Manager’s first climate transition-oriented private debt fund forms part of US$84 billion Global Private Debt platform.
A new fund from global investment manager BlackRock aims to leverage the firm’s regional private debt and transition investing expertise to invest in companies preparing for or contributing to the low-carbon transition.
Launched last week, the Climate Transition-Oriented Private Debt Fund is primarily focused on European and US middle market direct lending where fund investments can help accelerate borrowers’ climate transition agenda by providing support and resources.
“We’ve seen interest from clients in transition-oriented solutions,” Sonia Rocher, Portfolio Manager and Sustainability Investing Lead at BlackRock’s Global Private Debt platform, told ESG Investor.
She added that the fund provides a single-entry point to a “diversified and high-quality” private debt portfolio, with exposure to companies that are contributing towards or getting ready for the transition.
Mark of the middle market
The fund is BlackRock’s first climate-transition oriented private debt fund, and the firm expects the investment opportunity that it presents to “increase over time”.
The UK Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements and investment labels consultation noted that there was “strong support” for a ‘Transitioning’ category, with respondents noting its importance in “facilitating an economy-wide transition to a more sustainable future”.
The FCA said it was “critical” that the proposed regime “accommodates investment in assets in transition to becoming more sustainable.”
The European Commission has issued a targeted and a public consultation on the implementation of the Sustainable Finance Disclosure Regulation (SFDR). One of these consultations core objectives is to establish whether the current framework adequately captures transition investments.
To address this, it has been suggested that new categories – not based on Article 8 or 9 of SFDR – are established including one for products with a transition focus aiming to bring measurable improvements to the sustainability profile of the assets they invest in. Both consultations are open until 15 December.
Earlier this week, the Transition Plan Taskforce (TPT) unveiled its finalised disclosure framework which aims to ensure that firms’ transition plans explain how it will meet climate targets, manage climate-related risks, and contribute to achieving net zero, which could help fund managers to identify and target firms in transition for investment.
According to a recent Morningstar report, net deposits into Climate Transition fund have quadrupled over the past 18 months to US$5.8. The inflows into these transition funds over the first half of 2023 drove climate fund assets to a new record of US$31.7 billion at the end of June.
Allspring Global Investments also recently launched a third climate transition fixed income fund, with the fund receiving US$100m in assets.
Rocher explained that the new fund is designed to “respond to client demand for transition-oriented private debt strategies” through investment in “mid-sized firms with carbon emissions reduction goals or companies providing climate solutions”.
According to BlackRock’s Global Transition Investor Survey, 98% of investors have set a transition investment objective for their portfolios and 75% of institutional investors have indicated that they have net zero objectives.
Investments through the fund “supports them in their carbon reporting and achievement of their roadmap to reduce emissions,” she added.
Private debt investing is often focused on middle market companies, which contribute more than 50% of GDP in most Organization for Economic Cooperation and Development countries and account for 40% of carbon emissions.
“Their ability to reduce their carbon footprints and decarbonise their business models will be important if the global economy wants to reduce their carbon emissions,” she said.
Rocher added that these companies face a “unique set of challenges” compared to their larger counterparts. These include a lack of time, expertise and guidance for climate–related initiatives.
“A lender with access to company management and/or private equity sponsors can help to overcome through engagement”, she said.
Supporting company climate transition
The Climate Transition-Oriented Private Debt Fund is part of BlackRock’s Global Private Debt platform which manages US$84 billion in client assets. The company also manages more than US$100 billion in transition investing assets in other asset classes.
The investment manager’s Global Private Debt team is comprised of more than 200 investment professionals. These teams have a local presence in 19 offices across Europe, the US, and the Asia-Pacific region, which allows for “established local and global origination” and “access to attractive, diversified, transaction flow”.
Rocher said that this team will “actively engage” with the companies it finances to “support the implementation and delivery of their carbon reporting and decarbonisation targets”.
Earlier this year, BlackRock launched an active fund that aims to provide exposure to the materials needed to facilitate a global net zero transition
The new private debt fund will use BlackRock’s proprietary Climate Transition Rating Framework to finance companies at different stages of transitioning to net zero emissions and apply climate transition selection criteria so that the borrowers “demonstrate satisfactory characteristics.”
The Climate Transition Rating Framework forms the basis of the investment criteria for the fund and “aims to provide transparency and objectivity to the categorisation and tracking of portfolio companies”.
Rocher said that this is “particularly important in private debt where lack of data on emissions is often a challenge for middle market companies”, adding that BlackRock expect such frameworks to “harmonise over time”.
The BlackRock Investment Institute recently identified transition to a low-carbon economy as one of the five ‘mega forces’ underpinning the investment strategies of the firm’s Global Private Debt teams.
“Mega forces are structural changes we think are poised to create big shifts in profitability across economies and sectors,” Rocher said. “The mega forces are playing out today. The key is to identify the catalysts that can supercharge them and the likely beneficiaries.”
BlackRock’s Global Insurance report discussed the growing role of private credit in portfolio allocations of insurers. The 2023 results show higher conviction from respondents, with 60% of insurers are planning to increase allocations to direct lending, and 57% to multi-alternatives, while in previous years insurers were looking to allocate across a broad range of assets.