If 2020 was the year of COVID-19 then 2021 has been the year of ESG in European financing markets. While ESG is still in its relative infancy, a focus on sustainability has been on the rise in recent years and the last 12 months has seen real growth, with sustainability linked transactions accounting for 20% of larger cap leveraged loan deals by volume in 2021.
As at October 2021, Prequin estimate USD 3.1 trillion of private capital assets are now under management (AUM) by firms that are committed to ESG investing.
But what does this mean for mid-market borrowers? Well the message is clear, ESG needs to be on the agenda of executive Boards in the next few years as the trickle down effect from the large cap market gathers pace. We are already seeing lower mid-market term sheets include ESG linked margin ratchets and alternative credit providers taking a much greater interest in borrowers' ESG credentials than ever before, backed in some cases by specific fund allocations.
The reality is that sustainability is here to stay and the private debt community, which has delivered around 70% of all sponsor backed mid-market UK financings in the last 12 months, is helping drive the agenda - supported in part by their own LPs taking a greater interest in ESG factors as part of the underwriting process. As lenders turn a critical eye towards the implications of ESG in borrowers’ operating models, as consumer behaviours continue to evolve post COVID-19, it is becoming an important factor is considering longer term credit quality.
While mid-market corporates may not have extensive resources to address ESG issues it still needs to be on the agenda for corporate boards as the incentives on offer look set to grow in the next few years from sustainability linked funding products. At the same time the ability to demonstrate genuine "impact" is attracting an increasing proportion of the private equity community in both the lower mid-market and larger cap space.
Put ESG on your agenda - its a mid-term commitment for a longer term gain.