Filtering today for the ESG compliance threshold of tomorrow

David Thornton

Livewire Markets

It's one thing to stick the three letter ESG (environmental, social, governance) acronym onto a product, it's another thing to actually walk the talk and weave it through your entire investment process. 

But that's exactly what Revolution Asset Management does. And they don't do it from a distance. 

Private debt investments allow greater levels of scrutiny compared to many publicly listed assets.  

"We're able to engage directly with management and sponsors, and to interrogate that with quite a high level of detail; something you wouldn't be able to do if were simply purchasing bonds in the capital market," says Revolution Asset Management Chief Investment Officer Bob Sahota.

In this wire, Sahota will pull the curtain back on the ways Revolution Asset Management filter their assets for ESG compliance now but also, importantly, in the future. 

Edited transcript

What role does ESG play in private debt investing?

ESG has become extremely important. And you only have to look around at the weather events in Australia to really understand that this is climate change in action. We as private debt managers, take our ESG responsibilities extremely seriously. And what does that mean? It means that it's embedded in our investment process. We have to actually do a lot of work upfront on every one of the deals that we do. So ESG is one of the key filters alongside things like, is this the right industry, the right sector, the right leverage, the right margin? Is it the right sponsor? The management team, what's their track record? ESG and their credentials on ESG is also very important. 

On the private side, we are able to engage directly with management and sponsors to ask them about ESG and to interrogate that with quite a level of detail. Something that you wouldn't be able to do if you were simply purchasing bonds in the capital markets.

So we do have quite a proactive stance on this. And for environmental, social or governance reasons, should there be any of those issues that could impinge on a sponsor or borrower not being able to meet their interest obligations and pay back our loan, it makes good sense from a business perspective to not proceed with that loan. 

We in effect are both discharging our responsible investing responsibilities, as well as doing what is really good in terms of our asset class. 

Because remember, once you're in these deals, they're less liquid and you're not able to trade out of them. So you really need to do all of your homework up front. And ESG is really important that we don't end up on the front page with our clients being associated with things that nobody wants to be associated with from an environmental, social or governance perspective.

How is ESG baked into your investment process?

So really we have, in terms of baking the ESG into the process, it really is one of filtering and interrogation in the due diligence phase of every one of these transactions. We will be proactively looking at management and asking them direct questions about what is relevant to their business. Examples are, where are their supply chains? How are they making sure that they're not exploiting child labour? On the asset backed security side, examples are predatory lending. So if a non-bank lender is actually charging really high rates of interest that could be considered to be just legal today, but in the future could be considered to be illegal predatory lending. We really don't want to get anywhere close to that. 

It's our responsibility not to have people being exploited, but then secondly, it's also good business sense because these people may lose their licence to operate.

Looking to learn more about the role of private debt in a portfolio?

Unlike many assets, private debt generates income through market cycles and can provide diversification away from the publicly listed, big-four Australian banks and broader market movements. To learn more, visit the Revolution Asset Management website or send an enquiry using the 'contact' button below.

This content is designed for Institutional and Professional Investors only.

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This article is for institutional and professional investors only and has been prepared by Revolution Asset Management Pty Ltd ACN 623 140 607 AFSL 507353 (‘Revolution’). Past performance is not a reliable indicator of future performance. Revolution is not licensed in Australia to provide financial product advice or other financial services to retail investors. This information should not be considered advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling units and does not take into account your particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, any relevant offer document and in particular, you should seek independent financial advice.

1 contributor mentioned

David Thornton
Content Editor
Livewire Markets

David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half our podcast where he sits down with leading experts across equities, fixed income and macro.

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