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Rising demand for ESG financing in the private assets industry

© Mathew Schwartz

The fund financing market has turned out to be a prime place to integrate ESG criteria and play an active role in steering private sector capital towards a greener and more sustainable economy. In this article, we take a deep dive into this new sustainability-driven stage for fund financing.

Today, sustainability is a growing feature in many transactions on the private market. Europe is leading the trend, using EU regulation to encourage asset managers to apply ESG principles to their investments. According to Preqin research, 63% of the $2.5 trillion of alternative assets managed in the EU is managed according to sustainable principles.

Sustainable finance instruments

There are two main sustainable finance instruments?–?Green Loans, which set specific conditions on how loaned capital is deployed, and Sustainability-Linked Loans (SLLs), which can be used to finance projects linked to ESG objectives agreed at the outset, with conditions linked to how the fund meets Sustainability Performance Targets (SPTs). The arrangement often involves a bonus-malus system which indexes loan rates in order to provide an incentive for the fund to...

 

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