Chapter 8

Question 1

What do GPs typically include in their Private Placement Memorandum?

Answer 1

Materiality assessment for how they will prioritise climate risk management of portfolio companies

Question 2

How can a GP carry out a materiality assessment?

Answer 2

Own tailor-made materiality matrix
SASB materiality mapping by industry
BII’s ESG Toolkit for investors in emerging markets
Materials produced by Climat International (iCI)

Question 3

How will LPs and GPs be affected by regulation?

Answer 3

SFDR and TCFD mandatory for LPs, in turn affecting GPs

Greater standardisation from this, including portfolio KPIs

Question 4

What guidance can GPs follow for aligning portfolios to net zero?

Answer 4

The private equity component of the NZIF

SBTi private equity guidance - use SDA for real estate and electricity; portfolio coverage (% of companies with SBTi targets) and temperature rating targets for remaining; can also be used by private debt, funds of funds, and secondaries

NZAOA also covers private equity in its third Target Setting Protocol, requiring all assets to be covered by targets by 2025(starting in 2023)

Question 5

Which platform seeks to tackle the fragmented nature of ESG data in the private equity industry?

Answer 5

ESG Data Convergence Initiative
To achieve critical mass for meaningful and comparable data from portfolio companies

Question 6

CSRD applies for which private markets investors?

Answer 6

Large PE and VC

EU developing voluntary guidance for unlisted SMEs: ESRS. Since CSRD likely too much for these

Question 7

SFDR impact on private equity?

Answer 7

Article 8 and 9 funds must consider principal adverse impacts

Question 8

A loan is not a security but a

Answer 8

Contract

Question 9

The key approach in managing climate risk in private debt is?

Answer 9

Engagement

Maintenance covenants can provide lenders with early warning that borrower is going off track

Question 10

Private assets are not precluded from article 8 or 9 funds but challenges in fulfilling disclosure requirements will mean?

Answer 10

Active engagement must feature as a significant activity

Question 11

Which organisations’ pricniples does labelled debt usually abide by?

Answer 11

Loan Market Association (LMA), Loan Syndications and Trading Association (LSTA), and the Asia Pacific Loan Market Association (APLMA) Green Loan Principles

Question 12

What are the four Green Loan Principles?

Answer 12

1. Use of proceeds
2. Process for project evaluation and selection
3. Management of proceeds.
4. Reporting

Builds on the Green Bond Principles, which are administered by ICMA

Question 13

What about principles for sustainability-linked loans ?

Answer 13

Also from LMA, LSTA, APLMA.

Pricniples are:
1. Selection of KPIs
2. Calibration of SPTs (sustainability performance targets)
3. Loan characteristics - Margin discount/step up
4. Review of methodology
5. Verification

Question 14

What do the LMA and the European Leveraged Finance Association say on SLL KPIs?

Answer 14

Published Best Practice Guide to Sustainability Linked Leveraged Loans

Setting KPIs early in loan syndication process is preferable, but disclosure may come later in the progress given importance of setting well-targeted and ambitious KPIs that differentiate the trajectory from BAU.

Question 15

How well are SLLs penetrating the market?

Answer 15

Popular in Europe’s Broadly Syndicated Loan (BSL) market where a quarter of all issuance. Similar trend in US BSL. Also expected to permeate narrowly syndicated loan and mid cap direct lending markets.

Question 16

Outside of BSL, what investment analysis is conducted on private credit?

Answer 16

Buy and hold

Question 17

Outside of BSL, what investment analysis is conducted on private credit?

Answer 17

Buy and hold

Question 18

Will CSRD impact private credit?

Answer 18

Yes large unlisted companies

Voluntary guidance expected for SMEs

Question 19

What has the PRI developed for private credit?

Answer 19

The private credit PE Esg factor map, which is an attempt to harmonise reporting across SASB, TCFD, SFDR, and principles from LMA/LSTA etc.

Question 20

What are the two ways of implementing an internal carbon price?

Answer 20

Shadow carbon pricing - no monetary value exchanged but guides investment decisions

Carbon fee - business units charged a carbon fee

Then, to set the price:
External benchmark, implicit price (to achieve goal), or internal market mechanism (cap and trade)

Question 21

Which article allows trading of offsets to achieve NDCs?

Answer 21

Article 6 of the Paris Agreement

Question 22

3 top issues with offset quality?

Answer 22

Quantification
Permanence
Additionality

Question 23

Key points on trading offsets?

Answer 23

Difference between issuance and retirements is tradable volume

Most traded over the counter due to quality and risk variance

However, some exchanges focussing on scaling. E.g. for CORSIA demand there is the CBL Global Emissions Offset

Question 24

How should offsets be accounted for?

Answer 24

1. Inventories if intend to trade
2. Intangible assets if holding but not retiring yet
3. P&L impact once retired

Question 25

What are adjusted offsets?

Answer 25

Issuing country increases NDC ambition by equivalent to amount issued. Adjusted offsets thus trade at premium as more additional

Question 26

What mechanism does the EU ETS have to lock in emissions reductions through purchase of physical carbon allowances?

Answer 26

Any additional emissions reduction in investment period results in faster tightening of carbon allowance supply under the MARKET STABILITY RESERVE