Integrating ESG in Global Credit

By: Megan Starr and Taylor Boswell
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Carlyle has been at the vanguard of environmental, social and governance (ESG) integration for more than a decade. We believe that taking a comprehensive approach to evaluating risks and driving impact leads to better investment outcomes.

Recent volatility in global markets demonstrates the increased emergence of risk factors related to ESG topics – from health and safety issues throughout COVID-19, to the emerging physical risks from climate change. Our Global Credit team often uses ESG data and analysis in assessing these risks throughout the investment process. Nathan Urquhart, Managing Director and Head of Global Investor Relations, discusses the importance of ESG for Global Credit investors in a conversation with our Chief Investment Officer of Direct Lending Taylor Boswell and Global Head of Impact Megan Starr.

Nathan Urquhart: Megan and Taylor, thanks again for your time. Our Global Credit platform has mobilized quickly to help investors and borrowers navigate the rapidly changing global environment. Can you discuss the importance of considering ESG criteria during that investment process?

Taylor Boswell: Simply put, ESG is an additional tool within a broad set of tools we use to better assess the risks associated with certain investments. By incorporating ESG information into our due diligence process, we aim to better understand the risks associated with those investments. As risk factors emerge related to concerns such as climate change, sustainability, human rights or corporate management, we want to be able to assess their potential impact on an investment.

Meg Starr: ESG has been the darling of the equity markets for several years, but now we’re starting to see its growing importance in credit markets, alongside a heightened focus on ESG from investors, management teams and financial sponsors. It’s important to understand that ESG is rarely binary to credit, but instead, it’s an additional input into our investment process. As our credit platform continues to grow, ESG integration is a tool that can give us a more fulsome set of data to make better decisions and mitigate downside risks.

NU: What ESG standards do we follow to help guide our diligence?

MS: There are many global reporting standards and frameworks that help companies measure and report on a range of industry-specific sustainability information. For our private equity investing, Carlyle uses the Sustainability Accounting Standards Board (SASB) standards, which help us hone in on the most important ESG issues, guide potential engagement topics and offer tailored metrics for assessing performance on specific ESG criteria.

TB: Right now in Global Credit, we use differentiated data sets that provide us with the information needed to make better decisions. We’ll soon add the SASB standards to help focus our diligence on the most material ESG issues for a given sector and industry. We would traditionally evaluate many of these risks during our diligence, but our proactive approach to the investment process helps pull to the forefront risk factors that are often overlooked.

“ESG analysis is relevant for evaluating different risks, such as operational safety or potential environmental litigation, which could impact a borrower in the long run. By integrating ESG data into our credit process, we are able to better analyze issues and evaluate relevant implications to develop a more holistic investment thesis.” - Megan Starr, Global Head of Impact


NU: How does ESG play a role in developing capital solutions for borrowers and creating opportunities for investors?

TB: Integrating ESG represents an evolution in our investment process. These factors do not necessarily eliminate or prevent us from considering certain investments, but instead help us increase the nuance with which we can underwrite and price risk.

MS: For example, we could identify potential downside risks to an investment located on coastal real estate due to sea level rise or an increase in extreme weather events. Our access to better ESG data and information could lead us to develop strategies to mitigate the associated risks, or ultimately lead our team to pass on an investment if we do not believe we are being appropriately compensated for those risks. ESG is a lens through which we can focus on material information that when considered and integrated with other diligence information can promote better investment decisions over time.

”Integrating ESG data and analysis gives us the ability to properly price deals and compensate investors for the associated risks. The framework, paired with our dedicated ESG experts, provides Carlyle with a consistent and competitively advantaged footing to assess, monitor and manage these highly relevant risks.” - Taylor Boswell, Chief Investment Officer of Direct Lending


NU: Are there any key takeaways about how we incorporate ESG into our investment process?

TB: ESG is a lens to better evaluate constantly evolving global risks and issues related to our global credit investments. A common misconception is that ESG is an “end state” or that there is a rules-based implementation for sustainability. At Carlyle, we have a dedicated team of ESG experts that focus on how to make better decisions over time in pursuit of exceptional outcomes.

MS: Plus, why wouldn’t an investor want ESG data considered in the decision-making process? Risks related to ESG issues are constantly changing; the risks that may have not been relevant yesterday may become relevant today or tomorrow. We believe ESG analysis adds to an investment process, as opposed to constricting it.


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