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Not an option – the leveraged finance disclosure imperative The willingness of companies to provide ESG disclosures could increasingly influence their cost of capital. As stewards of capital, it is our fiduciary duty to push for greater ESG disclosure. By Jonathan Butler
Under the second prism, we use our ESG Impact Ratings to assess how issuers impact the environment and society, regardless of whether we think that these impacts are material to their credit risk. Many negative and positive impacts directly translate into credit risks or opportunities and they are captured under our ESG Impact Ratings and our Fundamental Credit NUMMER 7 | 2021
Ratings. However, there are some that do not yet have any material financial implication. Those impacts are potential red lights for emerging risks and the issuer’s position and direction of travel on ESG. We believe that our ESG Impact Ratings add value to our credit research by offering analysts and portfolio managers a more holistic, forward-looking perspective of an issuer and the long-term sustainability of its business. Additionally, our ESG Impact Ratings are particularly important for clients looking to invest based on ESG criteria. A framework for change Unfortunately, the leveraged finance sector remains a laggard when it comes to ESG disclosures, particularly in the case of the leveraged loan market, which is a long way behind. As an example of the
scope of the challenge, we have compared third-party ESG data coverage for our global high yield, investment grade portfolios and leveraged loan portfolios (Figure 1). The analysis demonstrates significant gaps in reliable disclosures in the leveraged finance sector, with the loan market looking particularly weak.
Jonathan Butler
Head of European Leveraged Finance, PGIM Fixed Income
In many instances, particularly in the case of private loans, gaining access to management is the easiest during debt marketing events, but it can be challenging to have an in-depth ESG discussion given the time constraints of such interactions. We would welcome more engagement by companies, private loan as well as public bond issuers, on ESG issues throughout their lifecycle. While we are seeing some general improvements in the
PHOTO: ARCHIVE PGIM, ILLUSTRATION: SHUTTERSTOCK
PGIM Fixed Income views ESG risks and opportunities for all its strategies through two separate but related prisms. First, our Fundamental Credit Ratings fully integrate our assessment of how ESG factors impact credit quality. The analysis of ESG factors is part of our fundamental credit assessment and is included in our internal credit ratings. Credit analysts focus on ESG issues in the same way as they would focus on other credit risks and opportunities.
