Setting standards for emissions data

According to the report: “Both European and US CLO asset managers have a vested interest in enhanced data transparency at the underlying borrower level and a consistent methodology for reporting GHG emissions at the portfolio level. The approach presented in this report is adaptable for implementation by CLO managers on both sides of the Atlantic. Uniform reporting standards would streamline deal and asset manager assessments, benefiting global CLO investors.”

New regulations are coming into force

Another committee member, David McNeil, head of responsible investment research at Insight Investment, points out the importance of not focusing only on the legal requirements. “Climate risks are becoming increasingly material across all asset classes, including CLOs. While regulatory and market developments are leading to growing pressure for disclosure, this also presents opportunities for CLO managers to better understand sources of climate-related investment risk within underlying loans — and to mitigate these risks through active management.” And he adds: “This guidance explains the relevance — and practical applications — of climate metrics for CLO market participants starting on this journey.”

The paper includes a number of metrics (see table, below) that could be used to track GHG emissions, but the intention wasn’t to recommend a specific metric. Nevertheless, each member of the committee has a favourite. For Cristina De Guzman Esteban, structured and private assets, M&G, that’s Weighted Average Carbon Intensity (WACI). “So far, I think the metric that has been most useful is WACI, which allows investors to easily compare CLOs.”

She says: “The main use for this report from my perspective as an investor is to use it to engage with CLO managers and help guide them on how to aggregate the data. Not all managers know what CLO investors are expecting from them.”

Emeric Chenebaux, who is a portfolio manager at Federated Hermes when he isn’t co-chairing the CLO Investor Committee, adds that when ELFA created the CLO Investor Committee there was a conscious choice to aim for simplicity and standards in a very complex asset class. “We’ve seen the efforts from some CLO managers trying to put the numbers together. And they were really great first initiatives. But as CLO investors we want to provide a framework to encourage managers to be consistent so we can compare apples to apples.”

According to the committee all three metrics have advantages and disadvantages, but they are providing all of them to their own end investors to let them decide which they find most useful.

Even if companies have estimated carbon emissions data they have reported, a large proportion of the portfolio is private companies, so CLO investors won’t be able to access that data. Having an aggregate number at least solves that.

It’s also important to note that this paper is the first step in a longer process. The committee points to a wider roll-out of the separate ESG reports that some CLO managers are now providing for their investors as the next step. Polus Capital is one such manager, and is now disclosing the carbon footprint of its CLOs to investors on an annual basis. However, the ultimate end goal is for WACI to become another WARF, a metric included in every trustee report.

So what’s next for CLO managers and investors who want to discuss these metrics in more detail? Chenebaux and Struc are both happy to be contacted, whether via ELFA or directly. “This is a small community,” says Chenebaux. “We are keen to hear from any CLO managers that have questions.”