ESG in the CLO Context

Mike Peterson

20 years: Capital markets media

In this video, Mike Peterson explains why ESG must move up the priority list for managers and investors working within the CLO market. He explains why ESG has struggled to gain a foothold among CLO managers and how this can be remedied.

ESG Financial Products

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ESG in the CLO Context

10 mins 50 secs

Key learning objectives:

Understand why CLOs have been relatively slow to embrace ESG
Outline how CLO managers are now taking steps to integrate ESG into their policies
Identify the industries that CLO managers are choosing to exclude from their portfolios

Overview:

Environmental, social and governance issues are becoming more important in the CLO market. But this is from a low base. CLO market participants have often argued that ESG is irrelevant to a business that consists of lending to a diverse portfolio of companies. That consensus is now changing, with Europe moving quicker than the US in response to investor pressure. More than 40% of new CLOs issued in 2020 included ESG restrictions of some kind.

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Summary

Why have CLO managers and investors historically believed that ESG does not apply to their product?

CLOs are lenders to companies rather than shareholders, making them more remote from a company’s management and its strategy.
Many CLO managers believe that ESG is already factored into their decision-making process.
Portfolio diversity is essential to CLOs, making CLO managers reluctant to exclude industries for ethical reasons.

How are CLO managers now beginning to adopt some ESG considerations into their investment process?

They are adopting policies in which they commit to use their influence to encourage responsible practices among the companies they lend to.
They are adopting policies about the conduct of their own business, such as promoting diversity.
Many have signed up to the United Nations Principles for Responsible Investment.

How are portfolio restrictions in CLO evolving?

Some large investors have historically requested that CLOs avoid certain industries, especially tobacco.
ESG-driven industry exclusions are becoming much more common in European CLOs.
Besides tobacco, the most common industries exclusions are now coal, controversial weapons, and drilling for oil and gas.

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Mike Peterson

Mike is a financial journalist and he has reported on CLOs since their earliest days. In 2001 Mike founded Creditflux, a trade publication for the credit market. Mike left Creditflux at the start of 2020 and is now an independent investor in media businesses.

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