PI Partnership
Shuen Chan is head of ESG at LGIM Real Assets
SECURE INCOME ASSETS: ESG INTEGRATION
As demand for investments in the private market continues to grow, there is an ev- er-increasing interest in considering envi- ronmental, social and governance (ESG) factors to promote greater transparency, for better risk management and to aim to deliver long-term value.
Integration of the Principles for Responsi- ble Investment in public equity and credit portfolios is increasingly improving – despite the myriad ways of doing so – as ESG data becomes more standardised and transparent. Private assets, however, could appear by definition to present chal- lenges to responsible investors, due to the different nature of that market. In this paper, we look at how long-term investors can incorporate ESG analysis to optimise portfolio risk within secure income assets – infrastructure debt, pri- vate corporate debt and real estate debt. We also consider future developments in this exciting and under-explored area.
Private credit and equity versus public markets: key differences Through their voting rights, equity inves- tors can influence company policy, opera- tions and decisions. As owners, they have a degree of influence over the day-to-day
management of their assets. But for secure income assets, also known as private credit, investors’ influence is limited by virtue of being a creditor (lend- er) rather than a shareholder (owner). These debt investments tend to have a long-term horizon – often of 10 years or more – while their more illiquid nature means that exiting them before the in- tended time horizon can be difficult. We believe it is just as crucial for secure income investors to assess a company or project’s ESG credentials as part of their investment process to ensure that they are comfortable with such long-term exposures.
Future developments Looking ahead, we believe there are plen- ty of reasons to be excited about opportu- nities for investments with strong ESG profiles in private credit and to have real world impact. We highlight some key are- as below:
Renewable energy: as renewable energy becomes a greater proportion of our ener- gy mix it continues to attract support from the government and private inves- tors. With increasingly ambitious climate change targets, the number and scale of projects has been increasing. Social – affordable housing: the UK con- tinues to suffer from a shortage of afford- able housing, with 1.3 million households on local authority waiting lists. Private capital will be a key role in ensuring this gap is closed.
Smart/low-carbon grids: in addition to more visible clean-energy projects, such as wind turbines and solar panels, we be- lieve there are also opportunities in inter- connectors and Offshore Transmission Owners. These are key parts of the system for transmitting energy to homes and businesses, and to different countries.
Important Information: Past performance is no guarantee of future results. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Views expressed are of LGIM as at December 2020. The Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272.
38 | portfolio institutional | February 2021 | issue 100
Renewable energy output is less predicta- ble than fossil fuels, and interconnectors enable countries to import power to main- tain a constant supply and create the green- est, most cost-efficient energy mix possible. The quantity and quality of ESG data available to investors in public markets has multiplied over recent years. In the private credit space, that journey is just beginning. Due to the diverse nature of the asset class, there is currently no mar- ket standard for ESG management and disclosure. At LGIM, we are championing several initiatives, and working with in- dustry bodies and borrowers to improve the comparability of datasets and consist- ency of reporting. We are also committed to a number of recognised reporting frameworks and guidelines, including the UN’s Principles for Responsible Invest- ment, the Task Force on Climate Related Financial Disclosure, the Paris Agree- ment on Climate Change and the Social Value Portal.
Sustainable outcomes By supporting transparency, data availa- bility and disclosures, we aim to improve ESG standards across the private credit market. This should facilitate further qualitative and quantitative ESG analysis of the asset class, leading to better and more sustainable outcomes for investors, in our view. More broadly, as the world faces multiple crises – from the pandemic to climate change – we believe that now more than ever before is the time for responsible investing, regardless of asset class. Still, we have shown that rather than being an obstacle, the private nature of secure income assets in fact means that many, from clean energy to social housing, are naturally aligned with ESG objectives by virtue of their purpose and function.
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