Private Finance ESG Monthly – April 2022

Breaking down trending ESG* trades & themes to help those within Private Finance get ahead of the latest issues shaping the market.

ESG Syndicated Lending Market

  • After a slow start to the year, sustainable lending volumes picked up significantly in March. Volume of sustainable lending for March ($81.2 bn) was more than double that of February ($28.4 bn).
  • The largest countries by volume of overall sustainable lending (year-to-date) are the US ($65.0 bn); Spain ($16.6 bn); and Canada ($10.0 bn).
  • Notable transactions for March include Sustainability-Linked Loans (SLL) for Duke Energy, Trafigura and Intel.

 Global ESG Syndicated Lending, March 2022 YTD ($ billion)

Source: Dealogic, 28/04/22

ESG Deal Activity

Apollo Global Management is due to acquire a majority stake in Novolex for $6 billion and has raised financing of $3.5billion to support the acquisition. The financing incorporates sustainability Key Performance Indicators (KPIs) linking the margin payable on the loan to the outcome of the KPIs on an annual basis.

Santander, in partnership with the International Finance Corporation (IFC), issued the first synthetic risk transfer (SRT) in the emerging markets with a climate risk mitigation objective. The IFC will provide up to $120m of second loss guarantees on credit losses that might be experienced in a $730 million portfolio of consumer loans. The freed-up capital will be used to extend at least $600 million equivalent of new green lending.

Abrdn has raised an initial £205 million for its Commercial Real Estate Debt fund II (CRED II), an evergreen, UK focussed strategy. The fund will aim to achieve a target size of £1bn and will take a sustainable approach to lending. Based on an analysis of the underlying assets, KPIs will be identified and if borrowers meet these, they will be eligible for a discount on the margin.

Spotlight: Blended Finance

To support the global transition to net zero, capital spending on physical assets for energy and land-use systems could amount to ~USD 275 trillion, or USD 9.2 trillion per year on average, between 2021 and 2050 – an annual increase of ~USD 3.5 trillion from today’s levels.

Source: McKinsey & Company: The net-zero transition – Report: January 2022

Blended Finance has three key characteristics:

  • Leverage: Use of development finance and philanthropic funds to attract private capital into deals.
  • Impact: Investments that drive social, environmental and economic progress.
  • Returns: Financial returns for private investors in line with market expectations, based on real and perceived risks.

Funds mobilised from the private sector ($USD billion)

Source: Amounts mobilised from the private sector for development, OECD
Amounts mobilised from the Private Sector by region ($USD billion)
Source: Amounts mobilised from the private sector for development, OECD

Company and fund-based vehicles are taking precedence - impact bonds may be a future structure

Proportion of closed transactions by vehicle type

Source: Convergence, the state of blended finance 2021

Providing concessional capital has been prevailing amongst other approaches

Proportion of closed transaction by blending approach

Source: Convergence, the state of blended finance 2021

Commercial and Impact investors focused on debt and equity

Commitments to blended transactions by instrument type (2015-2020)

Source: Convergence, the state of blended finance 2021. Note: Depository Financial Institution (DFI), Multilateral Development Banks (MDB)

Barriers to Scaling Blended Finance

Lack of scale and appropriate vehicles

  • Blended Finance (BF) debt vehicles need to be at least US$ 750 million, and BF equity vehicles at least US$ 250 million to attract big ticket size investment (current median size ~ US$65million)
  • Supply of bankable deals is further limited by the need for DFIs to deploy their own balance sheets (A-loans) where explicit private capital mobilisation targets often do not exist
  • Limited sell down of existing loans by DFIs to institutional investors

Lack of capacity and experience

  • Lack of local government capacity in Emerging Market (EM) economies, which resulted in a lack of well-planned or established projects. A risky, unstable, non-transparent and/or not sufficiently attractive regulatory environment are typical barriers.
  • Lack of institutionalisation and experience of asset managers with BF - many BF vehicles in the market are managed by smaller asset managers, who typically cannot pass the strict due diligence requirements of large institutional investors
  • Lack of capacity and experience of asset owners

Availability and access to data

  • Limited access to investment risk and performance data for both equity and debt investment
  • Lack of publicly available track records of DFIs and donors, makes pricing of risk challenging and reduces investors’ confidence to enter EMs
  • Lack of sufficient track records on Private Equity (PE) returns generated in Ems, even where available, they do not show sufficient historical returns against the risks taken (this has been also driven by market volatility and limited exit options in EMs)
  • Lack of rating methodologies for BF, leaves uncertainty as to how investors should rate these structures and has excluded less sophisticated investors from this asset class

Potential Solutions

Revising the deployment of donor capital

  • Making private sector investments in funds eligible for official development assistance (ODA) and broaden sectoral and geographical themes
  • Pooling donor funds and standardising investment – under an experienced administrator
  • Removing “national focus component” requirements for donor funding – Investors and asset managers cannot make such assurances to donors)
  • Increasing the use of guarantees
  • Revising the incentives model of DFIs

Building capacity

  • Building the capacities of all actors - local governments need to define the infrastructure needed, organise tenders to developers, contractors and financiers; and stable and transparent regulatory and legal frameworks need to be in place
  • Promoting an enabling environment and building institutional capacity – MDBs and DFIs can play a greater role by supporting institutional capacity and project preparation through grant funded technical assistance
  • Building knowledge and know-how & Increasing collaboration between asset owners, donors and asset managers

Generating data points to be made available and accessible

  • Increasing data coverage in EMs - default rates of MDBs’ and DFIs’ portfolios as well as recovery rates are key
  • Data providers need to play a more active role providing more coverage of emerging/frontier markets associated with enhanced disclosure
  • Establishing rating methodologies - rating agencies, MDBs and DFIs could work together with asset managers to establish a well understood, standardised rating methodology for blended finance fund structures

Barriers / Solutions (source): UNEP-FI & PRI Report Scaling Blended Finance, November 2021

Latest Climate and ESG Announcements by Sponsors

The articles included below are sourced from Environmental Finance, and so a subscription is required to access the full content.

  • AXA IM launches biodiversity equity strategy: AXA Investment Managers (AXA IM) has launched a biodiversity listed equity strategy. The fund aims to contribute to four sustainable development goals (SDG): clean water & sanitation (SDG 6), responsible consumption & production (SDG 12), life below water (SDG 14), and life on land (SDG 15). Read more about AXA IM biodiversity equity strategy

  • LGIM votes against 100 companies because of climate: Legal & General Investment Management (LGIM) voted against 100 companies in 2021 because of their management of climate risk. Read mor about the LGIM vote

  • BlackRock to score its impact using SDG 'data factory': The dataset, developed with technology company Entis, will be used by BlackRock to monitor its alignment to the SDGs, as well as: advise clients on portfolio construction, research, reporting, product creation and the evolution of ESG policies Read more on BlackRock

  • Soros Fund Management sets divestment plan in climate strategy: The family office managing the assets of billionaire philanthropist George Soros’ foundations published its inaugural ‘climate action strategy’. Read more on Soros Fund Management

  • Real estate investors call on regulators for dedicated ESG metrics: The proposal for metrics included the fact reporting is not based on ‘weighted average carbon intensity’ of real estate – a metric recommended by the Task Force on Climate-Related Financial Disclosures (TCFD). Instead, the associations recommend that real estate metrics for carbon intensity be normalised by floor area “as this gives a more accurate picture of change for most asset classes than normalising by value”. Read more call for dedicated ESG metrics

  • A wave of investor demand feeding into offset 'sweet spot' – Mirova: A swell of interest from corporate buyers and institutional investors in carbon offsets is feeding into a market already in a “sweet spot” of undersupply of quality credits (Mirova). Demand for carbon credits could increase by a factor of 15 or more by 2030. Read more on investor demand

  • AIG's climate policy transforms it from laggard to leader: AIG has announced a commitment to achieving net-zero Greenhouse Gas (GHG) emissions across its underwriting and investment portfolios by 2050, including specific restrictions on coal. Read more on AIG's climate policy

Government and Regulatory Updates

Check-out the following article for a full review of the key ESG Regulatory updates from April.

ESG Data, Articles & Market initiatives

Moody's unveils ESG portfolio screening kit. Moody's has launched a data platform that provides access to Moody’s physical and transition climate risk data sets across a recently expanded universe of 10,000 companies globally. Read moron Moody's ESG portfolio screening kit

Private equity firms reach 'tipping point' in net-zero targets. European private equity firms have reached a critical threshold in the number setting science-based decarbonisation targets, a member of the Science Based Targets initiative (SBTi) has said. More than 20 financial institutions have been validated by the SBTi, over half of which are private equity firms. Read more on private equity firms net-zero 'tipping point' targets

Amundi launches two ESG ETFs. Amundi has launched two ESG focused exchange-traded funds (ETF) which track the global fixed income or Asian markets. Read more on Amundi's two ESG ETFs

Amundi: ESG assets face 'crowding risk,' not a 'bubble'. The report from Crédit Agricole-owned Amundi argued that there is a real 'crowding risk' for ESG assets – especially among some green thematic investments – as rising investor demand outstrips supply of such assets. Roncalli and Laugel said that the financial return focus that drives 'bubbles' is less pronounced among ESG-focused investors as they also integrate investment motivations beyond financial considerations. Read more on Amundi's 'crowding risk' for ESG assets

Milestone' impact comparison tool launched by GIIN. Impact investors can now measure and compare their performance against a newly launched benchmark from the Global Impact Investing Network (GIIN). Read more on GIIN's impact comparison tool

Upcoming Webinars

  • ESG TALKS - how corporates are addressing CO2 reduction around the world (May 05, 2022, 1:30pm BST). Join DWS's ESG TALKS webinar series where Michael Lewis, Head of Research ESG will discuss current issues impacting responsible and sustainable investing. The event is hosted by DWS Group. Register here for t'How corporates are addressing CO2 reduction'
  • “Sustainable” Private Equity: An In-Depth Look at ESG Trends and Challenges (May 05, 2022, 5:00pm BST). This event looks at ESG trends and challenges facing Private Equity Funds and their portfolio investments. It will be presented by FTI Consulting. Register here for 'An In-Depth Look at ESG Trends and Challenges'
  • ESG - The New Seat at the Boardroom Table (May 11 2022, 4:00pm BST). Leaders from L.E.K.'s Sustainability Centre of Excellence will put the spotlight on ESG in the boardroom and look at the new imperatives and responsibilities facing board members. Register here for 'The New Seat at the Boardroom Table'

For those looking to discuss any of the above further, please reach out to our authors:

*For any unfamiliar terms used within this article please refer to our Insights glossary.


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