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THL Credit joins growing group of credit firms applying ESG criteria

THL Credit Advisors LLC is joining the growing group of credit managers that have formulated an Environmental, Social, and Governance (ESG) investment framework across its bank loans, high yield, CLO, and direct lending portfolios.

"We believe that... integrating ESG considerations has improved our investment process and provided a more comprehensive framework for the firm's portfolio managers and credit analysts to consider potential risks that could affect the performance of companies and issuers," Brian Good, co-head of THL Credit's Tradable Credit team said in a release. 

Much of THL's ESG investment framework is consistent with the United Nations–backed Principles of Responsible Investment (PRI). About 20 CLO managers across the U.S. and Europe have committed to the PRI, according to Moody's analysts led by Frank Cerveny. 

The notion of ESG has already made inroads into the European market last year, with CLO managers Permira Debt Managers, Bardin Hill Loan Advisors, and Fair Oaks Capital issuing ESG-compliant CLOs. That push has also come as a number of European pension funds have increasingly been interested in ESG criteria. 

More CLO managers in the U.S. have also followed suit, including Partners Group with its most recent Pikes Peak 4 CLO as well as MJX Asset Management with its Venture 38 CLO in July. 

Current CLO exposure to non-compliant issuers
Moody's analysts last month examined several of the ESG-compliant CLOs and found that negative-ESG criteria would have a limited credit-related impact on CLOs, mostly because the percentage of loans in industries that would be affected remains relatively small. Among the few ESG CLOs Moody's has rated so far, sectors that would be prohibited include oil & gas extraction, weapons, pornography, tobacco, and gambling. 

Within existing CLOs, loans in the hotel, gaming, and leisure industry would stand to face scrutiny, but still only make up about 2.87% in European CLOs and 1.96% in U.S. CLOs, according to Moody's. However, while the average exposure to potentially restricted sectors remains low, Moody's also found that 5–7% of some European CLOs hold debt that would not be ESG-compliant, while a handful of U.S. CLOs hold between 7–11% of such names.

A key to the growth of more ESG-compliant CLOs, though, will be the growth of ESG-related leveraged loan issuance given the challenges CLO managers already face in sourcing attractive collateral into their portfolios that would only dwindle further with the application of negative-ESG criteria. 

In anticipation of more future ESG-related issuance, attorneys at White & Case last week published a report detailing the different forms of ESG-compliant CLOs that could be expected in the coming years whether they be corporate credit CLOs with both negative and positive ESG criteria or Sustainable Development Goals (SDG) CLOs with loans made specifically to clean energy, infrastructure, and/or microfinance borrowers.

LCD is an offering of S&P Global Market Intelligence. S&P Global Ratings is a separately managed division of S&P Global.


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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.