Responsible investment practices are increasing in the private debt and direct lending markets, despite “significant challenges” in data collection, according to a new report from the Principles for Responsible Investment. A survey conducted for the report highlighted borrowers’ limited awareness of ESG issues or data disclosure and an absence of standardised disclosures. Further 65% of general partners reported that they do not validate the accuracy of ESG data. But the report noted that the distinct ownership rights in the private debt market put investors in a strong position to incentivise responsible practices among borrowers. “The private debt market has given rise to promising innovations, such as linking sustainability targets with interest rates, which provides a unique set of tools to encourage better sustainability outcomes,” said David Atkin, CEO of the PRI. But he warned that a “failure to outline challenging targets or standardise practices may result in allegations of greenwashing”. The report found that a high degree of collaboration is needed between private lenders, sponsors and portfolio companies to integrate ESG factors into private debt transactions. “Management teams of SMEs are increasingly looking to their private lenders to help accelerate the maturity of their company’s sustainability programmes with a key focus on integration into business strategy,” said Adam Heltzer, Chair, PRI Private Debt Advisory Committee and Head of ESG at Ares Management. Report recommendations included creating standardised ESG clauses in loan documents, formulating methods for consistent KPIs and incentives, and actively supporting standardised data collection and monitoring of borrowers. Global private debt AUM has nearly quintupled since 2008 to nearly US$1.4 trillion, with an anticipated compound annual growth rate of 11% through 2027.
