Blog Post 01.21.21
On 19 January 2021, the Loan Market Association (LMA) and the European Leveraged Finance Association (ELFA) jointly published an environmental, social and governance (ESG) disclosure guide for leveraged finance transactions (the Guide). The Guide recognises the dichotomy between the increasing importance of ESG factors in leveraged finance credit analyses and inconsistencies between ESG disclosures.
The themes in the Guide reflect the general market shift to address ESG factors. The Guide sets out three key reasons as to why greater levels of ESG disclosure in this area are required. These are:
In terms of practical advice, the Guide provides details on integrating ESG into a company’s offering documentation to permit wider access and transparency, and ongoing reporting requirements.
Chapter 3 of the Guide highlights some key areas for consideration in relation to ESG diligence. These broadly include the following:
Investors are placing increasing weight on the value of ESG considerations as an indicator of the long-term financial stability of a company (e.g., issues such as reputation, market competitiveness, etc.). This might distort the traditional concept of “materiality.” There is increasing data which allows for ESG metrics to be assessed on a quantitative basis. Developments in this respect are an area to watch. However, in the meantime, the materiality of ESG factors must be considered on a case-by-case basis.
Drafting Considerations and ESG Roadmap
Chapter 4 of the Guide establishes a roadmap for ESG disclosures in offering materials. Many of the themes follow on from the previous chapters, with specific guidance on considerations for the offering memorandum. As mentioned above, a holistic approach is recommended, such that ESG factors are interwoven with the wider business disclosures. Specifically:
Chapter 4 also explores the importance of consistent data metrics. Guidance is given as to other methods that can be used to disclose specific elements of an ESG strategy, such as external certifications, standards, verifications and ratings. However, the key takeaway is that data metrics and KPIs need to be harmonised across industries so that they are of value to investors.
Industry research reveals that clarity is demanded from all sides. Investors want to ensure they have transparency with regard to company disclosures and that robust company reporting systems are in place. Whilst companies are looking to strengthen their ESG profiles, they are being hindered by inconsistencies regarding exactly what investors need to see, and how and when this information should be disclosed. There is a significant challenge as to how this can be harmonised across industries and sectors. However, the burgeoning popularity of ESG considerations demands attention in this area to reduce the scope for ESG-washing.