By Hamlin Lovell, NordicInvestor

NordicInvestor interviewed Marjo Koivisto, Investment Associate and Head of ESG at Proventus Capital Partners, which carries out direct lending in Northern and Western Europe, as well as some secondary credit market investments. Tailoring credit financing for midsized European businesses in need of expansion, working capital or other refinancing is a unique and bespoke opportunity to support companies’ long-term sustainability transitions.

Proventus Capital Partners (PCP), and going further back, Proventus AB, has a long history of being a socially conscious and macro-driven investor since the start in 1969. PCP, the management owned credit fund, is now investing its fourth institutional fund, PCPIV (EUR 1,8bn). The team is continually deepening their ESG investing practice, including by becoming UNPRI members in 2020.

The UNPRI standard has become increasingly relevant for credit investors…”

The 3,038 signatories, representing over USD 100 trillion of assets, include many billions of credit assets”, says Koivisto. At PCP, the investment team analyses the ESG aspects of each case. The firm also has an ESG committee including Proventus Capital Management’s CEO, members of the investment group and external parties with specific relevant sustainability expertise.

Credit Risk

“One reason we integrate Environmental, Social and Governance issues into our investment process that there is empirical evidence that the lack of management of these risks by companies is correlated with negative credit events, based on academic studies”, says Koivisto.

ESG risks often become financially material….”

Environmental risks include extreme weather events, sea level rises, and climate transition risks. Social risks include privacy, product labelling practices and cybersecurity”, says Koivisto, who has previously worked as an economist at the World Bank, the multilateral lender. “We invest across industries and analyse each opportunity to attest whether ESG related events could materialize, what those scenarios could look like, and how well ESG opportunities and risks are being managed by companies”.

PCP also has an Ethics & Sustainability policy which it references on its website, and carry out ethical screening of investment opportunities. These criteria can lead to companies or industries being excluded.

ESG Processes in private and public credit

But the ESG integration process goes far beyond exclusion and PCP integrates ESG in extensive analyses of companies.

A best-in-class, or relative screening approach is not practical in private debt, since there are such few benchmarks for private companies…”

And tailoring financing and terms in the private market also helps us support companies’ credible efforts of transitioning their core business to long-term sustainability. Whereas in listed instruments we may look for information how the proceeds from the issuance would be used”, says Koivisto.  “In bilateral lending, we more and more expect management teams to be open to investigating their material ESG risks and opportunities. We want to work out with them how the management of ESG issues can protect the value of an investment”, she adds.

Transition to a greener economy

In ESG opportunities, PCP sees funding the green transition as one of the most important commercial opportunities in the market today.

Green product labels are growing 6X over conventional labels, and what differentiates the 2020s from 2010s is that the industrial green demand is now also there…”

We see opportunities not only in hard-to-abate sector transition investments, but across the board. Bilateral credit investing is a most powerful way to help drive companies’ sustainability transition and reduce transition risk over time”, Koivisto notes.

Bespoke Sustainability Terms

There is also potential to negotiate tailored deal structures. A bilateral loan could have sustainability terms specific to the issuer, and have financial incentives to reward on good ESG performance in the form of interest expense that reduces if targets are met. “A real advantage of being active credit investors originating our own deals and agreeing terms with borrowers, is that they can related to support sustainability linked outcomes. For instance, lending can incentivize a data storage business to make a full transition towards green electricity sources. This could involve margin ratchets in response to hitting ESG performance targets. We would only propose this if it supports the core business of the borrower. When the results are communicated to equity investors it could also increase the company’s value”, explains Koivisto.

Hard and Soft Climate Incentives

The potential to offer margin ratchets if GHG emissions or carbon footprints are cut is clearly a hard incentive and there are also softer ways to support corporate sustainability transitions. “Soft incentives include brainstorming with companies about how to make TCFD or other climate-related disclosures and set targets around material physical, transition and regulatory risks. Climate-related financial disclosures are increasingly important”, says Koivisto. “Many industries are clearly lagging behind the Intergovernmental Panel on Climate Change (IPCC) or Paris Agreement targets for reducing emissions, and every company now needs to understand the carbon footprint of its investment plans”.

Covid 19 and a green recovery

“We have had a close dialogue with borrowers throughout Covid 19 and have sought to remain a strong partner to them as some of them have felt the impact of the pandemic for example on their supply chains and work force planning. Yet, let us not forget that for some companies this pandemic market is also a real opportunity to grow market share and make investments as the green recovery gathers momentum”, Koivisto expects.

Case studies

This is not entirely new for PCP, who for many years have been financing companies with a green theme, including Denmark’s solar energy group, Better Energy and biogas producers, Scandinavian Biogas. There are also borrowers across a range of industries, displayed on the Proventus website.

Almost all of PCP deals are bilateral and with privately owned and entrepreneurial companies.