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ESG-linked financing in the private equity sector


Investor appetite for environmental, social and governance (ESG)-linked instruments continue to grow. Between 2018 to 2020, the global ESG-linked debt market has seen incredible momentum and expanded by threefold, exceeding $130 billion according to Bloomberg.

Whilst most cases of ESG-linked financing are typically found amongst corporates, a growing number of private equities including the likes of The Carlyle Group and EQT have seized the opportunity to capitalize on this unique financial innovation.

So what is ESG-linked financing, and how is this relevant to private equity (PE) investors?

ESG-linked financing, otherwise known as sustainability-linked financing, typically refers to the use of financing instruments that are tied to the sustainability performance of the issuer, such as sustainability-linked loans (SLLs) and sustainability linked bonds (SLBs).

SLLs are typically characterized by floating interest rates (e.g. interest reductions) that are linked to progress of sustainability key performance indicators (KPIs), while SLBs are structured to include a financial and/or structural impact (e.g. coupon step up) depending on whether selected KPIs reach predefined sustainability targets.

Notable cases include the Carlyle Group’s largest SLL to-date which ties the price of debt to firm’s goal of achieving 30% board diversity among its American portfolio companies. More recently, EQT became the first PE firm to issue an SLB, which links coupon adjustments to greenhouse gas emission reduction targets approved by the Science Based Targets initiative (SBTi) and gender diversity targets for the firm and its portfolio companies.

We should examine the unique characteristics of ESG-linked instruments to better understand the growing popularity of SLLs and SLBs. Unlike the more established green/climate bond structure, proceeds of sustainability-linked instruments are not restricted to specific environmental or climate adaptation projects. Proceeds raised through SLLs or SLBs can be used for general corporate purposes, providing issuers greater flexibility and discretion over how capital is deployed. Another defining feature of SLLs and SLBs is the opportunity they present to improve cost of debt owing to interest rate reductions, and to establish ESG credentials by making sustainability commitments explicit to participants of the capital markets.

Given the advantages of ESG-linked financing, how could PE investors best position themselves to capitalize this new source of funding?

To pursue ESG-linked financing, PE investors need trackable KPIs and meaningful sustainability targets that reflect performance of ESG issues which are material to the firm’s operations and/or investment activities. This may manifest in the form of science-based emission reduction targets, renewable energy targets or other targets aligned with UN Sustainable Development Goals.

PE investors that have raised credit through SLLs and/or SLBs are typically signatories of UN Principles for Responsible Investment (PRI). By committing to this voluntary initiative, firms develop a PRI aligned program to implement responsible investment policies and practices which integrate ESG considerations into investments activities. The level of implementation is given a rating and scored by the PRI (1) annually. The implementation process may include setting up monitoring mechanisms that help track ESG data across a portfolio or establishing ESG targets and sustainability objectives for investment activities. Doing so enables PE investors to better track, improve and disclose ESG KPIs and data, which lay the foundation for ESG-linked financing. As signatories of PRI progress in their scoring, some may also adopt the approach that US asset manager Neuberger Berman took with its SLL, which links interest to ratings scored by the PRI. Once a holistic ESG framework is in place to govern responsible investment activities, new possibilities for innovative financing structures emerge.

With ESG mandates on the rise, ESG-linked financing provides a renewed approach for PE investors to drive sustainable transformation across their investments in a way that lowers borrowing cost and improves market visibility. By articulating ESG credentials, performance and commitments, investors could also build more long-lasting relationships with its limited partners and stakeholders.


(1) The PRI defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership. For more, visit

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