The European Leveraged Finance Association has published an ESG exclusion checklist for the collateralised loan obligations market.
The ELFA says the checklist is designed to streamline the negative screening and exclusion process for CLO managers. It will be consulting with market participants on the ESG Exclusion Checklist over the coming weeks.
It is focused on arranging banks to complete at the time of a new corporate loan or bond syndication and aims to help investors quickly determine if a corporate borrower is a suitable investment candidate based on its ESG criteria.
The Checklist provides information on the percent of revenue that a company derives from a range of areas that might touch on an investor’s internal ESG guidelines. Areas for consideration include weapons, tobacco, thermal coal, fossil fuels, gambling, hazardous chemicals and waste, intensive farming and palm oil, among others. The Checklist includes a specific section for utilities companies, asking the corporate borrower to declare the percentage of electricity generated by thermal coal, liquid fuels (oil), natural gas and nuclear generation. Corporate borrowers may also indicate if they are a signatory of the UN Global Compact principles and if they are in breach of any of the principles.
Sabrina Fox, Chief Executive Officer, European Leveraged Finance Association, said: “Currently the use of ESG exclusion language is the norm for ESG integration into CLOs, but collection of data relevant to these determinations is not uniform and therefore creates inefficiencies that we intend to address with this resource. Rather than asking corporate borrowers to manage numerous different screening questionnaires from investors, the ESG Exclusion Checklist for Business Activities will allow borrowers to provide information in a standardised, consolidated manner, promoting a more efficient CLO market in Europe.”
The ELFA plans to release a final document in January 2022 following the consultation period. The tool will then be updated on a biannual basis to ensure it remains relevant and in line with latest market trends.