New advice for collateralised loan obligations managers aims to help investors steer clear of loan packages that include problem areas.
The European Leveraged Finance Association (ELFA) has launched its ESG Exclusion Checklist for Business Activities, designed to streamline the negative screening and exclusion process for managers of collateralised loan obligations (CLOs).
ELFA said the checklist, which is open to consultation, was designed to act as a tool to increase efficiency in the CLO market and “to be useful for a range of market participants”. The London-based trade association represents fixed income managers, including investment advisors, insurance companies, and pension funds.
“The guidance is designed for arranging banks to complete at the time of a new corporate loan or bond syndication. It aims to help investors determine if a corporate borrower is a suitable investment candidate based on its ESG criteria,” said ELFA’s statement on the release. The checklist will allow the corporate borrower to publish the data to its entire syndicate as well.
Furthermore, the checklist provides information on the percent of revenue that a company derives from a range of areas that might ring alarm bells for an investor’s internal ESG guidelines. Areas for consideration include weapons, tobacco, thermal coal, fossil fuels, gambling, hazardous chemicals and waste, intensive farming, and palm oil, among others.
“The checklist includes a specific section for utilities companies, asking the corporate borrower to declare the percentage of electricity generated by thermal coal, liquid fuels (oil), natural gas and nuclear generation,” ELFA added. “Corporate borrowers may also indicate if they are a signatory of the UN Global Compact principles and if they are in breach of any of the principles.”
“Currently the use of ESG exclusion language is the norm for ESG integration into CLOs, but collection of data relevant to these determinations is not uniform and therefore creates inefficiencies that we intend to address with this resource,” said Sabrina Fox, Chief Executive Officer, European Leveraged Finance Association.
“Rather than asking corporate borrowers to manage numerous different screening questionnaires from investors, the ESG Exclusion Checklist for Business Activities will promote a more efficient CLO market in Europe by allowing borrowers to provide information in a standardised, consolidated manner.”
The checklist was produced as a collaborative effort across ELFA’s Loan Investor Committee, CLO Investor Committee and ESG Committee.
ELFA plans to consult on the ESG Exclusion Checklist from mid-November until 15 December, 2021, with views sought from banks, agents, lawyers, corporates, sponsors, and investors.
The organisation said it planned to release a final document in January 2022 following the consultation period. The tool will then be updated on a biannual basis to ensure it remains relevant.