ESG IDP is a industry effort founded by the ACC, the private credit affiliate of AIMA, the PRI and LSTA together with leading alternative asset managers. It is further supported by industry organizations such as CDP, the leading framework for corporate disclosure on environmental impact, the Loan Market Association and ESG Data Convergence Initiative (EDCI), the general partner-limited partner initiative aimed at standardizing and collecting ESG data in private equity.

Going forward the ESG IDP will be governed by its Secretariat (ACC, LSTA and PRI) and its Executive Committee of committed alternative asset managers including an EDCI representative. We are delighted that Michael Kashani, Head of ESG Credit at Apollo Global Management, and Jeffrey Cohen, Managing Director and Head of ESG & Sustainability at Oak Hill Advisors, have accepted the inaugural roles of Chair and Vice Chair of the Executive Committee, respectively. We thank them for their leadership.

Why was an initiative like the ESG IDP needed?
Many borrowers in the loan market are privately-owned companies on whom there is little publicly available information. Where third party ESG data providers provide broad coverage of public companies, that is not the case for borrowers in the loan market. Therefore, ESG information needs to be specifically requested by lenders as part of diligence materials. To address that first issue, the LSTA published its ESG Due Diligence Questionnaire – Borrower (DDQ). Despite the progress sparked by the LSTA’s DDQ and its subsequent uptake, particularly in private credit transactions, ESG reporting by borrowers in the private credit and syndicated loan markets has not advanced as quickly as necessary to meet growing investor and regulatory demands. Borrowers also are frustrated by a seemingly opaque, random and inefficient reporting process which looks for specialized information, i.e., ESG information, when they come to market – a time where resources are constrained by the pressure (and often accelerated time table) of closing a loan.

How will the ESG IDP advance ESG reporting?
The ESG IDP addresses the interests and needs of all loan market stakeholders through industry-wide collaboration. Recognizing that borrowers likely wish to keep their ESG reporting, like financial reporting, limited to those parties that are its lenders, the ESG IDP offers its Template which is completed and shared by the borrower only with transaction parties. The ESG IDP does not collect any data. Furthermore, harmonizing lender requests for ESG information and identifying those ESG factors which are most material to lenders (and those ESG factors that will become increasingly material) outlines clear, consistent expectations for the borrower community. Borrowers can then effectively dedicate resources to developing their ESG reporting capacity. Finally, ESG reporting by borrowers through a standardized template will allow for lenders to receive more consistent, comparable data.

Who benefits from use of the ESG IDP Template?
Everyone!

1. For investors: the ESG IDP template will improve the consistency of disclosure to investors, enhancing their ability to identify industry-specific ESG risks in their credit portfolios and compare data across alternative asset managers more consistently.
2. For borrowers: the ESG IDP template will provide borrowers with greater certainty on the ESG indicators that are most relevant to lenders. This will allow borrowers to concentrate on these disclosures rather respond to a multitude of similar questionnaires.
3. For credit fund managers: the ESG IDP template will support the ability of credit fund managers to engage with borrowers and issuers on disclosure as well as develop efficient investor reporting processes.

How does the ESG IDP Template get used?
Lenders may request the completion of the Template as part of their diligence practices at the pre-investment/loan origination stage.  The completed Template will be shared via posting to the relevant data room, Dropbox or other means for sharing diligence materials.    While it is expected that borrowers will share the completed Template during the diligence phase of loan origination, borrowers may – and are encouraged to – choose to prepare the Template in advance of coming to the credit markets. This will obviate the need to dedicate limited resources to completing the Template at deal time.

Borrowers are further encouraged to use this Template as a guide as they plan and develop their reporting capacity.  One of the unique aspects of the Template is the sequencing of questions based on investors’ current and future expectations. The Template identifies core general questions (i.e., current investor expectations), optional general questions and industry-specific questions (i.e., aspirational investor expectations). Borrowers can complete as much of the Template as they can with a view to expanding their reporting capacity with time. What does this mean for the LSTA’s ESG Due Diligence Questionnaire – Borrower?
The LSTA sees the launch of the ESG IDP to represent the next evolution in ESG reporting for the private credit and syndicated loan markets. Therefore, the LSTA squarely supports use of the ESG IDP’s Template and the LSTA’s “ESG Due Diligence Questionnaire – Borrower” will sunset and no longer be available after the end of 2022. For further questions, please contact Tess Virmani.

For additional information, please refer to the ESG IDP’s press release here, Bloomberg’s coverage here and www.esgidp.org.