ICG, the London-listed alternatives manager, is the latest to enter the world of ESG-linked credit.
The firm secured a £550 million ($751 million; €620 million) revolving credit facility linked to carbon emissions targets and the integration of climate risk assessments into its investment decisions, it said in earnings documents last week. The facility will be used for corporate purposes supporting the listed firm’s liquidity needs.
In December, EQT inked a €1 billion debt facility with a pricing mechanism linked to ESG-related objectives for its corporate growth plan. Earlier in the year it launched ESG-linked bridge facilities both within the private equity and infrastructure business lines of more than €6 billion. KKR, Eurazeo, Investindustrial and Quadria Capital also have similar credit line requirements for their funds.
Private Equity International spoke with Steve Burton, treasurer at ICG and Eimear Palmer, managing director and responsible investing officer, to find out more about how their credit facility works, their sustainability targets and plans to launch ESG-linked credit lines for their funds.
Why did ICG want an ESG-linked credit facility?
Steve Burton: We’ve had a £500 million facility for a couple of years now and some of it is maturing in April 2021. Liquidity was a big issue last year, not just in financial services but across all corporates, so we were keen to refinance the facility and extend the maturity profile as soon as the market became available again.
ESG is fundamental to ICG and it was definitely the right time for us to inject that into the facility.
What drove the metrics was one of the biggest discussions with the board regarding the facility and how they would link more broadly to our corporate strategy.
What are the sustainability targets linked to the facility?
Eimear Palmer: This facility is an important milestone in ICG’s ESG journey as we link our ESG priorities with our corporate financing. We are very ambitious in terms of our ESG agenda and we are proactive in terms of how we look at ESG not just in our operations but also how we integrate it into our investment process and in our engagement with portfolio companies.
The targets that we set are aligned with our corporate ESG targets. In 2019, we set an objective to reduce scope 1 and 2 carbon emissions across our operations by 80 percent by 2030.
We are also focused on decarbonising our portfolio and integrating climate risk assessments into our investment decisions. We spent the last six months working with an external advisor to develop a climate risk assessment tool. Every investment opportunity is screened using this particular tool, so we consider both physical and transition climate-related risks for each deal we assess.
It’s a comprehensive tool that is being used not just in the screening stage but also throughout the investment process. For example, for strategies where we have more influence and access to management, we’ve developed climate-related KPIs to track by industry.
We also took the decision this week to ban any direct investments in companies that generate a majority of revenue from coal, oil or gas across all our funds. There are some exemptions for gas infrastructure, but this emphasises our commitment to supporting a more climate-resilient economy, as previously this exclusion only applied to our sustainable Infrastructure Equity fund.
As a founder of the UK network of ICI [Initiative Climat International] we’ve been collaborating with peers in our industry to develop and share best practice in terms of reducing the emission intensity of our investee companies and integrating climate risk into the investment process.
Can you tell us more about the structure of the loan?
SB: The facility has an initial term of three years with the possibility to extend for an additional two years. It’s a corporate facility that supports our liquidity needs wherever they may be required.
We were well oversubscribed and some banks were scaled back from their commitments. Citibank was the arranger and we have added new international banks, including Bank of America, BNP and Barclays.
If we hit each of these metrics, we get a benefit on the margin and commitment fee. If we miss the targets, we have an increase on the margin and commitment fee. It’s not a huge a number, but it’s about making sure we do hit them and making sure we are consistent with our broader corporate objectives.
The ESG metrics were of significant interest to the banks – they do adjust the margin. Therefore, having them agreed by the banks is very supportive to ICG’s ESG objectives, as a form of validation.
Has the coronavirus pandemic changed the corporate finance landscape?
SB: During the middle of last year, no one was talking about ESG-linked credit facilities because there was more focus on emergency liquidity facilities. But in a normalised market for these facilities, I think everyone is now looking at having some form of ESG-metric. Stakeholders will come to expect ESG-linked pricing metrics as the norm, rather than the exception.
What’s next for ICG? Is there a plan to ink another debt facility with an ESG-linked mechanism across the funds?
SB: The next thing we will look at is ESG-linked facilities on the fund level. That’s certainly an area we are very interested in.
EP: We are beginning to integrate sustainability into a number of our funds – by way of example, one of our real estate debt funds incentivises borrowers under a green loan framework with interest rate reductions linked to the sustainability performance of the relevant asset. This fund and two others which have sustainability criteria are the obvious candidates for this type of financing as a first step.
Steve Burton is treasurer at ICG and Eimear Palmer is managing director and responsible investing officer at the firm.