30 Big Ideas Shaping ESG: Finance

ESG-backed finance facilities have been one of the fastest growing areas of innovation in private equity over the last 12 months.

The debt fund that pays for ESG projects

Bregal Investments

The challenge: Making ESG-related improvements requires early investment of additional capital, but realisation of the benefits takes years.

The approach: Bregal launched the €40 million Bregal Sustainable Development Fund, which lends to the firm’s portfolio companies to support investments in ESG projects aligned with the UN Sustainable Development Goals. Loans are tailored to the capital structure and equity arrangements of the business and with its existing financing and governance structures in mind. Intended to catalyse ESG improvements, the initiative offers a new level of financial support to businesses undergoing an ESG transformation without jeopardising returns.

Bregal says: “The SD Fund is a unique initiative to provide tangible support to our portfolio companies in a way that helps accelerate ESG initiatives without jeopardising the fund’s returns.”

We say: An innovative attempt to provide the financing required to support ESG initiatives.

ESG-linked leveraged debt deals

The Carlyle Group

The challenge: How to build incentives into loans to encourage better ESG.

The approach: Carlyle linked sponsor-backed financing and institutional loans directly to ESG improvements with two European deals in 2020. At Jeanologia, which creates clean tech to manufacture denim, the GP linked a margin ratchet feature in the commercial bank financing to the amount of water the business was able to save. At Logoplaste, a rigid plastics packaging producer, Carlyle negotiated an amendment to its existing €570 million financing to link the interest rate to the business’s ability to meet its carbon dioxide savings target.

Lenders say: “This is a situation where finance and sustainability come intrinsically together. It’s a win-win for everybody.”

We say: These early ESG-linked deals are a glimpse of the future.

The ESG-backed finance facility

EQT advised by Debevoise & Plimpton

The challenge: How to integrate ESG-related terms into fund finance.

The approach: EQT’s €2.3 billion subscription line facility advised on by Debevoise & Plimpton and launched in June 2020 has an inbuilt ESG performance-linked pricing mechanism, which adjusts its margin in line with sustainability outcomes. The facility services the GP’s current flagship vehicle and has an upper limit of €5 billion. Backed by a syndicate of 17 lenders, it is intended to encourage portfolio companies to implement specific ESG improvements and meet measurable targets.

EQT says: The facility incentivises portfolio company improvements in “systemically important ESG areas, thereby further aligning interests and encouraging the development of more sustainable and future-proof businesses and returns”.

We say: The financing structure is powering a nascent transformation underway in fund financing.

A fund to tackle covid-19 stress

Vital Capital Investments

The challenge: How to help covid-hit companies in emerging markets where state support is lacking.

The approach: In March 2020, the impact investor launched the Vital Impact Relief Facility to provide affordable debt financing in sub-Saharan Africa to businesses facing working capital constraints triggered by the coronavirus pandemic. To be eligible, businesses needed to show that impact objectives met with the firm’s own priorities aligned with the UN Sustainable Development Goals. At least a quarter of staff needed to be women, preferably half.

Vital Capital says: “Rather than invest in large equity deals, which take years to build and scale (which is Vital’s typical strategy), we quickly realised the immediate need to help existing companies and jobs, so they could continue to provide goods and services in key development sectors, undisrupted.”

We say: A trailblazing fund that seeks to bridge the gap between local need and multilateral/government focus in a time of crisis.