Structured credit is a naturally ESG-friendly asset class

Ashley Blatter 80 x 80.jpg
Ashley Blatter
August 12, 2021

Adoption of ESG exclusion criteria is becoming the norm in CLOs

Source: Dealscribe, 30 June 2021

 

  • The incorporation of ESG considerations is gaining increasing focus in the global investment community. The total size of the ‘sustainable’ investment universe expanded by 15% between 2018 and the start of 2020 to USD 35.3 trillion, according to the Global Sustainable Investment Alliance in its recent report.

  • Asset-backed security (ABS) investments are generally low risk from an ESG perspective, given the focus on financing the real economy – houses, consumer purchases etc.

  • Environmental risks, where present, are being addressed through the collateral, e.g. focus on energy-efficient homes or electric vehicles.

  • From a social perspective, lending regulations have generally tightened up significantly post the global financial crisis, which has led to a lending environment across geographies with stronger consumer protections.

  • Likewise, regulation is strict and there are none of the governance issues that come from corporates, given that the assets of the security are held in a single purpose vehicle, which is bankruptcy remote and governed by strict documentation. There is also transparency to the underlying loan level, the cash flows that are received and where they are allocated.

  • 2021 has seen further ESG developments within the structured credit space. The UK RMBS market has had its first issuances of ICMA-labelled green and social bonds (financing energy-efficient homes and underserved portions of the population, such as first-time buyers).

  • The number of CLOs containing restrictive ESG language has increased in recent years and we are at the stage where inclusion is normal in the European market. CLO managers have also made concerted efforts to broaden ESG-related exclusions as part of their investment eligibility criteria and an increasing number of managers are reporting ESG scores for their portfolios. The chart, using data provided by Dealscribe, shows the percentage of European transactions by issue year that contain ESG criteria in the documentation.

  • At BlueBay, we have assessed the vast majority of European CLO managers from an ESG perspective and are reviewing ESG criteria within deal documents. BlueBay is committed to working with industry peers and the PRI to share and develop best practices on integrating ESG into structured credit, as a recent PRI report illustrates.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.

This document may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (the ManCo), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany and Italy, the ManCo is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by BlueBay Asset Management LLP (BBAM LLP), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and is a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In United States, by BlueBay Asset Management USA LLC which is registered with the SEC and the NFA. In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts of the registered office of the Swiss representative shall have jurisdiction pertaining to claims in connection with the distribution of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), where applicable, the Articles of Incorporation and any other applicable documents required, such as the Annual or Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Australia, BlueBay is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, BBAM LLP is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits BBAM LLP to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. The BlueBay group entities noted above are collectively referred to as “BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of BlueBay by the respective licensing or registering authorities. Unless otherwise stated, all data has been sourced by BlueBay. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only. This document is intended only for “professional clients” and “eligible counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) ) or in the US by “accredited investors” (as defined in the Securities Act of 1933) or “qualified purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer. No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of BlueBay. Copyright 2021 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates. ® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at www.bluebay.com. All rights reserved.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.