Global credit funds & CLO's
August 2020
| Issue 226
Published in London & New York.
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August 2020 | Issue 226
CLO managers offer views on ESG for upcoming PRI report
Michelle D'Souza headshot
Michelle D’souza
Principles for Responsible Investment (PRI) is set to unveil a report detailing results from its ESG structured credit survey in the next few months, and the institution anticipates that this will be a launch pad for further investigation about ESG integration into the asset class.
In a preview of the report, committee chair Fatima Hadj, who heads European leveraged loans at asset manager DWS, says that it found the main driver of ESG integration is identifying ESG risks and mitigating factors. ESG criteria were not always accepted by CLO managers, but this is changing, she says.
“In the past, new eligibility criteria in portfolio management were seen as a constraint. But managers do not see ESG factors as a constraint anymore; rather they see it as a way to mitigate risks in the portfolio,” she says. “It’s a huge step as this is slowly becoming a must-have criteria for better portfolio performance.”
Hadj says, as well as investors, demand has come from asset managers which are pushed into ESG by regulation.
There is no tailor-made ESG process for structured products. Firms often borrow from other departments where ESG integration is more advanced.
But because of the complexity of structured credit, not much can be translated, says Carmen Nuzzo, head of fixed income at PRI, who is responsible for the firm’s newly formed structured products committee.
PRI started work on ESG in fixed income in 2013 and since then has seen a huge rise in interest. “Corporate bonds were the first sector we started working on because it’s the easiest to conceptualise, particularly credit risk,” says Nuzzo. “Structured products are the most complicated debt instruments to analyse from an ESG viewpoint because the ESG evaluations have to be done at multiple levels.”
As part of the survey, the PRI committee interviewed 22 participants — including 14 asset managers (a mix of global asset managers and recognised boutiques), plus a further eight participants from the structured products advisory community.
The report will mainly focus on ABS and CLOs and underlying assets (corporate, consumer loans, etc). PRI aims to expand the work it started with investors by connecting with other stakeholders to see how it can move into different flavours of structured credit.
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“Managers do not see ESG factors as a constraint anymore”
Fatima Hadj
, Head of EMEA CLO/leveraged loans | DWS
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