According to a new research paper, Financing the Economy, published by the Alternative Credit Council (ACC) in partnership with Allen & Overy, private credit managers are accelerating the integration of environmental, social and governance initiatives into their investment strategies and engagement with businesses on sustainability.
The ACC surveyed 57 private credit managers and investors based across the U.S., Europe and the Asia-Pacific region that collectively manage more than $600 billion. The research found 74% already integrate ESG into their investment strategies and consider it to be a core part of their approach to due diligence, borrower engagement and investor reporting.
Beyond investing, the survey found managers are a growing source of guidance and technical support on sustainability issues for many SMEs and middle-market businesses. Almost half of private credit managers see this service as their biggest value-add on ESG issues, and nearly a third see their ability to influence ESG outcomes as their biggest strength.
A third of firms reported offering ESG-focused private credit products that incentivize businesses to become more sustainable. An example is by linking interest rates to ESG-related criteria. Such products are likely to become more prevalent, with a further 28% of respondents planning to make loans with ESG-linked financial incentives in the future.
The research reveals that private credit managers provided an estimated $196 billion of credit to the economy during 2020, a 74% increase on the $113 billion respondents predicted they would invest when surveyed last year.
The main recipients of credit continue to be SMEs and middle-market businesses, with 74% of respondents’ most common loan size being below $100 million. The research also finds a significant part of the market is now focusing on larger businesses, with 26% of respondents describing their most common loan size as greater than $100 million, up from 10% last year.
“It is encouraging to see how quickly the industry adapted and deepened its approach to ESG integration,” Jiri Krol, global head of the Alternative Credit Council, said. “There is broad agreement that we are still in the early stages of development when it comes to methodologies, loan documentation and engagement practices. It is also clear that while regulation can be helpful in some ways, the real driver of change is the industry’s desire to innovate and deliver for its borrowers, investors and society at large.”
“Over the last decade, private credit has developed into a global and highly-diversified market in excess of $1 trillion,” Jake Mincemoyer, head of U.S. leveraged finance at Allen & Overy, said. “With the increasing volume of capital being provided to SMEs and middle-market businesses and the growing size and frequency of mega-deals in private debt, managers have also seen greater focus on ESG principles across the global private credit market. While some regions have seen broader adoption of these changes than others, there is no doubt that ESG principles will remain a growing focus over the coming years.”
