Key learnings from the two instructive sessions included:

• Looking at the ESG expectations of Alternative Investment investors, Heine highlighted that “Limited Partners (LPs) increasingly expect Article 8 & 9 strategies across alternative investments”. Others agreed and flagged that Nordic investors remain the group with the highest expectations for ESG, with all of them performing detailed due diligence on how ESG is being integrated. North American investors tend to perform a lower level of due diligence while in Asia, Korean investors have yet to roll out ESG considerations in their asset allocations. 
• Fund labelling is important in the US: Some pointed out that referencing ‘ESG’ for an alternative investment strategy tends to face more challenges and pushbacks than a similar strategy labelled as ‘responsible’ or ‘sustainable’. Part of this could be attributed to the perception from LPs in Red States that pursuing ESG objectives conflicts with investor fiduciary duty to maximise risk-returns.
• Infrastructure to continue to drive growth: With regards to appetite for certain ESG investment products, the panellists highlighted that allocation to infrastructure assets has picked up substantially in the last two years on the back of public sustainability debate – and growth is expected to continue in the next two to three years. 
• Discussing how the alignment of portfolios to net zero varies by asset class, there was consensus that real estate is relatively well understood, however, the 2030 time horizon for Switzerland to halve its greenhouse gas (GHG) emissions [1] is deemed challenging given the quantum of capex required. For Private Credit (in particular SME loans), net zero alignment is more challenging given GHG emissions coverage varies across the portfolio. Heine highlighted how Patrimonium “seeks to embed ESG in all investment strategies despite non-uniform GHG emissions data coverage in the private space”. While the use of technology and third-party data can help increase GHG emissions transparency, the specialists concluded that there is still some way to go. Meanwhile, in some markets, such as Germany, SME lending already incorporates a strong focus on social and governance factors (e.g. workplace incidents).

“LPs increasingly expect Article 8 & 9 strategies across alternative investments. We seek to embed in all investment strategies despite non-uniform GHG emissions data coverage in the private space.” Daniel Heine, Co-founder and Head of Private Debt, Patrimonium

• The speakers agreed that the motivation for pursuing green labelled financing is often less about favourable pricing (‘greeniums’) but rather about signalling net zero ambitions to the market. Bhargava highlighted that “green lending sends a clear signal to LPs and the market on one’s contribution to the energy transition”. It was emphasised in this context the importance of Second Party Opinions (SPOs), which add an additional level of due diligence. Others highlighted that Use of Proceeds (UoP) facilities are being used for Impact Investment Strategies where impact is measured and audited. Additionally, UoP pricing going live on Day 1 was cited as another reason for pursuing over sustainability-linked products.  
• Despite some assets being intrinsically green – such as for example Renewables – additional ESG factors still have to be considered across the lifecycle of an investment. Therefore, due diligence needs to be performed on the construction of all green assets – whether intrinsically green or aiming to become green. 
• Incorporating ESG mechanics into loans can be time consuming due to the time lag between the closing of the initial documentation and the ESG margin ratchet impact (e.g. six or more months to get ESG key performance measures (KPIs) embedded into the facility documentation; 12+ months for the first reporting, and usually over 18 months post initial closing for the margin to be adjusted). However, the specialists mentioned that implementing ESG KPIs into underlying loans in Private Credit strategies generally tends to be easier when sponsors are involved.
• Looking at sustainable loans for SMEs, the alternative investment specialists argued that three to five easy-to-measure KPIs can help to grow the usage of sustainable loans across this asset type (including benchmarking against peers). However, for now, a blend of third-party reports and external data sources will be required to establish the initial sustainable transparency. 
• Looking at other ESG products, the roundtable speakers stated that there are limited examples of sustainable securitisations in the market due to the limited pool of assets, while restricting criteria can reduce diversification benefits of structured products such as Collateralised Loan Obligations (CLOs) and Asset Based Securitisation (ABS). Data points from various sources – such as financial documents or the Science Based Targets initiative (SBTi) – could be leveraged as an alternative way to signal sustainable alignment of assets in structuring a sustainable securitisation.

“We see continued growth in allocations to infrastructure in the next two years. Green lending sends a clear signal to LPs and the market on one’s contribution to the energy transition.” Sharad Bhargava, Principal, Clean Energy Infrastructure, Capital Dynamics

If you’re interested in the topics discussed at this event and want to learn more, then please contact: Patricio Silva, Caroline Haas, Felix Eschwege or Rahel Haque or your NatWest Relationship Manager.

[1] versus 1990 baseline