GLOBAL CREDIT FORUM

ESG in credit investing

Sep 30, 2020
  • BlackRock

Sonia Rocher, BlackRock’s Head of Research for European Middle Market Private Debt, was joined by Teresa O’Flynn, Global Head of Sustainable Investing for BlackRock Alternative Investors, and Robert MacMillan, CEO of HH Global to discuss raising the bar in data collection, due diligence and monitoring.

  • Sonia Rocher:  Hi, everyone.  Good morning, good afternoon.  It’s really a pleasure for me to be hosting the panel on ESG.  Sustainability is really a key component on how we assess risk and construct portfolios. 

    If I could quote maybe Larry Fink’s last letter to CEO, putting sustainability at the center of how we invest I think is a very powerful message.  I have invited to this panel Robert MacMillan, who is the CEO of HH Global, a private company. And I think it’d be really interesting to hear his view on how ESG has been for him a key competitive advantage for him and for his business.  And then, we have Teresa O’Flynn, who is the Global Head of Sustainable Investing for BlackRock Alternatives Investor.  And Teresa is really driving the ESG agenda for the Alternative division, which includes credit. 

    And maybe I’ll introduce myself very quickly.  I'm Sonia Rocher.  I'm heading Research here in Europe for private debt and I spent a lot of time over the last few years to integrate ESG fully within our underwriting processes.

    So, maybe I will start with you, Robert.  As a CEO of a mid-market company, why has ESG been always very important in your strategic decisions of this year.  And maybe before you start answering this question, I think it would be helpful for the audience too if you could just give a brief overview of what your company does and what are the key ESG factors for your business.

    Robert Macmillan:  Yeah, sure.  Thanks, Sonia.  HH Global is the world’s leading marketing procurement company.  We have operations in 44 countries, and we provide innovative and sustainable solutions across physical marketing, content creation, and customer experience.  Physical marketing can be anything from printed leaflets, posters, to physical permanent units in stores, retail stores around the world. 

    We have our Innovation with Purpose program, which delivered savings of 28,000 trees, 130 million liters of water, and nearly 9,000 tons of carbon.  So, we monitor this, we report on it.  Some of our clients have funded some of our programs.  One of our large financial clients, they funded an improvement, a program to improve efficiency and improve on quality, which also won an Eddy Award.  So, we had some recognition for that as well. 

    We run an environmental calculator so we can develop customer roadmaps and we can show the impact on the planet and illustrate savings in dashboards.  This has been very successful.  So, we’re measuring what we do as we move along. 

    I mean ESG’s really important to us.  We believe it’s the right thing to do, first and foremost.  We supply tens of thousands of products to the largest brands around the world and it’s our responsibility to make sure it’s produced and consumed responsibility – responsibly.  We also feel that ESG is a license to operate with our clients.  It helps us become a market leader and it’s allowed us to really grow our business and we feel really stand out from the crowd.

    Sonia Rocher:  Thank you, Robert.  Well, in your view, what has been the impact from COVID?  How do you expect things to change?

     

    Robert Macmillan:  Yeah.  I mean, to be honest, it’s been mixed.  I mean we have a whole range of clients, different geographies, different sectors.  We had a big run ourselves on supplying PPE to our clients, because they struggled with their supply chains.  And I think that’s the key element we found, that we must now have strong sustainable supply chains.  There was lots of vulnerability and I do think that, if anything, COVID will accelerate ESG and sustainable-related initiatives, because people have realized our fragile our ecosystems and our supply chains are and we need to address that so that we don’t get into the situation and I think COVID’s around, going to be around for a little while longer.

    Sonia Rocher:  How did you feel about the level of ESG discussion that you had to have with financial partners, both on the equity and on the debt side. 

    Robert Macmillan:  Yeah.  I mean to be perfectly honest, I was surprised at the amount of detail that we had to go into.  I was surprised at how important it was.  But this is something that’s key to our business.  You know, we feel we have a market-leading sustainability program that we call Innovation with Purpose and this we felt, as I said, we were asked a lot of questions.  We felt confident to answer them. 

    Sonia Rocher:  Thank you, Robert.  It is very interesting to hear really the point of view from a CEO of a company and how it’s been important and how it’s been a business enabler for your business.,

    Maybe if I turn now to Teresa to have the point of view from an investor.  Teresa, I mean there has been a lot of growing focus on ESG over the last few years.  Where have you noticed how things have most changed?

    Teresa O’Flynn:  Thank you, Sonia.  And hello, everyone.  It’s my pleasure to be with you all today.  So, where have we seen the most change?  I think 2020 is really going to be a pivotal year in the growth of ESG.  And I think this for a number of reasons and some of it is COVID-related, because I think COVID has really been the first real-time test of sustainable investing strategies and the importance of ESG. 

    So, how sustainable has stood up during COVID is a key question.  And what we have seen is remarkable resilience in ESG investment strategies and also in companies that have high ESG ratings. So, I think point number one, we’ve really seen resilience in sustainable as COVID has unfolded around the world.

    Point number two:  We have seen incredible flows into sustainable investment strategies and continued flows into sustainable investing strategies as COVID has unfolded around the world.  And really, I think this is a strong signal that investors are seeing sustainability as a long-term, not a short-term, trend. 

    I think a third point I would make, and it’s a very critical point, is, you know, climate change.  I think the science is undeniable at this stage.  If we take 2019, we saw multiple one-in-100-year weather events, one in the United States that caused the bankruptcy of the largest utility in the US.  And, of course, we’re seeing, you know, extreme weather events play out in 2020, including right at this very moment in time as we see wildfires on the West Coast of the US.  So, I think there’s a real recognition that one of the most pressing elements of sustainability is climate change and it’s very real and it presents significant risk to our financial system, to us as investors, to companies and it’s important that we proactively think about that risk when we’re making investment decisions.

    Another key driver of, you know, sustainable investing and why it’s really arrived center stage is it’s the growing focus of regulation, both in terms of putting pressure on companies to disclose what ESG means for their business models, for their financial projections, but also ESG has been caught at the center of asset management industry, big focus for regulators and central banks and again, you know, because there's a growing recognition of the criticality of ESG and sustainability for long-term stability of our financial systems in order to, you know, better value companies.

    And the final comment I would make is we’ve absolutely seen in recent times the rise of the S in ESG.  And, you know, Robert mentioned this already.  I think COVID has really shone a spotlight on supply chains and the vulnerability of supply chains to external events.  And there’s other components as well that have really become into focus in recent times, the importance of health and safety of our employees, thinking about, you know, customer base, etcetera.  So, the combination of all of these factors, Sonia, I believe have really signaled the arrival of sustainability and ESG into the mainstream.

    Sonia Rocher:  Thank you, Teresa.  And maybe if we refocus a little bit more or focus a bit more on credit, for credit ESG risk really translates into a credit risk.  So, it’s really top of the agenda when we make investment decisions.  In your views, what are the main hurdles that investors are facing when making these investment decisions?  And when you mentioned closures, reporting, and how regulation is stepping in in this, but what are the main hurdles at the moment in your opinion?

    Teresa O’Flynn:  Yeah.  So, ESG, it’s a complex and very nuanced topic.  I mean what it means will vary considerably, depending on what sector you're in.  And in some places, it’s rather obvious.  So, if you’re an infrastructure business, compliance with permitting, environmental regulation, it’s pretty obvious the criticality of that to your business model.  If you're a chemical company dealing with waste management, again another good example of, you know, something that is very critical, very tangible, and easy to put, you know, a – your hands around in terms of quantifying.  And, you know, these are factors that, you know, we’ve been considering in our business for many, many years.

    As you said, Sonia, ESG risk is credit risk.  So, you know, many of these factors have been implicit in our investment approach for many, many years and will continue to be so.  And, in fact, and I’ll talk about it in a moment, we’re getting much more explicit around this. 

    I think, you know, ESG, as I said, is a very broad topic and there are some elements that are non-financial and increasingly we’re seeing more and more go into the non-financial aspect.  So, let’s talk about the S piece, which I mentioned already.  Supply chains, thinking about human rights in your supply chains all the way through to, you know, employee engagement, customer satisfaction.  These are, you know, elements of ESG that it’s more difficult to put a number on.

    But, I think, again, you know, bringing it back to the current situation we're all living in as COVID continues to play out around the world, I think COVID has shown us that non-financial risks can become financial risks very quickly.  And I mentioned, you know, one of those already, you know, climate change, a negative externality, but something that can have very real and tangible implications on financial systems, but, you know, can be sometimes difficult to manage.

    I suppose, you know, we’re also conscious that there’s pressure on companies to disclose.  So, I suppose maybe the question as a follow-on that you might ask is what is BlackRock doing about this in the face of some of the challenges that the rise of ESG presents?

    I guess like one of the hurdles that you would have like arguably in credit is that typically we don’t sit at the board.  We have limited ability to influence companies.  I mean we can, obviously, engage proactively on their ESG dialogue, but we have limited ability to really influence. 

    What we have seen though in the leveraged funds space more recently are some triggers, like ESG linked targets and certainly for the companies to meet these targets.  We've seen a company in Spain, for example, that does packaging where they had a reduction, slight reduction in margin based on a reduction of carbon emissions. 

    But I guess the – where more influence can come in is maybe within equity investors.  And do you feel that equity investors, whether it’s on public or private side, are doing enough in that respect?

    Teresa O’Flynn:  Yeah.  And I’ll address your equity question in a moment, Sonia.  But I do want to pick you up on your last comment as well, because we’ve talked a lot about risk here and ESG is also a source of opportunity.  And I think, Robert, you’ve really articulated the opportunity it’s been – it’s presenting your business in terms of reshaping its future, enabling you to be so successful.  And we’re absolutely seeing right across the market the increasing instances of ESG-linked facilities.

    So, there’s a lot of opportunity around sustainability and ESG and I think the companies that are positioned to lean into that will be more successful in the long run

    Anyhow, Sonia, back to your question in terms of what are we seeing on the equity side and this really kind of picks up on some of the comments I made earlier, which is there is mounting pressure on companies to disclose.  And, you know, it’s coming from all directions.  It’s coming from regulators and it’s coming from, you know, their investors, from their customers, etcetera.  And as a result, we’ve seen a proliferation of ESG reports, ESG disclosures, and really a lack of standardization.  And you're definitely seeing amongst the investment community a desire for standardization, easier to use ESG metrics. 

    So, against that backdrop, there’s a couple of standards that we believe are emerging as, you know, kind of standout developments that will really help put shape on this conversation and we’ve endorsed them at BlackRock.  And they are, firstly, the Sustainability Accounting Standard boards who’ve really created very useful standards and frameworks for helping to report a myriad of sustainability issues

    From a climate disclosure perspective, we really welcome and have endorsed the Task Force for Financial Disclosures.  It’s a voluntary framework that’s been developed over the last number of years and it equips companies with a mechanism to think about physical climate risk, so the implications of hurricanes, wildfires, droughts, and also transition risk, which is really the implications associated with growing regulation around climate change, such as carbon tax.

    So, two examples of developments in the industry that I think are really going to help move this conversation on.  I mentioned it already, but regulation is coming down the track that’s also going to move on this conversation.  And here in Europe we have a series of sustainability regulation that will come into force in March of next year and it’s going to affect companies and it’s going to affect asset managers and really providing a framework against which we can create some standardization in the industry.

    I suppose the final point I would make on this, Sonia, is I think the LP community have a really important role to play in moving this conversation on in creating the standardization that we’re all talking about here.  I’ll give you a recent example.  We recently filled out an RFP for a multi-credit strategy for a UK-based pension plan and one of the very clear questions in the RFP was can you comply with our climate policy.  And they had a very detailed 25-page climate policy and the message was clear, if you cannot comply with this, you will not be considered for this investment strategy.

    Sonia Rocher:  Thank you.  Thank you, Teresa.  And I guess as we’re getting closer to the end of this panel, I think the key two takeaways that I really have is accountability.  I think you both mentioned it.  Robert, you mentioned how for you it’s important for really the management teams of both to be held accountable for their ESG engagement.  And from you Teresa, on how important it is for investors and with the help of regulators as well to make investors and companies accountable for it and get to the right level of disclosure which are expected.

    So, with this, maybe to end this panel I will just – if – what would be the three words that would come to mind when you think about ESG?  Robert, if you want to start. 

    Robert Macmillan:  Yeah.  So, for me it’s people, planet, and profit, and in that order as well.

    Sonia Rocher:  Thank you.  Teresa?

    Teresa O’Flynn:  And for me, yes, for me I say mainstream; this is not a fad.  I say climate change, but I also say opportunity. 

    Sonia Rocher:  Yes.  Actually, well, Teresa, Robert, thank you very much for sharing your views and insight on sustainability with us today.  Thank you.

    Robert Macmillan:  Thank you very much.

    Teresa O’Flynn:  Thank you, Sonia.  Thank you, Robert.

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Teresa O’Flynn
Global Head of Sustainable Investing for BlackRock Alternative Investors
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Robert MacMillan
CEO of HH Global
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Sonia Rocher
Head of Research for European Middle Market Private Debt
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