ESG Private Placement: more action than talk

The recent January Private Placement Industry Forum (“PPIF”) provided another useful barometer of ESG priorities in the private placement (PP) market.

ESG integration happening behind the scenes

Amidst an increasingly fraught US political debate on ESG strategies, some American investors have been more reluctant to actively profile their own activities in this area. However, most US PP investors are continuing to expand their sustainability integration initiatives, seeing these as imperative to avoiding long-dated and illiquid holdings – e.g. “don’t want to be the last one holding a stranded asset”. Scorecards and enhanced due diligence questions, such as those developed by the Private Placement Investors Association, are now common, and climate stress testing is increasingly applied. One investor noted that this is all part of a trend from “commitments” to “evidencing” in sustainable finance.

IRA game changer for green investment opportunities

The Inflation Reduction Act (IRA) is seen as a “game changer” for both green and transition investment opportunities, providing significant financial and institutional support over a 10-year timeframe. Besides boosting well-established renewable asset classes (such as wind and solar), diversification into areas such as hydrogen, carbon capture and sustainable aviation fuels were anticipated.

Divergence in exclusionary policies

While European PP investors tend to have strict exclusionary policies (e.g. some no longer buy airports), most US-domiciled accounts are quite selective – e.g. investments in the defence industry are fine, but not in controversial weapons, or oil and gas; except for direct exposure to new drilling projects. Several US accounts did note significantly increased price sensitivity to climate sectors as the time horizon moves to 10+ years, leading to an effective exclusion of long-dated exposure for e.g. coal generation.

Move to bond standards for ESG labels?

Amidst concerns of greenwashing, there is a growing call to ensure that any ESG labels applied to PPs can be held up to scrutiny. This was particularly discussed in the context of sustainability-linked private placements, where the goals are sometimes seen as insufficiently ambitious. This may result in PP issuers starting to adopt International Capital Markets standards for sustainable finance supply, which places greater emphasis on the need for external reviews and, for sustainability-linked, benchmarkable targets.

Greenium? Don’t mention the G word

While there have continued to be PP trades with modest greeniums in the past year, the topic remains sensitive – particularly amongst US-domiciled institutional investors. A number of US investors see this is inconsistent with their fiduciary duties. In the context of sustainability-linked transactions, investors hence (unsurprisingly) tend to prefer step-up structures.

SEC and the emergence of improved climate disclosure

While the SEC’s envisaged corporate climate disclosure regulation is targeted at listed companies, expectations are that this will also affect the private firms that access the PP market – both through their owners (e.g. when these are listed private equity firms) as well as through enhanced expectations from investors and intermediaries. This should be helpful for investors to further advance their own climate due diligence and strategies.

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