Three in Five Podcast

Episode 26: Three private credit ESG questions for Liz

Steve sits down with Liz Thorne, Managing Director, Private Fixed Income at SLC Management, to discuss investing sustainably in the investment grade private credit market, including how to evaluate opportunities where public information is limited.

Steve Peacher: Hi everybody thanks for tuning in to this episode of “Three in Five,” this is Steve Peacher at SLC Management, and I'm really pleased today to be joined by Liz Thorne, who is a managing director in our private fixed income team. Liz thanks for taking a few minutes.

Liz Thorne: Thank you Steve it's great to be here.

Steve Peacher: So Liz you're very involved not only investing in private income transactions, but you also have a particular focus on ESG given your background, and so the first question I want to ask is how, what does ESG investing look like in the investment grade private placement space and where has are your team found opportunity that marries attractive investments and private placements with ESG?

Liz Thorne: Yes, so there are two sides to it, the first side would be evaluating and pricing ESG risk, and the second would be investing in solutions to societal problems. And so it's the second side that's really exciting, we see a lot of opportunity. In fact we've been doing this for a long time and a full 40% of our portfolio is invested in sustainable investments. So it's important to define our terms and so when it comes to sustainable investments, we align with an international standard, the ICMA - International Capital Markets Association definition, which would mean those investments, where they use of proceeds finance a green or socially positive activity. So, examples of how we built that 40% in our portfolio would be, you know, a decades long experience investing in renewables, wind, solar, geothermal. More recently resi-solar, fuel cells, energy storage, micro grids. We’re an active participant in the energy savings contract market and in this space we're paying for energy conservation measures to be installed, which pay for themselves in savings, and so we do this in federal government buildings, in hospitals, in schools. Last year we did a deal for military housing. Beyond that we invest in affordable housing, green buildings, long term care. We've done a couple homeless shelters recently, we're looking to do more in that space, but you asked me specifically about 2021 and so examples of transactions in 2021, in addition to what I just mentioned, would be that we invested in one of the largest providers of opiate addiction recovery services. We've invested in a net zero facility for a large sports and performance facility. Related to the pandemic, we invested in a foundation, and I think you’d probably be aware that foundations found their funding greatly reduced over the pandemic at the same time as their needs increased, and so our financing allows that foundation to do more grant making. And another example that's not sustainable investing but is sustainability linked would be that we did a shipping deal, and our interest rate is linked so that the shipping company has committed to decarbonize certain levels by 2025 and 2030, and our interest rate will increase if they don't achieve those levels.

Steve Peacher: Yeah, it's really a fascinating array of different investment types. I don't think most people would realize that there's so many opportunities in the investment grade private placement market to be making these kind of unique investments in things that really are directly related at you know kind of all things ESG, so I think it's fascinating. One of the challenges is trying to quantify and analyze ESG risk and in the public equity markets, in the public bond markets, because of the size of the companies and their public nature, there are ESG data providers, there are third party services that provide ESG ratings. What do you do in the private markets when you're looking at these private issuers that aren't as big and are not public. What do you use to help evaluate and quantify ESG risk?

Liz Thorne: Right, I mean that the data challenge for ESG investments is one across the market really, but really very pronounced in the private market. So, we do have a provider that can provide us with assessments of physical risk, and so a fair number of our investments are location specific credits, and so that helps. But other than that we have felt the need to build our own proprietary ESG scorecards. Those scorecards are tailored to the specific types of investments, so within corporates it would be tailored to the material ESG risks of the sector that we're looking at. Then beyond that our privates team includes project finance, so there's transactions there, a separate scorecard for a power projects, for infrastructure projects, or for PPP projects. We have a large real estate investment team. We have separate scorecards there, as well as for securitization. And so at this point, we have scored our entire portfolio using our ESG scorecard and we're really finding that these scorecards help communicate our ESG risk judgement and drive more consistent and complete ESG analysis.

Steve Peacher: You know the ESG landscape from all angles is changing so rapidly, it seems. In investing what changes do you see that are underway, that you know will impact what you do, or what is done more broadly in the markets over the coming years?

Liz Thorne: Well, there are two changes I would point to: one is increased demand for evidence and the other is increased demand for collaboration. So, the ESG scorecards that I just mentioned, for instance, are examples of evidence of our assessment of ESG risk that we can use, but we also are asking our investees to provide evidence of their impact and the outcomes of their programs. And so the energy savings contracts I mentioned a little bit earlier on, those have a great attribute of providing very granular level of what the measured water and energy and fuel savings are. So, evidence is a big part of it, the second part, which is collaboration. You know I think the investment community recognizes that will go further faster if we go together, and so I myself have had more meetings with other investors in the last year than ever before, and what we're discussing is what we're doing as it relates to ESG, what works and what hasn't worked. And so Those are the two big trends I see continuing.

Steve Peacher: So the ESG world is evolving, but also in some ways nebulous. So one of the things I really liked about this interview and your answers was that you gave so many specifics about things that we're doing, deals for doing, ways we're approaching it. And I think that's finding where the rubber meets the road in ESG in investing is really what's going to be all about, so that was it was really informative. I want to just change direction ask you, I like to end these with a personal question. And, and I know you like to travel, so my question is coming out of that pandemic as travel is opening up what are some things you want to do that have been made that may have been on hold because of the pandemic?

Liz Thorne: Yes, yes, it has been on hold. Let's see there are a lot of things. My husband's family is from Greece, and so I always feel the pull to go back there. But, most recently I’ve done a lot of travel and South America and found some amazing national parks, and so I think the next trip will be back down to South America.

Steve Peacher: That sounds good, I have to get those recommendations from you after you've gone down there. Well, thank you very much, this has been really informative, I hope everybody who listened to it enjoyed it and thanks for taking a few minutes for this episode of “Three in Five.”

Liz Thorne: Thank you, Steve.

Third party ESG data is an input into our proprietary evaluations of ESG risk. Absent common regulatory ESG standards and definitions, this data may be inconsistent among providers and is subject to change.

This podcast is intended for institutional investors. The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast. This podcast may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.