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A Five-Part Framework for ESG Disclosures in Global Leveraged Finance
ESG effects on credit fundamentals make disclosures an inherent investment requirement.
- By Eugenia Unanyants-Jackson, Head of Environmental, Social & Governance Research, and John Ploeg, CFA, ESG Specialist
- March 11, 2021
The effect that ESG factors have on credit fundamentals underscores that comprehensive ESG disclosures are no longer a “nice to have.” Rather, they are an investment imperative, as we explain below. While the global investment-grade universe has made notable progress on disclosures, companies in the global leveraged finance universe remain conspicuously behind. Given this delay and the need for standardization, we introduce a five-part framework of tangible steps that leveraged finance companies might reference when attempting to meet investors’ heightened disclosure demands.
More fixed income investors are seeking—if not demanding—comprehensive ESG disclosures from issuers, and we are among them. However, our long-standing integration of ESG factors into credit analysis and the assignment of ESG Impact Ratings across all of our issuers continue highlighting the disclosure deficiency within the global leveraged finance sector.
We integrate ESG factors for good reason: ESG failures present material credit risks. For example, within the emerging market high yield corporate universe, default rates in the oil & gas and metals & mining industries are more than double those in other EM corporate industries. Sensitivity to commodity price volatility and instances of ESG shortcomings have contributed to the elevated default rates in these closely watched industries as we explain in an accompanying white paper.
In terms of the scale by which the global leveraged finance sector lags its peers, we compared ESG coverage on our representative portfolios for our global investment grade, high yield, and leveraged loan strategies (Figure 1). While nearly 3/4 of global investment-grade names presented greenhouse gas coverage using reported data, less than 1/3 of global high yield names presented similar coverage. A nearly non-existent representation among global leveraged loans—less than 1/20th—presented greenhouse gas coverage using reported data.
FIGURE 1: The Scope of the Leveraged Finance Disclosure Challenge
Third Party Coverage of Greenhouse Gases (GHG) Intensity for Global Investment Grade, High Yield, and Leveraged Loans.
Considering the sizable gaps in coverage, our five-part framework proposes a basic level of ESG disclosures for global leveraged finance issuers, which consists of the following:
- Identify and disclose material ESG risks and opportunities for the business.
- Identify and disclose positive and negative impacts that the company’s business activities have on the environment & society.
- Disclose material ESG risks and impacts in the annual report and accounts. Describe mitigation and management measures taken to address ESG risks and key negative impacts. Where ESG factors and trends lead to new business opportunities or where there is a scope for positive contributions to the environment and society, highlight those with commentary on actions taken or planned.
- Provide as much data as possible for ESG risks and impacts. Quantitative data also supports peer comparison, modelling, and portfolio analytics.
- Focus on ESG factors that are relevant and important for the industry, company, and supply chain. For example, on the environmental side, these could be GHG emissions, environmental pollution, water withdrawal, waste generation, biodiversity loss, etc. On the social side, these could be workforce-related issues (e.g. occupational health and safety, diversity and inclusion), or product/customer-related issues (e.g. product safety, data privacy and security), or value chain-related issues (e.g. human rights violations). On the governance side, key issues include ownership structures and controls, corporate governance, investor rights and credit protections as well as business conduct issues.
Standardised frameworks can help guide such disclosures, and we support standards developed by the Sustainability Accounting Standards Board as well as the recently launched guidance on ESG disclosure by The European Leveraged Finance Association (ELFA) and the ESG Questionnaire launched by The Loans Syndication and Trading Association (LSTA).
These initiatives reinforce investors’ requirements for comprehensive disclosures. Our desire is that disclosure standards, along the lines of the five-part framework provided above, incentivize leveraged finance issuers to join their investment-grade counterparts with comprehensive ESG disclosures as it may become an increasingly important determinant of their future cost of capital.
This material reflects the views of the author as of March 11, 2021 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.
Eugenia Unanyants-Jackson
Eugenia Unanyants-Jackson is a Principal and the Head of Environmental, Social & Governance (ESG) research at PGIM Fixed Income, based in London. Ms. Unanyants-Jackson is responsible for managing the strategic integration of ESG research across all elements of the firm, including investment decision-making, and internal and external education and engagement. She also co-chairs the ESG Committee that is tasked with governing PGIM Fixed income’s ESG approach. Previously Ms. Unanyants-Jackson was with Allianz Global Investors where she was the Global Head of ESG Research since 2016, leading the implementation of ESG integration across fundamental equity and fixed income strategies. Prior to this she was a Director of Governance and Sustainable Investment at BMO GAM (formerly F&C Investments). Ms. Unanyants-Jackson received a diploma in Teaching English and German from the Tbilisi I. Chavchavadze State Institute of Western Languages and Cultures in Georgia, and a MA in Public Administration from the Georgian Institute of Public Affairs. She is also a co-chair of the Corporate Governance and Stewardship Council for The Conference Board, a co-chair of the Shareholder Rights Committee for the International Corporate Governance Network (ICGN), and served on the Market Integrity and ESG Investing Steering Committee at the European Fund and Asset Management Association (EFAMA) and the Stewardship Committee at The Investment Association, (IA) UK.
John Ploeg, CFA
John Ploeg, CFA, is a Vice President and ESG specialist for PGIM Fixed Income, based in London. As part of the Firm’s ESG specialist team and a member of its ESG committee, Mr. Ploeg is involved in all aspects of its ESG approach, including the maintenance and enhancement of its ESG ratings methodology, ESG engagement activities, and tracking ESG-related market and regulatory developments. During the year, before taking on the role as ESG specialist, Mr. Ploeg attended Sciences Po’s Paris School of International Affairs, where Mr. Ploeg received a Masters in Environmental Policy. Previously, Mr. Ploeg was head of the firm’s European CLO product management team, where he was responsible for all business aspects of the firm’s European CLO platform. Prior to relocating to London, Mr. Ploeg was a member of the firm’s US CLO product management team in Newark. Before that, Mr. Ploeg worked in the CIO department of PGIM’s parent company, Prudential Financial Inc, first in the department's Alternative Assets Group, and later in its Modeling & Analytics Group. Mr. Ploeg received a dual BA degree in Computer Science and Economics from Brown University in 2007, and currently holds the Chartered Financial Analyst (CFA) designation.
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