Net zero guidance published for private debt sector
New net zero guidance for the private credit industry has been published, outlining a standardised approach for investors, fund managers and portfolio companies.
The development of the guidance was led by the Institutional Investors Group on Climate Change (IIGCC), with support from non-profit organisation Ceres.
It also incorporates input from private debt industry stakeholders, including members of IIGCC’s Private Markets Working Group.
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The guidance aims to help assess climate-related risks within private debt investments, with a view to advancing climate change integration practices and risk mitigation in private markets overall.
Aspects of the guidance include the 12-month grace period post-deal close, the three-way engagement model involving private equity sponsors, climate-related ESG margin ratchets and the inclusion of requests for climate disclosures in loan documentation.
The guidance forms the private credit component of the IIGCC’s Net Zero Investment Framework, taking the total number of asset classes covered to seven.
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“By outlining a consistent industry-wide approach, the new guidance can help raise ambition levels for both GPs and LPs active in private credit, as well as underlying portfolio companies,” said Misa Andriamihaja, private equity lead at the IIGCC.
“Based on input from a wide variety of industry stakeholders, the guidance’s most valuable attribute is its recognition of the specific characteristics of private debt investments. Together with last year’s private equity guidance, we look forward to seeing investors create and implement their net zero plans for private market investments in support of their financial goals.”
The IIGCC said that Pemberton Asset Management, a multi-strategy European private credit manager, is already using a number of the levers introduced by the guidance in its direct lending business. For example, the adoption of climate-related ESG margin ratchets or sustainability-linked loans (SLLs) to support the uptake of net zero practices.
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“Since rolling out the latest iteration of Pemberton’s ESG Margin Ratchet 3.0 earlier this year, which includes a key performance indicator for alignment to net zero milestones, we have found that this has notably advanced productive discussions on climate-related information disclosure between us, the prospective borrower and PE sponsors that own these companies,” said Niamh Whooley, managing director, head of sustainable investing, Pemberton Asset Management.
“Private credit investors have a voice and this ‘three-way’ engagement model recommended by the NZIF helps facilitate active engagement in our asset class.”
