The Institutional Investors Group on Climate Change (IIGCC) has launched private debt guidance — Net zero investment framework for the private debt industry – aimed at establishing a cohesive framework for action that is useful across the industry for setting and delivering on net zero commitments.

The guidance is intended to support any private debt investors that are active in the following strategies: direct lending, venture/growth debt, opportunistic credit, structured credit, fund financing and private placements, IIGCC announced.

The development of the guidance was led by IIGCC with support from Ceres and incorporates input from a diverse group of participants in the private debt industry, including members of IIGCC’s Private Markets Working Group.

“The guidance reflects important private market-specific nuances and takes the view that, given the unique characteristics of private debt investments, distinct actions are required to set and deliver decarbonisation goals for this asset class,” according to IIGCC.

Some of the innovations introduced by the guidance include the 12-month grace period post-deal close, the three-way engagement model involving private equity sponsors, climate-related ESG margin ratchets and the inclusion of requests for climate disclosures in loan documentation.

The guidance forms the private credit component of the Net Zero Investment Framework, taking the total number of asset classes covered to seven.

Integrating climate risks in private markets

According to IIGCC, the guidance seeks to promote clarity and enable action in assessing and disclosing climate-related risks within private debt investments, thereby advancing climate change integration practices and risk mitigation in private markets overall.

Misa Andriamihaja, private equity lead at IIGCC, said: “By outlining a consistent industry-wide approach, the new guidance can help raise ambition levels for both GPs [general partners] and LPs [limited partners] active in private credit, as well as underlying portfolio companies.”

Based on input from a wide variety of industry stakeholders, she added, the guidance’s most valuable attribute is its recognition of the specific characteristics of private debt investments.

“Together with last year’s private equity guidance, we look forward to seeing investors create and implement their net zero plans for private market investments in support of their financial goals,” she continued.

Peter Ellsworth, senior director at Ceres, said: “This guidance, developed with significant input from the private debt community, offers a helpful blueprint for investors to decarbonise their private debt portfolios.”

He added: “Private debt is a quickly growing asset class with unique challenges. This guidance balances ambition with practicality, providing bespoke net zero target types and tailored engagement strategies. The emphasis on communication with all parties in this asset class, including private equity sponsors, will help accelerate climate action by private companies.”

He encourages private credit investors – whether or not they have made a commitment to net zero – to use the guide to inform diligence and evaluate how their assets support the emerging clean energy economy.

Read the digital edition of IPE’s latest magazine