1) You have been involved in private credit for over two decades. How did you end up in sustainable private debt investing?

Historically, our team has looked to identify, originate and underwrite unique and innovative investments within emerging sustainability-oriented market sectors. Of course, in earlier days 10-15+ years ago there was little if any validation / measurement of, e.g., a solar project’s net zero contribution. As such, our approach has evolved and innovated with markets over time and is inspired by best practices derived investing across various private infrastructure, project and specialty finance markets and cycles. The strong growth we are seeing today in sustainability transition-aligned industries, particularly within some fragmented, smaller and less-efficiently financed sectors, requires a bespoke and tailored approach. We believe solutions-based private credit can broaden access to capital, helps catalyze solutions by empowering disruptors, delivers investment resilience, and provides engagement and stewardship. It is gratifying to apply lessons and best practices learned towards generating profit with purpose.

2) Lombard Odier is one of the very few global asset managers that’s a Certified B Corp. What does that mean from an investment perspective?

Lombard Odier was an early signatory of the UN Principles for Responsible Investing (PRI) and is a signatory of the UN Global Compact. We are also signatories of the Principles for Responsible Banking (PRB) and Net Zero Asset Managers Alliance. We are also proud to be the first global wealth and asset manager to obtain a B Corp certification. Such memberships are a result of Lombard Odier’s significant proprietary sustainability, stewardship and engagement professional teams staffed globally. These resources help us engage with investees at a level and connection point unique in the market today, helping us deliver more than just capital to our investee partners.

3) Your sustainable private credit business counts the UK’s Environment Agency Pension Fund (EAPF) as an investor. What’s their influence on your process?

We are grateful for the trust and partnership that the EAPF, winner of the 2023 Pensions for Purpose Impact Investing Adopter Award and Paris Alignment Award, has demonstrated in their commitment. We believe our approach is strongly enhanced by the insight of partners such as the EAPF and have greatly valued their aligned engagement to date.

4) Which sector do you anticipate the most sustainable private debt issuance to be from in 2023? 

Capital solutions providers have the luxury of employing a bottoms-up approach to sourcing opportunity based on idiosyncratic investee bottlenecks, rather than staking bets on specific sectors or market direction. Although the cost of private credit has increased along with rates, it still represents an accretive option for borrowers versus an even higher still cost of equity. Accordingly, we have seen a marked demand increase broadly across verticals less-cyclical and less-correlated to broader market trends. Today, sectors benefitting from the Inflation Reduction Act (e.g. renewable electricity, microgrids, electric vehicles, etc.) are seeing a surge in investment interest that will require complementary, sculpted private credit solutions capital to service demand.

5) How has the investment landscape shifted in recent years with the increased focus of governments worldwide on tackling climate change?

We believe we are now seeing the early innings of the institutionalization of ESG risk management and, to paraphrase the EAPF, the alignment of profit and purpose. As such the landscape is evolving rapidly and creating room for market leadership based on genuine commitment to authenticity, alignment and additionality in creating climate solutions. We believe the most attractive risk-adjusted opportunities may be with companies expected to benefit from increasing regulation and market intervention, or at least those expected not to be harmed by increasing carbon costs and the long-term structural shift away from exploitative industries.

6) Is greenwashing a problem? How do you avoid that?

Sustainability assessment is a key part of the investment process, aiming to act not only as a risk management tool but also as a value creation driver. One aligned approach to avoiding greenwashing is to invest in companies disrupting mature markets, particularly those serving an essential need, with a product or service that provides more value to stakeholders using fewer resources. It is also important to be able to ensure authenticity in approach to running ESG / sustainability assessment processes – an increasing number of firms are hiring extensive internal resources to avoid potential conflicts of interest or principal-agent issues. We believe a vigorous private credit approach will utilize robust reporting covenants to verify measurable outcomes and respond to potential ESG risk events. Humility is also key in realizing that we may not yet have all the answers, requiring constant iteration and innovation. Market participants recently implemented SFDR Level 2, which resulted in widespread reclassifications from SFDR Article 9 to SFDR Article 8.

7) How hard is it to source good sustainable deals? Is there a notable difference in their performance?

For asset takers, the majority of direct lenders, it is still difficult, even in today’s choppy markets, to find compelling sustainable deals in broader agented, auction-centric sponsored markets. We continue to see a capabilities bias against novel, off-piste, smaller, or less-travelled opportunities, which may be more difficult to analyze, understand or underwrite. Lombard Odier is attracted to such idiosyncratic situations where it can construct compelling financial returns alongside measurable positive impact. Through our predominantly non-sponsored referral network, we have seen a significant pickup in demand for our solutions-based credit capital.

8) How’s private credit different from other debt investments in terms of sustainability?

Private credit values relationships with founders and operators, and an approach avoiding broader auctioned / syndicated processes where investment managers may be more removed from direct stewardship and engagement can enable managers to work intimately with management teams to both implement rigorous reporting requirements and develop mutual goals in terms of sustainability / KPI reporting, which we believe are particularly valuable in underfinanced, fragmented markets. Private credit managers with credible internal resources may be well-positioned to help management teams formalize their sustainability processes and commitments and attract head-turning follow-on investment. As an example, we see in the market that PearlX recently announced that it was majority-acquired as the first North American investment by Antin Infrastructure Partners’ NextGen platform.

9) What’s your favorite book related to sustainability investing?

I would recommend “The Power of Impact Investing:  Putting Markets to Work for Profit and Global Good” by our former colleague, Dr. Judith Rodin. In new media, we find Ted Seides’ Capital Allocators podcast to be among the most informative in the investment zeitgeist, as he consistently guides excellent commentary, dialogue and insights with a variety of relevant market participants.