In Conversation with the LSTA: Diving into the ESG IDP

Tess Virmani Deputy General Counsel & EVP – Head of Policy, LSTA

Elizabeth Yazgi Assistant General Counsel, LSTA

The harmonization of ESG reporting requirements represents a critical challenge for sustainable finance and it is this challenge that the ESG Integrated Disclosure Project (IDP) seeks to address.

In this Q&A interview, Tess Virmani and Elizabeth Yazgi of the LSTA discuss the formation and development of the IDP and why its uptake should be encouraged at a global level.

1. What is the ESG Integrated Disclosure Project (IDP)?

The ESG IDP is a market driven initiative dedicated to supporting private companies to make ESG focused disclosures when seeking financing. Companies seeking finance are increasingly faced with multiple requests for ESG related data aligned with different frameworks and initiatives. The ESG IDP has brought together leading investment managers, banks and credit investors to address this and create a harmonized, proportionate disclosure template that can serve as an industry standard designed by lenders. The chief objective of this work has been to ensure that the data requested can realistically be provided by businesses of various sizes, including small to medium enterprises (SMEs) (discussed further below). Use of the template will streamline the disclosure process for borrowers and enable lenders to receive consistent data from sponsored and non-sponsored borrowers across the private credit and broadly syndicated loan markets. The ESG IDP is maintained by its Secretariat (Alternative Credit Council, LSTA, and PRI) and its Executive Committee comprised of different market stakeholders.

For more information, please visit www.esgidp.org.

2. What is the intended use of the ESG IDP template?

The ESG IDP template has been designed as a diligence tool to assist lenders in soliciting relevant ESG information from companies to whom they might lend. Because lenders have the greatest leverage at the time of loan origination it is expected that lenders would request a completed template to be shared with them at the pre-investment stage. Importantly, however, the template can easily be completed in advance of a company coming to the loan market. Responding to ESG inquiries often requires consultation with different internal stakeholders at the company. Rather than place additional demands on company employees who are focused on closing the loan, advance completion of the template will allow for a less stressful borrower experience and a better product. Arrangers of syndicated loans are reminded that communicating this with their borrower and sponsor clients will bring efficiency to the loan transaction. Market participants have found additional uses for the template outside of its original design, including borrower engagement, portfolio monitoring and investor reporting processes. Companies can also use the template for guidance on what ESG factors are most relevant to lenders as they look to introduce or grow their ESG reporting capacity.

3. What are some of the important attributes of the ESG IDP template?

Global

The IDP template establishes a global baseline of ESG reporting requests which will advance the availability and sophistication of ESG information. The IDP template is backed by organizations from across the world.

Proportionate

Private companies can range from small, family run businesses to mid-size companies, to larger companies with ample resources. In addition, companies across jurisdictions may pay different levels of attention to ESG issues. The IDP template offers flexibility, and borrowers are encouraged to complete the IDP template to the extent feasible. For many companies, this might mean only the core general questions are within reach. For other companies, particularly those in highly regulated sectors, this might mean the complete set of general questions as well as the prioritized questions specific to their industry. Finally, some companies may complete the IDP template in its entirety.

Harmonized

The IDP template represents a harmonized set of core questions commonly requested by lenders and have been identified as soliciting ESG information that is most relevant to lenders. In support of the ESG IDP template, the LSTA has retired its ESG DDQ for Borrowers. In addition, the industry specific questions included in the template are aligned with the IFRS’s SASB Standards. The SASB Standards serve as the technical basis for the ISSB’s industry-based disclosure standards. In addition, the ESG IDP template identifies those questions that solicit information which can be used for SFDR PAI reporting.

Private Equity Aligned

Given the prevalence of portfolio companies that borrow in the corporate loan market, the IDP recognized the importance of fully aligning with the private equity-focused ESG reporting initiative, the ESG Data Convergence Initiative (EDCI). Private equity sponsors participating in the EDCI have agreed to track certain metrics for their portfolio companies. By adopting the EDCI metrics within the IDP template, sponsors can further capitalize on these efforts by sharing information with lenders.

Supported

The ESG IDP has enjoyed broad support across corporate lending since its inception. Thirty asset managers and credit investors founded the ESG IDP. Today, support for the IDP has expanded to include not only the Secretariat and 21 institution Executive Committee, but also Supporting Organizations, such as the LMA, ELFA and APLMA, and the Investment Consultants Sustainability Working Group – US. In addition, investment managers representing $6+ trillion in assets stand behind the ESG IDP. Finally, data providers have rallied behind the IDP both as recognized supporters and by offering the IDP template on their platforms. Holtara is offering additional support for the IDP template by powering the macro-enabled and non-macro IDP template versions.

4. If a firm is interested in supporting the ESG IDP’s work, is there a way to communicate that?

Certainly – any institution wishing to publicly endorse the ESG IDP may enroll as an ESG IDP Supporter on the IDP website. The firm can provide their identifying information on a short application form, which takes less than a minute. The IDP already has a significant “supporter base” comprising a coalition of market-leading asset managers, credit investors, trade associations and other institutions (these include, for instance, Credit Suisse, First Eagle, Fitch, PIMCO and Moody’s, to name a few). Signing up as a supporter is a streamlined process but goes a long way in spreading awareness of the template among loan market participants. Of course, apart from becoming a public supporter, the most meaningful way to endorse the initiative is for credit providers to consistently use the template in its lendingtransactions.

5. Looking more broadly, what other ESG and sustainability projects is the LSTA working on?

The LSTA has engaged in several sustainability initiatives this year. Notably, we have partnered with the APLMA and LMA to advance several documentation workstreams which we are eager to deliver to the market by early 2025. The first of these is a set of updates to our existing sustainable loan frameworks, which include the Green Loan Principles, Social Loan Principles and Sustainability-Linked Loan Principles (SLLP) and related Guidance documentation. The goal of these updates, which we have undertaken in consultation with a dedicated working group of market participants, is to align the frameworks to current market practice and ensure their global applicability. As we have had active engagement with lenders and investors active in the space, we are confident that the updated forms will continue to reflect market consensus.

Secondly, we are adding to the existing pool of “framework” documents on offer with a new Guide to Transition Loans. Transition finance, which we broadly define as a means to finance investments that contribute to the global transition to a low-carbon economy without undermining other ESG objectives, is newer to U.S. markets but has gained considerable traction in Europe. Based on discussions with members, we have found that market participants have a keen appetite for transition finance, but face headwinds when trying to structure such instruments in a way that makes sense across different jurisdictions. We will aim to capture regional and sector-specific variations and reference existing regulatory frameworks and taxonomies in the new guide.

Last but not least, the LSTA is in the midst of finalizing market guidance for green loans in the form of a standardized and market-vetted “Drafting Guidance” piece as well as model engagement letter provisions for green loans, which will be modelled on and complement our existing guidance and engagement letter language for SLLs. The impetus for this project was the recent uptick in interest in green loans. Here again, the finished product will reflect the input of a committed working group of leading lenders, green loan coordinators and asset managers who have worked alongside the LSTA during this project.

Despite the politicization of ESG in the U.S., we expect that sustainable finance activity will remain robust across global markets, albeit in varying degrees and with considerable structural nuance observed across loan facility documentation. By introducing guidance on transition and green loans in tandem with the updates to our existing guidance, the LSTA aims to promote harmonization around ESG and assist market participants fulfil their ESG compliance and investment mandates. We are thrilled to be poised to launch this suite of products to market as the year comes to a close, and will continue to monitor market developments as we look ahead to 2025.