The European Leveraged Finance Association (ELFA) has today launched its ESG Exclusion Checklist for Business Activities, designed to streamline the negative screening and exclusion process for CLO managers. ELFA will be consulting with market participants on the ESG Exclusion Checklist over the coming weeks.
The ESG Exclusion Checklist has been created as a tool to increase efficiency in the CLO market and to be useful for a range of market participants. It is designed for arranging banks to complete at the time of a new corporate loan or bond syndication and aims to help investors quickly determine if a corporate borrower is a suitable investment candidate based on its ESG criteria. It will also allow the corporate borrower to publish the data to its entire syndicate.
The ESG Exclusion Checklist provides information on the percent of revenue that a company derives from a range of areas that might touch on an investor’s internal ESG guidelines. Areas for consideration include weapons, tobacco, thermal coal, fossil fuels, gambling, hazardous chemicals and waste, intensive farming and palm oil, among others. The ESG Exclusion Checklist includes a specific section for utilities companies, asking the corporate borrower to declare the percentage of electricity generated by thermal coal, liquid fuels (oil), natural gas and nuclear generation. Corporate borrowers may also indicate if they are a signatory of the UN Global Compact principles and if they are in breach of any of the principles.
Sabrina Fox, Chief Executive Officer, European Leveraged Finance Association, said: “Currently the use of ESG exclusion language is the norm for ESG integration into CLOs, but collection of data relevant to these determinations is not uniform and therefore creates inefficiencies that we intend to address with this resource. Rather than asking corporate borrowers to manage numerous different screening questionnaires from investors, the ESG Exclusion Checklist for Business Activities will promote a more efficient CLO market in Europe by allowing borrowers to provide information in a standardised, consolidated manner.”
The Checklist was produced as a collaborative effort across ELFA’s Loan Investor Committee, CLO Investor Committee and ESG Committee.
ELFA is consulting with market participants on the ESG Exclusion Checklist from now until 15 December, with views sought from banks, agents, lawyers, corporates, sponsors and investors. ELFA plans to release a final document in January 2022 following the consultation period. The tool will then be updated on a biannual basis to ensure it remains relevant and in line with latest market trends.
ELFA is encouraging market participants to get in contact with feedback on the consultation. Any comments should be sent to elfa@elfainvestors.com.
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