The European Leveraged Finance Association, or ELFA, has published its environmental, social and governance exclusion checklist, which it hopes will streamline the negative screening and exclusion process for credit investors. The checklist launched for public consultation in November 2021, and incorporates feedback from market participants received at the end of last year.
The tool, titled "ESG Exclusion Checklist for Business Activities," is intended 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 specific ESG criteria of a firm or fund. It is designed to allow corporate borrowers to easily publish updated information to their entire lender base, and also provides information on the percentage of revenue that a company derives from business activities that might impact an investor’s internal ESG guidelines.
Sector view
ELFA says the final version of this resource has also been updated from a sector perspective to include disclosures on alcohol and private prisons, as well as delving deeper into requests for disclosure on fossil fuel revenues, nuclear energy and oil exploration. It was evident during the consultation process that investors use different definitions for ESG factors and exclusions, ELFA notes, and the checklist has therefore been updated to reflect this. Potential definitions have also been added on areas such as controversial weapons, tobacco, fossil fuel extraction from unconventional sources, services to the gambling industry, hazardous chemicals and waste, and ozone-depleting substances.
The checklist was further expanded during the consultation period to include common exclusions used by managers in the European leveraged finance market — including whether prospective borrowers are signatories of the UN Global Compact principles or if they are in breach of any of the principles, as well as whether they are in breach of ILO Conventions, OECD Guidelines for Multinational Enterprises, or UN Guiding Principles on Business and Human Rights (UNGPs).
ELFA specifies that the checklist is not meant to serve as a template for exclusions that a fund or credit manager may decide to use, but rather aims to include the most common exclusions used by European fund managers to equip them with the necessary information to make an assessment at the time of a loan or bond deal coming to market.
The ESG Exclusion Checklist was produced as a collaborative effort across ELFA’s ESG Committee, Loan Investor Committee and CLO Investor Committee.
ELFA will update the tool annually to ensure it remains relevant and in line with the latest market trends as ESG integration continues to evolve.
