We recently refined our approach to managing ESG factors within our diversified credit business, making it a separate but integrated part of our due diligence process. This detailed, in-house approach is more transparent for our clients and supports our increasing level of investment in private debt, which is typically not covered by third-party ESG research providers.
Debt investors lend money to companies but do not have ownership rights, hence they typically have less ability than equity investors to influence company management. Therefore, we believe an ESG approach for debt investing needs to be concentrated in the investment screening and due diligence phases, prior to entering an investment. This enables us to avoid investments that do not meet certain ESG criteria, whilst our fuller due diligence in the underwriting process ensures that ESG risks are appropriately elevated in our credit assessment.
Our ESG Scorecard assigns a separate risk assessment to each set of ESG issues associated with a potential investment - Environmental, Social and Governance. This includes the impact of any mitigating factors (e.g. specific conditions to the investment, maintenance covenants, presence of an active industry regulator), so it is the ‘net’ ESG risk profile that is incorporated into our assessment of the company’s credit rating.
Meet the authors
Clint Dempster
Clint is the credit lead within the APAC Diversified Credit team, directly managing the Diversified Credit analysts and providing oversight of the investment process, credit memorandums and financial models.
Hiran Wanigasekera
Hiran is an Executive Director and Co-Head of IFM Investors' Australian Diversified Credit capability. He responsible for joint management of key credit portfolios, credit product strategies and managing the day-to-day running of debt portfolios. Hiran has worked across a wide range of credit sectors and industries including bank lending, corporate credit and structured investments.
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