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The Fund Finance Association held its 7th annual European Symposium in London earlier this summer, attracting more than 1,700 investors, fund managers, bankers and lawyers within fund finance. Allvue was in attendance to interact with industry peers and to hear from some of the key players in fund finance. I also had the privilege of moderating a panel discussing the evolution of ESG in fund finance. Here are my top three takeaways from the session.
ESG has been a relatively recent but rapidly growing addition to the fund finance market, but not all participants in the fund finance space are pushing equally for ESG’s influence to grow. In most cases, LPs are the main drivers leading GPs to incorporate ESG in their investment-decision making, and managers are willing to comply – with some actively viewing ESG as an opportunity for differentiation.
Many banks are also playing along well with growing ESG asks. However, in our panel’s experience, non-bank lenders have been less enthusiastic about exerting ESG influence in their funding operations.
The Loan Market Association (LMA) — the body associated with guidelines surrounding the EMEA syndicated loan market – released new guidelines in May surrounding sustainability-linked loans (SLLs), a vehicle which has seen immense growth in the past few years. The new framework provides much-needed clarification and practical guidance around linking margins for subscription lines and NAV/ABL facilities to specific ESG factors.
This development along with frequent ESG regulatory changes in other areas of the private credit space are likely to drive further growth of firms tying lending and investment screening to ESG considerations.
Greenwashing describes the act of firms marketing their adherence to ESG standards in order to sell to investors interested in responsible investing products, without actually incorporating ESG factors in their investment process. Accusations of greenwashing are increasingly common – and will likely be a focus in upcoming SEC regulation in the US. Firms are taking steps to protect themselves from greenwashing risk, with the fund finance segment likely to follow suit. As discussed by the panelists, some strategies for counteracting greenwashing in fund finance include the following approaches:
The panel expressed optimism about the progress of ESG in fund finance as paralleling the rest of the private capital space; ESG’s standards are still quite broad and open to interpretation. However, fund finance players are starting to innovate in new approaches to incentivize managers to collect ESG KPIs tied to specific outcomes, most notably related to European regulation (particularly sweeping rules like the Sustainable Finance Disclosure Regulation – SFDR).
As the fund finance segment continues to mature in its handling of ESG, Allvue’s market-leading Fund Finance solution continues to evolve. Allvue has invested in streamlining the exchange of information between fund finance lenders, borrowers, and GPs via report standardization, data transfer specifications, reconciliation, and real-time shared workflow. As a result, fund finance teams are better empowered to collaborate as the need for complete, accurate and reliable data becomes increasingly important.
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