ESG in Private Credit: Where are the High Potential Areas?

Danesmead ESG moderated two roundtables on ESG at the PE Wire Private Credit European Summit 2024, joined by two expert speakers. The focus was on ESG opportunities and challenges in private credit. Here are a few key takeaways from the debate:

• Integration of ESG considerations in private credit varies, with some integrating it in a more complex and sophisticated way than others and parallels with other asset classes (e.g. private equity) hard to make. Nonetheless, options to integrate ESG certainly exist and are growing.

• LP demand and regulatory constraints are driving the increase in ESG integration across private credit. LPs do generally expect private debt GPs to integrate ESG into their investment decisions, though some more than others. And although some LPs are still concerned about fiduciary duty and impacts on returns, most are starting to see the benefits.

• Lenders can bring value to portfolio companies using engagement, collaborative approaches, incentives and other measures, such as margin ratchets. It is generally easier to create value in direct lending due to the opportunities for direct engagement.

• The terms “sustainability” and “ESG” have somewhat fallen out of favour, with “impact” becoming the next term (and indeed focus) on the horizon. Impact allows for the clear definition of KPIs and reporting, amongst other benefits.

• The so-called ESG backlash in the US is not uniform in nature, with impacts varying state by state, and greenhushing (where firms stay quiet about their ESG activities to avoid controversy) increasing in some locations. Still, most agreed there is little risk of the backlash spreading to Europe in the same way due to the stronger regulatory landscape in the latter.

• Though some issues remain, data availability and quality has improved significantly and processes are becoming more automated, thus lowering burden of manually collecting and analysing data.

• Demand for ESG is certainly increasing and all agreed progress has been made, despite the slowing effect of political events and circumstances.

If you’d like to discuss any of the topics mentioned, don’t hesitate to get in touch.