23 May 2024
- New private credit guidance is the first and most comprehensive net zero guide tailored specifically for the private debt industry.
- The guidance recommends differentiated but complementary net zero targets for both general partners and limited partners; and outlines a consistent, standardised approach for engagement and reporting which can be adopted by LPs, GPs and portfolio companies.
- Private credit becomes the latest asset class covered by the Net Zero Investment Framework, the most widely used resource to develop net zero strategies and transition plans by investors.
The new guidance – Net Zero Investment Framework for the Private Debt Industry – aims to establish a cohesive framework for action that is useful across the private debt industry for setting and delivering on net zero commitments.
The guidance is intended to support any private credit investors who are active in the following strategies: direct lending, venture / growth debt, opportunistic credit, structured credit, fund financing and private placements.
The development of the guidance was led by IIGCC with support from Ceres and incorporates input from a diverse group of participants in the private debt industry, including members of IIGCC’s Private Markets Working Group.
The guidance reflects important private market-specific nuances and takes the view that, given the unique characteristics of private debt investments, distinct actions are required to set and deliver decarbonisation goals for this asset class.
Some of the innovations introduced by the guidance include the 12-month grace period post-deal close, the three-way engagement model involving private equity sponsors, climate-related ESG margin ratchets and the inclusion of requests for climate disclosures in loan documentation.
The guidance forms the private credit component of the Net Zero Investment Framework, taking the total number of asset classes covered to seven.
Integrating climate risks in private markets
The guidance seeks to promote clarity and enable action in assessing and disclosing climate-related risks within private debt investments, thereby advancing climate change integration practices and risk mitigation in private markets overall.
Misa Andriamihaja, Private Equity Lead, IIGCC: “By outlining a consistent industry-wide approach, the new guidance can help raise ambition levels for both GPs and LPs active in private credit, as well as underlying portfolio companies. Based on input from a wide variety of industry stakeholders, the guidance’s most valuable attribute is its recognition of the specific characteristics of private debt investments. Together with last year’s private equity guidance, we look forward to seeing investors create and implement their net zero plans for private market investments in support of their financial goals.”
Peter Ellsworth, Senior Director, Ceres: “This guidance, developed with significant input from the private debt community, offers a helpful blueprint for investors to decarbonize their private debt portfolios. Private debt is a quickly growing asset class with unique challenges. This guidance balances ambition with practicality, providing bespoke net zero target types and tailored engagement strategies. The emphasis on communication with all parties in this asset class, including private equity sponsors, will help accelerate climate action by private companies. We encourage private credit investors, whether or not they have made a commitment to net zero, to use this guide to inform diligence and evaluate how their assets support the emerging clean energy economy."
Niamh Whooley, Managing Director, Head of Sustainable Investing, Pemberton Asset Management “Since rolling out the latest iteration of Pemberton’s ESG Margin Ratchet 3.0 earlier this year, which includes a key performance indicator for alignment to net zero milestones, we have found that this has notably advanced productive discussions on climate-related information disclosure between us, the prospective borrower and PE sponsors that own these companies. Private credit investors have a voice and this ‘three-way’ engagement model recommended by the NZIF helps facilitate active engagement in our asset class.”
Pemberton Asset Management, a multi-strategy European private credit manager, is already using a number of the innovative levers introduced by the guidance in its direct lending business. For example, the adoption of climate-related ESG margin ratchets or sustainability-linked loans (SLLs) to support the uptake of net zero practices.
Lindee Wong, Director of Climate and Biodiversity, Tikehau Capital: “Tikehau Capital is pleased to contribute to the development of the Net Zero Investment Framework for private debt, which establishes an industry-wide approach to real-world decarbonisation. This framework offers a holistic view of a portfolio company's progress towards net zero, providing investors with essential tools to accelerate their portfolio’s alignment with the Paris Agreement."
ENDS
About IIGCC
IIGCC brings the investment community together to work towards a net zero and climate resilient future. We create change the world needs by unlocking investor action on climate change.
Our work supports investors in generating returns for clients and beneficiaries, which in turn provides financial wellbeing for future generations. We work with our members to address climate risk and ensure they are well positioned to make the most of investment opportunities offered by climate mitigation and adaptation efforts, ensuring that their investments contribute towards a better world for us all to live in.
Our team supports investors to create practical solutions that can make a real difference in tackling climate change – providing guidance and support on investment practices, policies and corporate behaviours that have real impact and deliver change that the world needs. For more information visit www.iigcc.org and @iigccnews
Media contact
Ross Gillam, Head of Communications, IIGCC
E: rgillam@iigcc.org
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