The increasing application of ESG considerations in debt market investing is leading to calls for greater standardisation and disclosure of the metrics being applied.
Investment managers speaking at an Australian Securitisation Forum webinar on ESG in fixed income and structured credit investing said they had incorporated ESG into their debt investment frameworks and were increasingly using internally formulated metrics to score transactions.
Managers said they are developing their own scoring systems because third party providers have not developed suitable products for the fixed income, private debt and structured finance markets.
The scores feed into the overall risk ratings of the transaction and influence the amount the investors would buy and what price they would be prepared to pay for an asset.
However, the president of the US Structured Finance Association, Kristi Leo, said there are concerns about the level of disclosure of in-house ESG scoring in the US.
Leo said: “The Securities and Exchange Commission has started a discussion about whether there should be mandatory disclosure of ESG scores for debt issues, so the market can see what metrics are being used.
“There are concerns about a lack of standardisation and about the risk that the process is open to greenwashing.
“Another concern is that issuers are struggling with growing demand to supply a range of different metrics. We need some standardisation.”
The executive director of debt investments at IFM Investors, Lillian Nunez, said these trends are only emerging in Australia, which has a “nascent” green debt market.
Last year, green issuers included Lendlease, which will use the proceeds of a A$500 million issue to fund the construction of green buildings; New South Wales Treasury Corporation, which topped up a $5.2 billion program that is used to finance projects that deliver positive environmental or social outcomes; Flexigroup, which raised $250 million with an issue of asset-backed securities that included green notes backed by solar receivables; and Brighte Capital, which raised $190 million and claims to be the country’s fastest growing residential green energy financier.
Last year, IFM started applying an in-house “score card” for private debt warehouses, which looks for exposures to industries that are at risk on ESG metrics.
Nunez said: “There are a number of questions. How do you measure the ESG rating of these issues? How are the benefits disclosed and reported?”
Portfolio manager at investment manager Nuveen, Aashh Parekh, said the issue is more difficult to resolve when it comes to securitisation, because of the large number of underlying assets involved.
Does a mortgage pool earn more ESG points for having low rates and being more sustainable in the sense of helping borrowers pay off their loans, or for having more homes with solar panels?
Are lenders that provide better payment relief terms for distressed borrowers doing a better job of meeting a social obligation? What would a “green RMBS” look like?
Macquarie Investment Management credit analyst Adam Daman said Macquarie assigns an ESG rating to all its holdings.
He said clients are increasingly asking Macquarie to use these ratings in different ways, such as applying negative screens, positive screens or looking