Fidelity to add ESG portfolio test in Article 8-aligned CLO

Michelle D’souza

Reporter

Fidelity International has taken ESG scoring in the CLO market a step further by including a new ESG portfolio profile test on an upcoming European CLO. It is understood to be the first CLO aligned with Article 8 of the Sustainable Finance Disclosure Regulation (SFDR).

Fidelity brought in MeDirect’s CLO and leveraged loan team in January, and took over management responsibility for GH CLO 2019-1. As Creditflux goes to print, the team is marketing its second CLO via Barclays.

Fidelity will rate every issuer using its proprietary ratings system. If an issuer has existing ratings through bonds or equity, the investment analyst team will use those, with all ratings reviewed by Fidelity’s investment committee. If an issuer doesn’t disclose ESG information it cannot get better than a D on Fidelity’s A to E scale.

To pass the new test, which will also feature in trustee reports, Fidelity’s CLO team has committed to having more than 50% of the CLO’s portfolio rated C (good) or better.

“It’s essentially a new portfolio profile test, which you need to maintain or improve like all the other tests in the CLO documentation,” says Michael Curtis, head of private credit strategies. “If the CLO fails the test, we cannot buy a D-rated credit.”

“We’ve tried to create a framework that’s integrated at portfolio level”

Camille McLeod-Salmon, Portfolio manager | Fidelity

Fidelity will also provide an average ESG score in its CLO trustee report, converting its A to E ratings into a score of one to five, alongside providing commentary on the ESG developments of the portfolio.

Curtis tells Creditflux the ESG method was developed with Fidelity’s sustainability team, which advises across fixed income and equity. “For us, it would have been more unusual not to apply the same approach to our strategy in loans,” he says.

Portfolio manager Camille McLeod-Salmon says the SFDR-Article 8 alignment approach gives investors a clear and accountable framework with a third-party trustee. “There’s a lot of noise in ESG and what we’ve tried to do is boil it down and create a framework that’s accountable and integrated at portfolio level.”

She says being a large firm with ESG resources across equity and fixed income helps Fidelity significantly. It knows what best-in-class for ESG looks like and how to engage with borrowers. It also has a framework to help drive ESG performance.

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Global credit funds & CLO's

October 2021 | Issue 239

Published in London & New York.