For months now, private credit funds have been asking for tighter documents, but sponsors have not necessarily provided them. However, there is one area to which this stand off does not seem to apply: environmental and social governance. When it comes to the ESG margin ratchet, both parties seem happy to get a little stricter.

“We’re seeing an increase in the number of two-way ESG margin ratchets written into documents, even while the tired old debate of two covenants or three [between lender and sponsor] drags on,” said a market participant.