The interest in responsible investing within the private debt asset class is mounting as investors seek to understand ESG objectives and outcomes within private assets. Our latest thought piece provides insights into the growing demand for ESG, and the role in helping portfolio companies integrate ESG principles.

With the increasing push to responsible investment, companies need to think about the key risks and implications of the operations when seeking capital. Asset owners are increasingly demanding that their capital is directed to companies that do the right thing, and with that − the expectation that over time − companies and investors that back them will get rewarded. When private companies seek to access capital, it is often too late to think about ESG for the first time.

As changes in social and investor expectations have been at the forefront of the drive towards responsible investing, what society and investors look for is what is embedded in the company’s operations, culture and actions. There is increasing pressure on companies to report on ESG issues such as sustainability and to be aware of, and manage, the implications of risks beyond their own, such as risks embedded within their supply chains.

Revolution views ESG risks as being a core component of overall credit risk. That is, responsible investing is a key component of our investment process and has been since inception of the firm. Revolution recognised very early that ESG principles were quickly becoming key criteria in assessing private companies.

There are specific ESG considerations when it comes to private debt. The first one relates to addressing “private”. We are investing in private markets and that brings certain challenges with it (but also benefits!). The second relates to “debt”. There is a fundamental philosophical difference when considering responsible investing in the context of fixed income, that is creditors versus equities as company owners. Equity investors are typically focused on ESG in terms of identifying specific companies that will outperform their peers and generate superior returns over the longer term. Debt investors are instead focused on using ESG to identify, and avoid, specific types of risks that could result in an investment incurring losses over the long term by becoming impaired.

Download our latest thought piece on the expanding role of ESG in private debt.