SFVegas: Investors demanding more in ESG criteria

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LAS VEGAS – Fund managers seeking sustainable and responsible investments have increasingly asked fixed-income and structured-finance issuers to provide more details about the impact and the risks in their environmental, social and governance (ESG) portfolios.

In recent years, it’s been difficult providing them all the answers, according to a panel at the Structured Finance Association’s annual trade show this week.

ABS investors who have previously needed only to know an asset was excluded from verboten classes like tobacco, oil and gas or firearms are now pressing for details on how well an investment stacks up in the social and governance factors, as well, according to said Aashh Parekh, a portfolio manager specializing in asset-backed securities for Nuveen’s $1 trillion-asset global fixed income unit.

But managers’ hands can be tied due to a lack of standardization, as well as third-party verification, in defining “ESG” assets across the structured-finance industry.

“It's not a foregone conclusion that what [framework] we're going to come up with is going to be 100% quantitative in nature,” Parekh said. “I'm not sure that structure products in general is quite yet to the point where we can put specific numbers on everything, because it's an information gathering exercise as well.”

“ESG is not new,” added another panelist, Benjamin Cohen, the chief executive of data analytics firm T-Rex. “But the pervasiveness of the demand for ESG especially, in fixed income markets is somewhat new. And so then the question is, what are we going to report and what are going to be the standardizable.”

It’s a problem that is beginning to crop up in certain asset classes, such as collateralized loan obligations. While determining the ESG impact of an individual corporate loan is fairly routine, a portfolio involving hundreds of broadly syndicated loan participations, “the question becomes, how do you measure that?” said Mukund Sadagopan, the head of CLO structuring for Royal Bank of Canada.

Some CLO managers have begun scoring portfolios for ESG criteria, such as LibreMax Capital’s CLO manager Trimaran Advisors. But these are internal parameters that largely lack external verification, the panelists admitted, apart from fledgling ratings agency impact scores.

Both the SFA and the Loan Syndications and Trading Association have launched efforts to bring the ESG standards in, for example, corporate bonds, into the ABS and CLO spheres.

Standards will have to evolve to meet investors’ ESG demands, but the standards could also provide an impetus for more investors to climb into a market. If we could show them an ESG focus, then you can support the expansion of the structured products market,” said Parekh. “You can draw new investors that have never done it before and you can get then to potentially buy products. I think that's interesting.”

Freddie Mac expanded its investor base with sustainable, investment-friendly structures, said Luba Kim-Reynolds, an investor relations member involved with Freddie’s multifamily property securities platform. Freddie issued the first of two green-bond securitizations last year in responding to investor ESG interest – and to further its mission of expanding lending for affordable workforce housing. “We saw at least five to seven new investors who has not purchased our agency CMBS paper [previously,” she said.

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