In Conversation with France Invest: Private Debt and Impact Investing

Alexandra Tixier Head of Impact Private Credit, Allianz Global Investors as an author

Louise Doucet Sustainability Director, Ardian

As impact investing becomes a more central component of private debt, the market is working to reinforce the integrity and effectiveness of impact-driven lending

In this Q&A interview, Alexandra Tixier of Allianz GI and Louise Doucet of Ardian discuss France Invest’s recently released ‘Private Debt and Impacting Investing: Lender’s Investor Contribution’ guide, and how the guide can help promote best practices that harness the impact potential of private debt in the market.

1. What inspired the creation of the “Private Debt and Impact Investing: Lender’s Contribution” guide, and why is it an important moment for the market?

The guide is the result of a collaboration between leading asset managers active in the sustainable finance space as part of a working group, including Allianz Global Investors, Amundi, Ardian, GENEO Capital Entrepreneur, LGT Capital Partners, Tikehau Capital, and Symbiotics. By promoting a best practice common framework for lending for impact debt funds – that is funds which aim to have a measurable, positive environmental and/or social impact through lending decisions - the guide is intended to address issues resulting from the absence of standardised best practice in the market. It is important to note, however, that the guide is primarily intended to support the financing of companies that have business models which directly address major environmental and/or social issues, not financing the transition of companies to improve their operations from an environmental and/or social perspective.

2. When shaping the guide, what were the key challenges or gaps you set out to address, and how does the final framework respond to them?

The aim of the guide is two-fold – to highlight the significant role that lenders can have in creating impact via private debt fund lending decisions, and to address challenges that are currently inhibiting them in engaging in this work. Impact private debt is an emerging asset, and the bulk of guidance on tools in the impact fund area released up until now has been predominantly focused on impact private equity. This has resulted in issues such as a lack of standardised frameworks and diverging practices across geographical jurisdictions, which have in no way benefited from the complexity of carrying out impact assessments. By providing concrete recommendations, and offering tools to maximise the usage of private debt strategies in impact investing, the guide aims to resolve these issues and strengthen existing market standards.

A significant part of achieving this objective was done through clearly outlining the prerequisites required for the management of an impact private debt fund, such as clearly defining impact objectives in legal documentation and establishing precise selection criteria that target markets and populations that would benefit from such investments. Additionally, a central component of the guide is the recommendations provided on the integration of impact considerations into the investment process, such as separating ESG from impact, leveraging expert impact knowledge in due-diligence procedures and collaboration with external parties in instances where in-house knowledge is lacking. Furthermore, the importance of selecting and financing companies with clear impact indicators, conducting thorough risk analysis, and embedding commitments to impact reporting in loan agreements is highlighted.

3. To ground the guide in real-world practice, which external standards, frameworks, or market experiences did you draw on?

When working on the guide, the group had no intentions to redefine fundamental concepts such as impact – instead working with existing definitions that are prevalent in France and the broader international impact community, such as those of France Invest, GIIN, ICMA, and the FCA. While it may lead to enhanced clarity on the definition and scope of impact investing, the ongoing SFDR review is not addressed in the guidance.

The guide makes use of several practical examples to illustrate that these principles can be implemented in reality and demonstrate how lenders can engage with borrowers to calibrate material key performance indicators (KPIs) and sustainability performance targets (SPTs), strengthen internal sustainability planning and improve impact measurement. These are predominantly drawn from the experience of the contributing parties through case studies. Recognising the increased usage of the sustainability-linked loan (SLL) instrument over the past few years, a number of recommendations are based on the LMA’s Sustainability-Linked Loan Principles – such as the structuring of financial instruments with margin adjustments tied to ambitious annual targets and the involvement of third parties to verify transactions and results. Verification processes should be designed to ensure independence, methodological transparency and consistency over time, including the use of external reviewers assess both the appropriateness of KPIs and SPTs at origination and the reliability of reported performance throughout the life of the instrument.

When utilising the SLL instrument, it is important to differentiate ESG objectives from impact objectives, a topic previously explored in France Invest’s Best practice guide for private debt sustainability-linked financing.

4. Governance often determines how much impact a fund ultimately delivers. How does the guide approach governance mechanisms to strengthen impact outcomes?

The guide explores how the potential disparity between financial and extra-financial performance within an impact private debt fund can be rectified through implementing certain governance mechanisms. Drawing on examples such as linkage of carried interest to the achievement of SDG aligned impact objectives, the guide shows how impact criteria can be integrated with fund, management and management company level remuneration mechanisms to achieve this end.

Extra-financial performance should be independently verified through third-party review to ensure that ESG and/or impact objectives used in remuneration frameworks are applied consistently and free from conflicts of interest.