An opaque segment of the credit industry — the $1.2 trillion leveraged loan market — is the latest to see the light on sustainability investing.
As lenders determine where to put money, buyers of loans to high-risk borrowers are seeking information about how the companies perform against environmental, social and governance measurements, according to the Loan Syndications and Trading Association, the industry’s main trade group.
The buyers’ interest led the industry group to develop a questionnaire for potential corporate borrowers that covers topics such as whether the company has any ESG-related operational issues and how much ESG factors into evaluating management performance and compensation. The questionnaire was released Monday.
The trade group’s move trails steps by investors, banks and others in the financial world to take into account sustainability investing. Bloomberg Law noted, for instance, that third-party assessments of corporate ESG efforts have become normal in the bond and equity markets.
“ESG criteria are becoming increasingly relevant in the corporate loan market,” Tess Virmani, who oversees ESG initiatives at the LSTA, said in the statement. “More and more institutional investors routinely require answers from investment managers to whom they allocate capital.”
The questionnaire will be voluntary, but asset managers who helped develop it — such as BlackRock, CIFC Asset Management, Oak Hill Advisors and Voya Investment Management — said it’s a necessary step. BlackRock recently pledged that sustainability will be a guiding principle when it invests client money. The others touted the importance of ESG considerations in the statement.
- Even in Europe, which has led the global charge in ESG standards, their use in the leveraged loan market is in its infancy, Reuters reported last year. But debt investors and limited partners in their funds are increasingly pressuring private-equity firms to disclose sustainability factors to drive investment decisions and manage risk.
- At the World Economic Forum in Davos, Switzerland, last month, the leaders of many of the world’s largest companies advocated the development of a core set of ESG metrics and disclosures.