EVORA Insights Roundtable Summary

Can private credit/debt have an ESG impact?

On the 17th June, on a hot day in London, we were joined by eight clients for a roundtable lunch including some of the largest private real estate debt funds. We were there to discuss how private credit/debt can effectively progress ESG objectives when these products do not have the same level of control and stakeholder engagement as equity investment funds.

When there is such a significant need for transition funding, shouldn’t lending have a significant part to play in the decarbonisation of buildings, in adaptation, in health and wellbeing, in nature conservation?

It was clear from the outset that there were some strong differences of opinion – perfect conditions for a rich discussion.

At the root of these differences was a deep sense of ambiguity about regulations and an overwhelming lack of standardisation in investor preferences and data reporting requirements. This is compounded by the fact that banks and non-bank lenders have different viewpoints and appetites for risk, as well as the EU and US seeing ESG and financial risk from different perspectives. Even within the EU we see different country regulators transposing the rules in differing ways.

Pricing ESG risk (and opportunity) into debt is a clear point of differentiation – with some lenders seeing sustainable development objectives as requiring a higher cost of capital, whilst others see the benefits and are offering discounts. Some revelled in the challenge of a reduced borrowing universe whilst others remained concerned about how distribution could be made more complex by ESG. Some see the first-mover advantage as already passed whilst others see that first movement as a challenge, particularly under the shadow of an increasing number of greenwash accusations.

Plotting a way through this uncertainty takes time and effort without there being a clear endpoint in sight for the evolution of sustainable finance. An unintended consequence of the regulations flowing from the EU Action Plan for Sustainable Finance is that it has created some market inertia due to the fear of incorrect interpretation in their application, particularly in Alternatives.

Everyone expected the momentum behind the ESG agenda to increase, even after the broadside from Stuart Kirk at HSBC and from other commentators. However, Kirk’s comments on a 6-year time horizon (or less) has struck a chord in financial services, even though the delivery of this message was poor. The lending term or an investment hold period does make a difference when considering one’s fiduciary duty.

Over lunch, there were strong positions advocating for morality, for risk prudence and for a traditional interpretation of fiduciary duty that can’t compromise on financial returns. Could we reconcile these different points of view?

Despite the need for competitiveness and differentiation in this market, there was a clear desire for collaboration in certain areas. Data standardisation being one. A clear regulatory pathway being another recognising the challenge of transitioning legacy assets and the significant capital already deployed against these assets.

If financial market regulators were able to set out minimum standards now, for Art. 8 funds as an example, and a roadmap for how they could ratchet up over time, this would allow debt providers to plan and cycle their portfolio in the right way.

Those who have begun to screen borrowers on ESG, observed that the response from borrowers has been very positive, both from large and small companies. Which suggests that gathering the right data is possible. The challenge being that investor DDQs were often different, which is time consuming throughout the financial chain. There was agreement that there is nothing in the market that meets this needs for standardisation at this time.

Our discussion showed that this is a rich vein of conversation with a need for real action to move the debt market forwards. EVORA will continue to support the evolution of the market by engaging with the top debt providers and their investors.

EVORians sweatin’ it out’

Fresh on the heels of our Walk This May challenge, we kept our fingers on the pulse with our June Bootcamp.

You are probably aware that June is known as GRESB season at EVORA. For our consultants, this is the biggest deadline of the year, with a larger than normal workload. It can be super stressful, so the Health and Wellness team wanted to make sure the activities and theme this month fitted in with the consultants’ busy schedules and helped them combat stress and keep a healthy mindset.

Therefore, we had Liam, a personal trainer and nutritional coach, run two sessions a week for the company, via Teams. This was optional to join, with no commitment to come to every session. It was important to us that it was held virtually so that anyone from the company could join in, no matter where they are located.

On Wednesdays, we met at 8:40am GMT to have a HIIT (high intensity interval training) session. As the name suggests, this really got us going before work on a Wednesday. It was great to see colleagues from around Europe join in and exercise together. It was great how we managed to warm up and down and still get a great heart pumping session in, all in 20 minutes.

Exercise is so important to mental wellbeing, getting the blood flowing, reducing anxiety and increasing cognitive functions. It’s also a great way to stay fit, especially for us office based lot who are used to a more sedentary lifestyle. Sara soon realized that when she works out in the morning “my mood is much better and I eat healthier during the day”

These HIIT sessions were great at working up a sweat and putting you in the right frame of mind for the rest of the day. EVORians were encouraged, and for Emma “doing the energiser has made me feel more alert and ready to crack on.”

On the Friday session, we slowed it down with a more sedate session. This one was held at lunchtime and had us stretching and releasing all the built up tension from the week. This was a great way to end the week, and Sarah felt it was “lovely to spend some time undoing all the hours of sitting that I do in a week.”

Straight after the more relaxed session was our regular meditation meeting on Teams. We’ve had this weekly since lockdown and is now led by one of our very own – Matt has been meditating daily for 7 years now and knows the importance of breathing exercises and meditation for both the mind and body.

Matt uses Headspace for the sessions, which all EVORians have access to once they’ve passed their probation. These sessions are a personal highlight of my week, giving me 15 minutes to breathe and take a second to align my thoughts and meditate. Like the bootcamp, there is no pressure to come to every session and anyone can join wherever they are based.

After this month, many of us are committed to keeping up a HIIT session weekly – that adrenaline rush after a workout is hard to beat and the positive effects for the rest of the day huge. As Andrea said, the exercise “helps to focus my mind on something else.  I feel like I can concentrate better afterwards.” Whether this was people’s first time trying HIIT or they are regulars at the gym, we have all seen the benefits of adding a 20 minute session to our weekly routines.

Huge thanks to Liam for leading the sessions this month.

CSRD: Is your organisation ready for the new ESG reporting requirements in Europe?

Further signs this week that the EU is seeking to strengthen environmental and social reporting requirements; Tuesday saw MEPs and EU national governments strike a provisional deal which would require major corporates to report on how their businesses impact on both people and the environment.

The Corporate Sustainability Reporting Directive (CSRD) will require that major businesses – defined as organisations with over 250 employees and a €40 million turnover – report their social and environmental impact against common standards. Tuesday’s move is an amendment to 2014’s Non-Financial Reporting Directive (NFRD) which set out its aim to encourage: “investors, civil society organisations, consumers, policymakers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business”. The CSRD, if it can find agreement in the European Council and Parliament, will bolster the need for reporting on key social and environmental activities. These include requirements for:

  • The audit (assurance) of reported information
  • Detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards
  • Digital ‘tagging’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.

In his overview of the drivers behind the CSRD, Pascal Durand, who led negotiations was clear:

“The European extra-financial audit market will be standardised, much more rigorous and transparent. Parliament succeeded in securing an opening of the audit market by member states in order to make room for new certified players to become major players and not just leave it in the hands of the financial auditors, notably the big four”.

The agreement, which if enacted will apply equally to public and private companies meeting the Accounting Directive size threshold, will be required to report on environmental, human rights, social standards and work ethics issues. Likewise, major non-EU businesses will be subject to the same provisions. In a nod to the difficulties comprehensive reporting can represent to smaller businesses, the agreement lays out a provision to less rigorous reporting for qualifying SME businesses and subcontractors.

The drive towards common standards is a welcome one, although details on those standards is not yet available. However, this year’s launch of the Social Taxonomy consultation gives an early indicator of the EU’s planned direction.  

If you would like to discuss the above with our ESG experts, you can get in touch with them today.