Most investors agree, clear data and strong reporting standards are the best combatant against greenwashing; however, ESG data is in a state that neither ESG critics nor the most dedicated impact investors are satisfied with. Of 9fin’s dataset of 11 key metrics, companies reported on an average of just 5.

Furthermore, private businesses, the bulwark of the LevFin issuer base, offer worse reporting. Public companies report on an average of 6.05 of metrics, compared to 4.16 for private companies. For more information on the methodology of 9fin’s research and a full report on ESG company data, clients can visit here. If you are not a client but would like to request a copy, please complete your details here.

Most leveraged finance professionals would agree progress has been made in the ESG investment sphere in recent years. Even throughout 2021, SLB issuance increased from quarter to quarter throughout the year. European High Yield posted €34bn of Green and Sustainability-linked bonds in 2021, which is equivalent to nearly 25% of total issuance.

Several buysiders have told 9fin that ESG considerations govern all of their investment decisions, with particularly strong trends against gaming credits.

Fidelity has gone so far as to hard-code ESG ratings into the docs for its Fidelity Grand Harbour 2021-1 CLO, as reported. The CLO has a firm trigger level associated with ESG ratings on companies, with more than 50% of assets required to be scored ‘C’ or above, meaning the companies are good or better than their sector on an ESG basis.

Nevertheless, the industry would benefit from improved reporting to generate trust in the ESG-focused investment industry.

Some of the biggest challenges lenders face when reviewing ESG reporting are below, but at 9fin, we are on a mission to make sense of the often fragmented information provided by companies. We use a mixture of technology and expertise to provide transparent and accurate data; as well as clear descriptions when something isn’t straightforward.

Our ESG offering provides subscribers with the data and tools they need to comply with new ESG reporting regulations coming into force later this year under the EU’s Sustainable Finance Disclosure Regulation (SFDR). As of December 2022, Financial Market Participants (FMPs) that consider Principle Adverse Impacts (PAIs) on sustainability factors in their investment decisions (all FMPs with 500 employees or more) will have to disclose how each of their financial products consider these impacts. This involves providing information on 14 mandatory PAI data points (the template for the PAI disclosure is given in the RTS Annex I).

Our LevFin ESG dataset currently measures 14 key data points and will soon roll out a total of 25 data points across 740+ European companies and will include all the mandatory SFDR Principle Adverse Impacts (PAIs).

Lack of reporting

Cerba, the laboratory services business owned by EQT, is an example of a company that does not report a significant amount of ESG data.

In May 2021, the business issued a €1.525bn loan paying a E+375 bps margin, with sustainability-linked margin ratchets.

The first ratchet measures the reduction of greenhouse gas emissions, while the second surrounds the percentage of women Cerba employs in senior management; however, there is a lack of information regarding any ESG data, including sustainable performance targets (SPTs) linked to the loan.

An ethics charter outlines its SSL KPIs, but the company offers no data to allow lenders to track progress against them.

Furthermore, the company’s website offers documents in a virtual library, but these amount only to marketing collateral or product information. Information on its Corporate Social Responsibility page is also sparse.

Notably, the business received investor pushback and its ESG terms were amended as part of wider docs changes, as reported by 9fin last year.

Lack of reporting on specific metrics can be just as frustrating for analysts, rather than a general scarcity of data.

For examples, Prax, which runs one of the largest oil refineries in the UK and offers oil and biofuel storage and distribution, reports scope 3 emissions, but doesn’t include full detail. The company came to market in January 2022 with $250m of SSNs, which were eventually pulled amid the difficult market conditions following the invasion of Ukraine.

Prax’s scope 3 reporting comprises just 2.9% of the company’s total emissions and the only activity included in this is electricity transmission and distribution.

The Science-Based Targets Initiative says reporting scope 3 emissions in Prax’s sector should include activities like customer use of finished products for both mid and downstream lines of business.

The American Petroleum Institute states that scope 3 emissions represent a significant majority for this sector which may be up to 70-90% of oil product lifecycle emissions.

It’s likely that Prax has just started reporting scope 3 emissions and plans to disclose more in the future, but as the data currently stands, it may be misleading for potential lenders if their knowledge of emissions reporting is limited.

Citrix offers a similarly scant level of detail on some of its reporting. The cloud computing business reports scope 1, 2 and 3 emissions, with details on each scope 3 activity included; however the company stated that no leased data centres are included in its reporting.

Procuring reporting from third parties is, of course, challenging, but excluding this information results in an incomplete picture of emissions.

Citrix also notably does not report other ESG factors considered material to the industry, such as water use, waste and recycling/reuse data.

APCOA Parking offers another example of vague reporting. The company did not provide a base year for its emissions reduction target, only stating that its objective was to achieve a 20% carbon reduction target by 2021. Lenders, therefore, would struggle to assess how ambitious this target is, without a baseline date from when that reduction could occur. Clients can read our ESG QuickTake on APCOA Parking here. If you are not a client but would like to request a copy, please complete your details here.

Inconsistencies

Just as a buysider would struggle to invest on the basis of an inconsistent OM, inconsistent sustainability reporting provides the same difficulty.

Reno de Medici, a recycled cartonboard producer, reported its baseline GHG emissions intensity rate for 2020 as 0.45 (tCO2e per metric ton of production) and elsewhere, in the same report, gave that same figure as 0.50 tCO2e/ton.

Emission intensity is the SPT attached to the company’s 2021 sustainability-linked loan and the company uses 2020 as its baseline year for this target.

If the baseline year is in fact 0.45 in 2020, this means that the emissions intensity increased in 2021, indicating that the company may not be moving in the right direction for this sustainability performance target. We reached out the Reno de Medici for comment prior to publishing this article but did not receive a reply.

Prax also showed a less direct example of inconsistent reporting.

The business was inconsistent with its financial and non-financial disclosures, particularly with the reporting of emissions following an acquisition.

On 28 February 2021, the date of the company’s financial year-end, Prax acquired Lindsey oil refinery. While the carbon footprint calculated for 2021 does not include Lindsey’s contribution, much of the refinery’s financial contribution is included in the consolidated financial statements of the group.

In line with the GHG protocol, it is considered good practice to recalculate emissions for previous years upon the purchase of a new refinery, though the data could also be provided separately for the acquisition.

Diminishing reporting standards

An important facet of ESG KPIs is that the company aims for progress on them.

In this case, Graanul Invest, a biomass producer, decreased the number of metrics it reported on from 2020 to 2021, following the carve-out of a section of the business.

The company and its sponsor Apollo told 9fin, the company did not report on forestry management because this part of the business was now a separate entity.

Nevertheless, external lenders can no longer clearly assess where the company is sourcing its wood, a contentious topic in the biomass debate at the moment, as reported. Even if forestry management is carried out through a third party, most buysiders would expect to see reporting on the sourcing of raw materials.

Given the European Parliament recently voted to exclude woody biomass projects from receiving European subsidies and being counted toward member states’ renewable energy targets, this issue is particularly notable.