Risky ESG Debt Finds a Buyer as $18 Billion Credit Fund Piles In

(Bloomberg) -- Leveraged finance manager Capital Four says it now has a higher ratio of sustainable assets than the wider fund-management industry on average, as demand for high-risk and high-return ESG products picks up.

The credit manager, which from its base in Copenhagen oversees almost $18 billion in assets, says about 40% now meet so-called Article 8 rules under Europe’s Sustainable Finance Disclosure Requirement, meaning they can be categorized as light green. That compares with a 28% fund-management industry average across Europe.

Chief Executive Officer Sandro Naf says the strategy acknowledges that managers who don’t give “any consideration” to environmental, social and governance risks “will find it very difficult to raise capital.”

Capital Four’s credit strategies target high-yield bonds, leveraged loans, structured credit and private debt. But no matter which corner of asset management a fund is in, Naf says there’s “a clear and long-term structural shift toward higher and higher ESG standards for institutional investors, also from investors outside Europe.”

More than half the money that flowed into European funds last year went into ESG products, according to the Association of the Luxembourg Fund Industry. The ALFI study also shows that total sustainable assets have more than doubled since 2018, while Bloomberg Intelligence estimates that total ESG debt issuance surpassed $3 trillion in early June.

Just the Beginning

But the numbers also suggest that the shift into ESG has a lot further to go. ALFI estimates that sustainable assets still only make up about 11% of the roughly $12 trillion in total managed across Europe.

For asset managers, a big part of the challenge lies in certifying that the companies they invest in are as sustainable as they claim. The European Union is in the process of building a regulatory infrastructure to make that process more transparent, but managers still face a huge task in trawling through inconsistent and patchy data from issuers.

Naf says Capital Four applies its own scoring methodology to figure out how reliable issuer ESG claims are. “This is particularly important” because “external ESG data is very scarce” in the high-yield and loan markets, he said.

Meanwhile, end investors are starting to build their own ESG scoring models, as a lack of reliable data emerges as a key concern in the asset management industry. The goal is “to get an even higher ESG tilt in the portfolios,” Naf said.

Ultimately, companies that “are not transparent about ESG will find it harder and harder to find financing,” Naf said. “And rightfully so.”

He also says he expects that even in leveraged finance, moving to ESG “enhances your risk-adjusted return.”

©2021 Bloomberg L.P.