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By Katryn Pasaribu and Prof. Kristjan Jespersen

Tropical deforestation has been targeted as the primary driver of agricultural-induced deforestation. Consequently, the conservation of remaining natural forests is an internationally growing concern. However, even though multi-billion-dollar initiatives have been poured out for nature-based solutions to address climate change, including the protection of forests or biodiversity, recent studies suggest that conservation is underfinancing due to the lack of continuity or a steady flow of funds for every single forested spot around the world (Barral, 2021; Bos et al., 2015; Phelps et al., 2011). Thus, the question of how to link financing for conservation and the business value chain is substantial. An ambitious research project, “No Trees, No Future – Unlocking the Full Potential of Conservation Finance,” funded by the David and Lucile Packard Foundation, seeks to design and test a rigorous methodology that addresses the linkage between the private sector’s contribution to conservation financing and their value chain.

At the same time, the current progression of the EU Corporate Sustainability Reporting Directive compels companies to disclose, identify, and describe their environmental risk and opportunities for the whole value chain, including topics such as emissions (climate change) and biodiversity. Companies are expected to develop targets and policies and to measure their accomplishments accordingly. This condition means the report should be comparable over time (historical progression), verifiable (geo-location), and understandable (measurable). With this current development in regulation, companies need serviceable methods to address the requirements. We find that the spatial footprint approach developed through the “No Trees, No Future” project affixes the two unrelated issues, conservation finance and companies’ sustainability reporting, and turns the two issues into two sides of a coin.

The methodology generally consists of a spatial analysis, a forest cover loss-to-emission conversion calculation, an assessment of carbon-based pricing impact evaluation, and an analysis of benefits-based burden-sharing guided by economic benefits. Figure 1 below explains the process of the spatial footprint analysis for conservation finance.

Figure 1. Animation of the analysis process of spatial footprint analysis for conservation finance 

The methodology starts with spatial analysis. The spatial analysis identifies the deforested spots within the agricultural concession. In this analysis, leakage or spillover conversion is not counted to have a clear-cut linkage between business activities and their direct impact. The empirical work of this research project centers on the spatial information of oil palm concession as the object of analysis. The spatial analysis results in deforested spots within the oil palm concession by overlaying the global forest cover map, annual forest cover loss map, and oil palm concession map. The next step involves translating the biomass loss from deforested spots into emissions. The deforested spots map is overlayed with the above-ground biomass map, resulting in the estimated above-ground biomass loss from the deforestation within the concession. The total emission arising from deforestation is calculated using the biomass-emission conversion rate. The third step is calculating the monetary value of the calculated emission using the carbon price mechanism; in this research, a carbon tax is used. From this third step, the dollar value of the total fund can be interpreted as the amount of conservation funds that should be allocated back to the region where the concession is in place.

Nevertheless, the oil palm buyers should not entirely be burdened by the dollar value because the burden should be distributed based on the benefits received (Hayward, 2012; Page, 2008). The conservation burdens should be proportionally shared between producers and buyers based on the economic benefits received. Thus, the buyers’ responsibility for conservation is proportionately calculated based on the market surplus received by the buyers within the palm oil market transaction. An individual buyer’s tonnage of palm oil is used to calculate the individual buyer’s shares. The last step is replicable for every chain in the whole value chain of the oil palm industry. Thus, the contribution is distributable throughout the value chain.

The spatial analysis covers the EU-CSRD requirement regarding environmental impact analysis, especially biodiversity-related issues, such as land use change impact. The forest loss-to-emission calculation covers the EU-CSRD requirement regarding climate change mitigation (emission) related issues. The emission pricing also helps companies translate their impacts in terms of monetary value, which the recent regulation requires. Thus, the spatial footprint approach addresses the reporting requirement and explores a strategy of financing mechanisms for conservation throughout business value chains.

The next question will be, will the identified fund be enough? What will be the possible implications once the “burdens” are identified? Intuitively, the identified fund is insufficient because the pricing does not factor in the value of ecosystem service loss or biodiversity loss from the forest conversion. However, this method covers proxy and emission, which is, at the moment, globally acknowledged. The possible implication, once the burden is identified for every region of oil palm producers, is sourcing shifting due to the different magnitude of the dollar value of the “burden” of each region. Without regulation in place being enforced, the dynamic of sourcing shifting may backfire on the forest conservation goal.

References

Barral, S. (2021). Conservation, finance, bureaucrats: managing time and space in the production of environmental intangibles. Journal of Cultural Economy, 14(5), 549–563. https://doi.org/10.1080/17530350.2020.1846593 

Bos, M., Pressey, R. L., & Stoeckl, N. (2015). Marine conservation finance: The need for and scope of an emerging field. Ocean & Coastal Management, 114, 116–128. https://doi.org/10.1016/j.ocecoaman.2015.06.021 

Phelps, J., Webb, E. L., & Koh, L. P. (2011). Risky business: an uncertain future for biodiversity conservation finance through REDD+. Conservation Letters, 4(2), 88–94. https://doi.org/10.1111/j.1755-263X.2010.00155.x 

Hayward, T. (2012). Climate change and ethics. Nature Climate Change, 2(12), 843–848. https://doi.org/10.1038/nclimate1615 

Page, E. A. (2008). Distributing the burdens of climate change. Environmental Politics, 17(4), 556–575. https://doi.org/10.1080/09644010802193419 

About the authors

Katryn is a postdoctoral researcher at Copenhagen Business School. Katryn received her Ph.D. in Natural Resource Economics from the University of Tennessee, her MS in Agricultural and Applied Economics from the University of Wyoming, and her BA in Economics from the University of Indonesia. Her research interests are Environmental and Natural Resource Economics, Sustainable Production, Rural Development, and Environmental Carrying Capacity. Currently, she is working on a Conservation Finance research project named “No Tree – No Future”.

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

By Kamil Raad, Jackie Hwang and Prof. Kristjan Jespersen

Companies today are facing growing pressure to decarbonise from consumers, investors and regulators. Data management is key to this process as companies need to map their current emissions and monitor and report on these over time. As decarbonisation and sustainability more broadly affect multiple areas of a firm, the sheer volume of data can prove overwhelming—becoming a real challenge for companies. This has driven the proliferation of decarbonisation and sustainability management softwares that promise to solve the challenges companies are facing. However, with over 60 options on the market, selecting the right tool can be a challenge in and of itself. This article outlines an approach for companies to methodically approach tool selection and highlights the importance and need for companies to align their sustainability data governance and IT strategy. The findings are the outcome of a master thesis written for the MSc Business Administration and eBusiness program, under the supervision of Dr. Kristjan Jespersen.

To select a sustainability management tool, companies are recommended to follow the seven step IT procurement process shown below. For a decarbonisation tool, six steps can be followed along with requirements that were defined with practitioners across 10 industries – found at the end of this article.

Figure 1: Six-step decarbonisation tool selection process. Research Outcome.

To start the selection process, a body of stakeholders needs to be gathered which encapsulates all areas of the decision to ensure blind spots are covered. This includes the sustainability, IT and finance teams as well as end-users. The stakeholder body will participate in all subsequent steps of the process. Once gathered, the decision-making body can form the strategy for the tool, including mapping the current state of tool usage in the company, and the challenges faced in the existing sustainability processes. Based on this, a “to-be” state can be defined which will guide what is needed from the tool. The strategy will guide steps 3, 4, and 5 as requirements can be defined or prioritized based on the company’s objectives. Finally, tool options can be gathered and assessed – first using desk research, followed by sales demos and market dialogues with providers. Once done, a shortlist of candidates can be defined and official IT tender processes can be followed.

While the process may appear somewhat straightforward, the steps need to be approached diligently to ensure all the right criteria are considered. Further, a particularly crucial step in the process is setting the strategy for the tool. As it stands, this is an underdeveloped area in both practice and academia. In academia, little guidance exists on how this alignment should take shape or how it should be approached by companies. In practice, the lack of resources, the novelty of the area and the need to act quickly are driving companies to overlook strategy setting, instead opting for quick decisions. While this can be beneficial in the short term, it can limit the process efficiencies gained over the long term, as certain needs go overlooked and companies end up needing to change tools frequently. By following a structured process, strategy setting can be done quickly and effectively. Companies that do this will gain an advantage as they will not only ensure they select the right tool for the short term but also one that aligns with their deeply rooted sustainability and decarbonisation challenges.

As managing sustainability and decarbonisation data continues to grow in importance, companies need to stay aware of the tool landscape and approach decision-making in a structured manner. This will be crucial to enable well informed decisions that allow companies to maximize their tool’s utility and drive process improvements. Ultimately, this should drive improvements in the way companies manage their decarbonisation and sustainability targets. Nevertheless, for this to work as intended, greater attention needs to be placed on aligning sustainability data governance and IT strategy within the company, and both practice and academia still need to develop in this respect.

Figure 2: Decarbonisation tool selection criteria. Research outcome based on 16 practitioner interviews.

About the Authors

Kamil Raad recently completed his master’s degree in Business Administration and eBusiness from CBS where his research during the degree centred around the use of technology to support sustainability objectives. He was formerly an ESG Research Assistant at the Copenhagen Business School (CBS) under Prof. Kristjan Jespersen. Kamil is currently working in the Strategic Sustainability Consulting department in Ramboll Management Consulting, helping companies with a vast range of sustainability topics.

Jackie Hwang recently completed her master’s degree in Business Administration and eBusiness from CBS. She is currently working in Deloitte’s Digital Strategy Consulting department, helping organisations leverage technology to support business goals. She is passionate about sustainability and making an impact to help businesses use technology to become more efficient and sustainable.

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

By Prof. Kristjan Jespersen

The following is an interview with Professor Laura T. Starks. Laura T. Starks, Ph.D., holds the George Kozmetsky Centennial University Distinguished Chair at the McCombs School of Business, University of Texas at Austin. Dr. Starks specializes in teaching courses on environmental, social, and governance (ESG) investing. Her research focuses on ESG issues, including climate finance and board diversity, as well as molecular genetics and financial decisions. Dr. Starks has received numerous awards for her research and teaching contributions. She is affiliated with various organizations, such as NBER and ECGI, and serves as the President-Elect of the American Finance Association. Additionally, she has held editorial roles for financial publications and served on various boards and advisory committees related to mutual funds, pension funds, and government pension funds.

Our conversation focuses on the recent tensions in the field of ESG, areas of research, research design and possible paths forward. Our conversation explores one of the main tensions in ESG investing which is the potential trade-off between financial returns and ESG objectives. Some investors worry that prioritizing ESG factors might negatively impact investment performance, while others believe that companies with strong ESG practices may perform better in the long run. Our conversation explores these and other important points.

You will all enjoy!

About the author

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan Jespersen is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

by Jasmin S. Petersen, Louise H. Nielsen, Sabine S. Hansen, Kedar Uttam and Prof. Kristjan Jespersen

Environmental, social, and governance (ESG) factors have become crucial for promoting sustainable business practices, with investors increasingly recognizing the link between environmental impacts, social responsibilities, corporate governancem and potential risks and opportunities. Consequently, ESG scores are now integral to investment strategies worldwide. While the impact of higher ESG scores on company value has garnered attention, there is limited analysis specific to sectors. The European Healthcare being significant to public health and societal well-being, presents an excellent opportunity to expore the relationship between ESG scores and stock prices. Specifically, ESG indicators such as environmental (e.g. harmful emissions and waste) and social (e.g. heavy workloads) challenges associated with this sector, offer a compelling opportunity to explore this important relationship focused on stock performance and ESG. Our study aimed to investigate the effect of ESG scores on stock prices of 104 European Healthcare companies from 2015 to 2021. Through rigorous statistical analysis, we examined the correlation between ESG scores and stock prices, considering the individual pillars (environmental, social, and governance) separately.

Impact of ESG scores on European Healthcare Companies’ Stock Prices

In this study, we conducted a comprehensive analysis of the relationship between ESG scores and stock prices in the European Healthcare sector. To achieve this, we utilized rigorous statistical techniques along with a thorough literature review Our primary goal was to isolate and evaluate the individual impact of each pillar (environmental (E, social (S), and governance (G)) on the  companies’ stock prices within the sample. To carry out this investigation, we employed regression analysis carefully assessing the relationship between E,S, and G pillar scores and the corresponding stock prices of the companies. The  ESG scores used in our statistical model were sourced from the MSCI database while financial data came from the Refinitive Eikon database. Our findings revealed that none of the individual pillars – E,S,G – exhibited a statistically significant effect on the stock prices of the companies.

The model’s results showed that a higher E/S/G pillar score had neither a positive nor a negative effect on the company’s stock prices, indicating that they receive no tangible financial benefits from investing in ESG. It is essential to acknowledge that our model has limitations; it cannot illustrate a hypothetical scenario of how the companies’ stock prices might have performed if they had not pursued improvements in their ESG pillar scores.Despite these unexpected results, which conflicted with previous research linking ESG-consciousness to higher market performance, our analysis provides valuable insights into the unique dynamics of ESG in the European Healthcare sector.

ESG Scores’ Trajectory

The ESG score data utilized to develop our model exhibited an intriguing trend within the European Healthcare sector. Both the industry-adjusted ESG score, which measures company’s ESG management relative to industry peers facing similar ESG risks, and the the individual pillar scores showed consistent improvements over the study period. Notably, all  individual pillar scores experienced growth of over 10% during this time, with advancements observed among both the top10 and bottom10 performers (see Figure 1). These findings indicate that the healthcare sector is actively adapting to the evolving sustainability regulations in the European Union, as evidenced by their dedicated efforts to enhance ESG performance. Despite the absence of immediate financial benefits, companies in the sector have still chosen to invest in ESG activities, recognizing various non-pecuniary advantages that are equally, if not more, crucial in today’s business landscape. ESG scores have emerged as a powerful symbol  of a company’s commitment to sustainable business practices. By elevating their ESG scores, European healthcare companies aim to demonstrate their unwavering dedication to addressing ESG issues. This commitment, in turn, serves to enhance their  legitimacy, align with stakeholder interests, and respond to institutional pressures. Such proactive engagement with ESG dimensions reflects a strategic choice made by these companies to remain at the forefront of responsible and sustainable business practices in the healthcare industry.

Figure 1: Average ESG scores for Top 10 and Bottom 10 companies in the sample

Through an exhaustive literature review, we have ascertained that robust ESG performance plays a pivotal role in cultivating a positive reputation, thereby fortifying stakeholder trust and nurturing enduring relationships with investors, customers, employees, and other stakeholders. Notably, healthcare companies appear to be cognizant of the far-reaching advantages that emanate from a steering reputation and the trust bestowed upon them by stakeholders. ,

Recommendations

The pursuit of ESG efforts presents a notable challenge for healthcare companies, given the  resource-intensive nature of the sector. While these companies are motivated by“non-pecuniary rewards” [3] to enhance their ESG scores, mere adherence to generic ESG commitments may translate into significant improvements in market value enhancements. To unlock tangible financial benefits and gain a competitive edge, healthcare firms must move beyond mere compliance and adopt a strategic approach tailored to their unique sub-industries. A generic approach to ESG issues may have certain limitations, especially in effectively addressing societal objectives outlined by the UN Sustainable Development Goals (SDGs). However, by discerning between financially material ESG issues  related to the SDGs and those that lack financial impact, healthcare companies can identify areas where they have the potential to act in line with the SDGs, even in the absence of direct  incentives [4]. Strategic targeting of such areas can yield the most favorable outcomes, positioning them for long-term success

Decarbonization of healthcare emerges as a crucial initiative that merits incentivization[5]. Rather than treating ESG as a box-ticking exercise, healthcare firms should embrace a proactive stance demonstrating superior ESG performance. Efficient resource allocation and alignment of ESG practices with core values will contribute to long-term sustainability, bolster market position, and attract responsible impact investors.  Embracing ESG as a strategic imperative, healthcare companies can not only address pressing societal challenges but also fortify their market standing, signaling a profound commitment to sustainable practices.

Future of ESG in the Healthcare Sector

The changing landscape of regulatory standards will usher in a transformative shift in the role of  ESG scores for healthcare companies. As these companies integrate ESG considerations into their core business strategies, they will not only bolster their resilience in navigating market shifts but also contribute significantly to the broader mission of sustainable development. The implications of growing number of regulations on the healthcare sector are far-reaching [6]. ESG principles are becoming deeply ingrained in corporate practices, placing mounting pressure to adopt sustainable and socially responsible business models. Investors increasingly weigh ESG performance in their decision-making, rewarding companies that prioritize sustainability. Consequently, companies that fail to meet these evolving ESG standards may encounter difficulties attracting capital and investors.

By proactively embracing ESG initiatives, healthcare organizations can secure a competitive advantage, positioning themselves at the forefront of evolving regulations. Such companies will be better positioned to attract socially conscious investors and forge partnerships with like-minded businesses, elevating their reputation among customers and the broader community. Moreover, aligning with ESG principles opens up new avenues for innovation, propelling the development of eco-friendly medical technologies and solutions.

As the healthcare sector responds to these regulatory changes, embracing ESG as an integral part of their operations will not only contribute to the industry’s sustainability but also lead to long-term growth and success. By aligning business practices with evolving ESG standards, healthcare companies can actively drive positive change while solidifying their position as responsible leaders in the pursuit of sustainable development.

Sources

1. Pizzutilo, F. 2023. Is ESG-ness the vaccine?, Applied Economics Letters, 30:4, 484-487,
2. Feng, J,JW Goodell,D Shen.2022. ESG rating and stock price crash risk: Evidence from China, Finance Research Letters, Volume 46, Part B.
3. Laura T. Starks (2021) Environmental, Social, and Governance Issues and the Financial Analysts Journal, Financial Analysts Journal, 77:4, 5-21.
4. Consolandi, C., Phadke, H., Hawley, J., & Eccles, R. G. (2020). Material ESG Outcomes and SDG Externalities: Evaluating the Health Care Sector’s Contribution to the SDGs. Organization & Environment, 33(4), 511–533.
5. Health Care Without Harm & Arup. 2022. Designing a net zero roadmap for healthcare – Technical methodology and guidance. Available at https://noharm-europe.org/sites/default/files/documents-files/7186/2022-08-HCWH-Europe-Designing-a-net-zero-roadmap-for-healthcare-web.pdf
6. Czeschik, C. Coming soon: Sustainability reporting for hospitals. Healthcare.in.europe.com. Available at https://healthcare-in-europe.com/en/news/sustainability-reporting-hospitals-CSRD.html

About the Authors

Jasmin S. Petersen is employed as an Assistant Associate at PwC, specializing in corporate sustainability. She recently obtained a bachelor’s degree in European Business from Copenhagen Business School (CBS).

Louise H. Nielsen is employed as a Finance Assistant at ejendom.com, a SaaS start-up for operations and maintenance of properties. She recently obtained a bachelor’s degree in European Business from Copenhagen Business School (CBS).

Sabine S. Hansen is employed as a Junior Data Scientist at Acceleration Nordic, specializing in optimizing businesses and supporting data-driven decision-making. She recently obtained a bachelor’s degree in European Business from Copenhagen Business School (CBS).

Kedar Uttam is a Postdoc in ESG and the ocean economy and works at the Department of Management, Society and Communication (MSC), Copenhagen Business School (CBS).

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.

This blogpost is primarily based on a Bachelor’s thesis submitted by Jasmin S Petersen, Louise H Nielsen and Sabine S Hansen. The thesis received the Annual Best European Business Bachelor’s thesis Project 2023 Award under the category “Most European Business focused Bachelor thesis”. The thesis supervisor is Kedar Uttam, Department of MSC, CBS, with the voluntary guidance on statistical analysis: Katryn Pasaribu, Department of MSC, CBS.

By Emilie Juel and Prof. Kristjan Jespersen

With the planet facing unprecedented environmental challenges, social inequality, and governmental issues, financial institutions and regulators are rethinking traditional investment schemes and recognizing the potential of investments driven by sustainability. However, the unique characteristics of the private debt asset class, relative to more tangible asset classes, have caused a slow and turbulent progress in integrating ESG standards in their investment processes. Research on the intercept of ESG integration and private debt funds is very scarce. As a result, researchers have not been able to portray how ESG is being integrated into the investment practices of private debt funds.

Introduction

Private debt funds have gained significant traction as an alternative asset class, offering investors attractive returns with lower volatility compared to equity investments. However, the integration of environmental, social, and governance (ESG) considerations in private debt investments has been an area of growing importance. The thesis research of the master’s student, Emilie Juel, aims to explore the current state of ESG integration in North Western European private debt funds, examining their understanding of sustainability, use of practices, ESG reporting, barriers of integration, effect on investment decisions, and the future outlook.

Understanding sustainability and current sustainable practices to integrate ESG

The first objective of this study is to investigate how North Western European private debt firms define and understand sustainability. A shared understanding of sustainability is crucial for the effective incorporation of ESG considerations. Research suggests that private debt funds utilize recognized ESG labels and frameworks such as the UNPRI, GRI, and SFDR to guide their ESG integration. However, the level of commitment to ESG varies among private debt managers. Some managers show less seriousness about their ESG commitment, potentially due to concerns about greenwashing. The issue with ESG claims and reporting of private credit funds is the privacy of underlying portfolio data. On the other hand, a majority of private debt firms are indicating a growing commitment to making ESG an integral part of the investment process, but the lack of a how-to manual is hindering progress.

The second objective is to shed light on the current practices of North Western European private debt firms in integrating ESG considerations into their investment processes. Private debt managers in this region employ various approaches to ESG integration, with negative screening being the most prominent. Additionally, an increasing number of managers are utilizing internal or external rating frameworks, impact investing, and sustainable linked loans (SLL) to incorporate ESG considerations. However, the lack of comparable high-quality data poses challenges in fully implementing these practices. Collaboration and knowledge sharing among industry peers can play a crucial role in improving ESG practices and reporting schemes in private debt.

Barriers hindering more sustainable debt

The research highlights the difficulties faced by private debt managers in integrating sustainability considerations. Obstacles include the lack of comparable and high-quality data in private companies, limited means of measuring sustainability comprehensively, and the time-consuming nature of assessing ESG factors within the short turnaround time of debt investments. Inadequate internal expertise and a scarcity of external consultants with sufficient knowledge of private debt also pose challenges. Also, the significant use of unverified internal rating schemes with little to no validation or insight highlights the risks of inefficient ratings and greenwashing of debt vehicles. Additionally, the limited control over portfolio companies and restricted access to monitoring ESG create distinct obstacles for private debt firms in enforcing ESG standards and unifying integration practices.

The Future of ESG Integration in Private Debt

The future of sustainability in the private debt market remains uncertain yet promising. Capital allocators are increasingly pressuring private debt managers to prioritize sustainable investments, and regulatory bodies are taking steps to address issues related to disclosures, data quality, and greenwashing. Collaborative initiatives from organizations such as EBF, UNPEFI, UNPRI, and EU UN are working towards providing guidance and promoting sustainable investing. However, questions arise regarding the responsibility of private debt managers for the sustainability impacts of underlying assets, with varying perspectives on the extent of their accountability.

To address the challenges and achieve meaningful ESG integration, a collaborative effort from investors, regulators, and other stakeholders is required. Balancing fiduciary duties and ESG considerations will be crucial for private debt managers. Collaboration, knowledge-sharing, and standardization of ESG data can facilitate progress in this domain. Especially across general and limited partners as well as asset class types. By fostering broad collaboration, enhancing transparency for investors, and deepening ESG integration, the private debt sector can align its practices with the growing global sustainability agenda. A tailored regulatory system of rating debt and credit products equally through transparent processes will facilitate more truthful ESG insight. The journey towards a truly sustainable private debt market continues, with opportunities for further exploration and research on the horizon.

Closing thoughts

The integration of ESG considerations in private debt funds in North Western Europe is gaining momentum but still faces challenges. While private debt firms are increasingly recognizing the need for ESG considerations in their decision-making processes, there is still a strong reliance on financial factors that outweigh ESG factors. Quantitative standards and metrics to influence investment decisions based on ESG scores are lacking, and the subjectivity of ESG scores necessitates external validation to avoid potential biases.

Addressing these challenges and achieving comprehensive ESG integration in private debt funds will require collaboration among investors, regulators, and other stakeholders as well as regulated tailored debt rating processes. Transparent and high-quality data on private companies, along with improved means of measuring sustainability, are crucial for effective integration. Additionally, private debt firms need to enhance their internal expertise and seek external consultants with specialized knowledge in private debt and ESG. Nonetheless, the regulatory landscape is evolving, with increasing demands for transparency and accountability in ESG practices. Regulators are taking steps to address issues related to disclosures, data quality, and greenwashing. Striking a balance between fiduciary duties and ESG considerations will be essential for private debt managers, who must navigate evolving regulations while fulfilling their responsibilities to investors. Standardization of ESG data and reporting schemes can play a vital role in facilitating progress in ESG integration. Collaboration and knowledge-sharing among industry peers, including both sponsored and non-sponsored general partners, will contribute to developing best practices and improving ESG integration across the private debt sector.

The future of sustainable private debt holds promise, with growing global sustainability agendas and increasing pressure on capital allocators to prioritize ESG considerations. However, ongoing efforts are necessary to address the challenges, adapt to changing regulations, and foster a collective commitment to responsible investing. The integration of ESG considerations in private debt funds in North Western Europe is gradually progressing. While challenges related to data availability, measurement methodologies, and time constraints persist, there is a growing recognition of the importance of sustainability in private debt investments. By collaborating, sharing knowledge, and standardizing ESG practices, the private debt sector can align its practices with sustainable investing goals and contribute to a more responsible and sustainable financial system. The journey toward a truly sustainable private debt market continues, with opportunities for further exploration and research on the horizon.

This research will be shared with the involved private debt investment managers across North Western Europe to facilitate a greater understanding of ESG integration across the sector, as well as with the UN PRI to assist the research of the field. 

About the authors

Emilie Juel has formerly worked as an investment analyst at Nordic Investment Opportunity, working with alternative investments as part of NIO’sinvestment team.She is currently positioned as an investment banking associate at FIH Partners, where her focus is centered on financial advisory, modelling and valuation. She recently obtained her master’s degree in Applied Economics and Finance from Copenhagen Business School (CBS), where her research explored the connection between financial concepts and sustainability, particularly focusing on the private debt sector. Emilie also holds a minor in ESG & Impact Investments as well as a bachelor’s degree in European Business from CBS.

Prof. Kristjan Jespersen is an Associate Professor in Sustainable Innovation and Entrepreneurship at the Copenhagen Business School (CBS). Kristjan is an Associate Professor at the Copenhagen Business School (CBS). As a primary area of focus, he studies the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance. He has a background in International Relations and Economics.