How we manage ESG risk in debt portfolios

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.