Climate change investor group sets out private debt framework


14 Jun 2024

New guidance establishes agenda for private debt investors to deliver on net zero, finds Andrew Holt.

New guidance establishes agenda for private debt investors to deliver on net zero, finds Andrew Holt.

The Institutional Investors Group on Climate Change (IIGCC) has introduced new guidance aimed at establishing a framework of action for private debt investors to set and deliver net-zero commitments.

The guidance could well be seen as an indication of how private debt has become an important focus within the net-zero transition.
 With this, the IIGCC intends to support any private credit investors who are active in direct lending, venture/growth debt, opportunistic credit, structured credit, fund financing and private placements.

The guidance reflects private market-specific nuances and takes the view that, given the unique characteristics of private debt investments, distinct actions are required to set and deliver decarbonisation goals for the asset class.

The development of the guidance was led by IIGCC with support from Ceres, a sustainability investor network, and incorporates input from a group of participants in the private debt industry, including members of IIGCC’s private markets working group.

Some of the innovations introduced by the guidance include a 12-month “grace period” post-deal close. This, according to the guidance, is to “give GPs [general partners] more time to collect the relevant information for reporting against the Net Zero Investment Framework (NZIF) and engage with portfolio companies (PCs) to improve transparency, get portfolio company’s expression of intent to progressing along PC criteria and potentially finalising deal terms such as ESG margin ratchets.”

Three-way model

It also includes a “three-way engagement model” involving private equity sponsors and the inclusion of requests for climate disclosures in loan documentation.

This model, noted the guidance, is recommended between lenders, PCs, and private equity (PE) sponsors, where applicable, to ultimately encourage consistent sharing of climate/ESG data and to foster discussions across data standardisation across private markets.

Through this model, GPs are encouraged to fulfil their full engagement target by engaging with their PCs on net zero and climate-related concerns as well as their PE sponsors where private debt deals are sponsor backed.

This should enable GPs to broaden the remit of obtaining the relevant information to support the achievement of their net-zero targets, noted the IIGCC.

Misa Andriamihaja, private equity lead at IIGCC, explained the rationale behind the new guidance. “By outlining a consistent industry-wide approach, the new guidance can help raise ambition levels for GPs and LPs active in private credit, as well as underlying portfolio companies,” she said.

And Andriamihaja added: “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.”

Niamh Whooley, managing director and head of sustainable investing at Pemberton Asset Management, added: “Private credit investors have a voice and this three-way engagement model recommended by the NZIF helps facilitate active engagement in our asset class.”

The guidance largely seeks to promote clarity and action in assessing and disclosing climate-related risks within private debt investments, thereby, hopefully advancing climate change practices in private markets overall.

Industry wide

The guidance forms the private credit component of the NZIF, taking the total number of asset classes covered now to seven.

There is no doubt that private debt is a fast growing asset class with unique challenges, especially when it comes to decarbonisation.

“This guidance balances ambition with practicality, providing bespoke net zero-target types and tailored engagement strategies,” said Peter Ellsworth, senior director at Ceres. “The emphasis on communication with all parties in this asset class, including private equity sponsors, will help accelerate climate action by private companies.

“We encourage private credit investors, whether or not they have made a commitment to net zero, to use this guide to inform diligence and evaluate how their assets support the emerging clean energy economy,” Ellsworth added.

Last year, global investments in the energy transition reached $1.8trn (£1.4trn), according to Bloomberg New Energy Finance (BNEF). This represented a 17% increase on 2022 – despite the macro-economic, geopolitical and supply-chain challenges that characterised last year.

However, this appears to be nowhere near enough. BNEF estimates that annual global investment needs to reach $4.8trn (£3.7trn) by 2030 and $6.6trn (£5.1trn) by 2040 to put the global economy on track to reach net zero by 2050.


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