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Direct Lenders Seek More Data to Develop ESG Market

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Direct lending funds’ ambitions to invest more heavily into sustainable projects are being hindered by a shortage of good quality ESG data.

The pools of capital, which have grown in popularity as banks pull away from middle-market corporate borrowers, are looking to up their lending to ESG-linked companies and projects. According to a survey by Ocorian, which administers and advises some of the funds, 82 per cent of capital markets executives working in direct lending expect the focus on ESG lending to deepen in the next 18 months.

Top of their priority list of targets are socially sustainable ventures, according to the survey of 100 senior capital markets executives. Almost four-fifths said such projects, including the construction of affordable housing, would be most important to their ESG activities. Half said they were focusing on ESG because it would provide a larger and more diverse pool of investors.

However, they also said that a shortage of good quality data for due diligence checks and screening purposes is making it difficult to integrate ESG principles into their lending strategies. The inconsistency of the data and the absence of a clear set of definitions about what constitutes ESG is also hampering funds’ plans.

Martin Reed, head of capital markets – Americas Region for Ocorian, said more robust regulatory oversight of ESG data disclosure would help.

“One way of steering more defined requirements for ESG would be for regulatory institutions, such as the SEC, to be more involved in setting a standard. I think that in itself would help develop and steer the industry,” Reed told ESG Insight.

Institutional Money

Direct lending funds are prospering as regulations have made it unattractive for banks to lend to mid-market borrowers. The funds, many of which are linked to large institutions like pension funds and sovereign wealth funds, offer loans in the same way as banks but they tend to be more tailored to specific borrowers with tighter covenants. Also, the loans tend to be shorter in duration and are not widely traded.

Although the funds have taken the place of many institutional lenders and private banks, pension funds, investment banks and other institutions provide about a quarter of the capital in the funds globally, according to private debt firm Katch.

Reed said that funds are fine-tuning their ESG sensitivities as investor demand for sustainability-linked assets grows. In the absence of readily available data, the funds are engaging more closely with potential borrowers.

“They’re going to look into the policies and procedures that that company has and they’re also going to be looking at what the structure of that company is,” he said. “So, if ESG is an element of that focus, and it’s what’s driving that fund’s decision on who to invest in, then” the need for data will feed in at that point.

The absence of information now reflects “how immature the ESG platform is”, Reed said, but he expects the situation to improve as more funds integrate ESG principles into their processes.

“That’s all still in flux and yet to be determined, because people are still trying to figure out what position they have on ESG,” he said.

Managing agents such as Ocorian are also increasingly orienting their business towards sustainability-focused clients.

“We are developing our own ESG policies and it is a factor in who we are; focusing on doing business with who we would want to be an agent for,” he said.

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