ESG Integration in Private Credit: An Asset-Level Approach

There's no doubt that ESG initiatives will continue to grow in prominence, or that private credit requires a different approach 

In contrast to public and private equity markets, private credit managers have been challenged when trying to integrate ESG into the investment process, given limited coverage of private, middle-market companies by established databases, and their influence bound by the scope of the equity owners’ objectives. Utilizing asset-level evaluation, private credit managers are working to develop better ESG data, which will drive constructive dialogue and better investment decisions.

Asset-Level Approach
Each individual company presents such nuanced exposures that managing ESG risks from an asset level is often preferable to that of an industry-level analysis. We believe that a bespoke, company-specific analysis of ESG criteria empowers credit managers to become more confident when determining which ESG risks are material and may ultimately be deciding 'go/no-go' factors for their investment committees.  

In our view, traditional financial diligence and credit underwriting should be paired with an independent evaluation of ESG criteria. Utilization of an independent ESG specialist can help ensure that findings remain independent from, and unbiased by, any preconceived investment narrative.

A Fully Integrated Process
An integrated ESG due diligence workstream should be designed to complement traditional investment and credit underwriting processes.  

Embedding ESG considerations into day-to-day operations requires cultural buy-in, reinforced through explicit accountability mechanisms, and designated ESG responsibility. We believe that a robust credit underwriting and monitoring process, with integrated ESG investment criteria and policies, enhances a private credit manager’s ability to make better informed investment decisions.  

ESG programs will continue to evolve across the private credit landscape, including new sustainability frameworks, technologies, and key performance metrics. We believe ESG integration and asset-level evaluations will remain a hallmark of good investments and long-term value.

About Benefit Street Partners
Benefit Street Partners (BSP), a Franklin Templeton company, is a leading credit-focused alternative asset management firm that invests across a range of illiquid and liquid credit strategies. BSP capabilities include private/opportunistic debt, liquid loans, high yield, special situations, and real estate lending.