Carlyle this month sourced a €2.3 billion debt facility for its European private equity and real estate platforms, for which the cost of debt is dependent on its success in meeting a series of targets set around diversity, equity and inclusion and sustainability.
These include ensuring that the boards of the companies in its European portfolio have what the US alternative asset manager refers to as a “diversity rate” of at least 30 percent; carbon footprint targets; and the provision of environmental, social and governance training for Carlyle board directors.
The facility, which was provided by NatWest Markets as lead arranger and Crédit Agricole Corporate and Investment Bank as ESG co-ordinator and agent, is the second financing sourced by Carlyle to feature a sustainability goal aimed at advancing board diversity.
In February, the firm secured a $4.1 billion credit line from a consortium including Bank of America that it claimed it was “the largest ESG-linked private equity credit facility in the US and the industry’s first facility to focus exclusively on advancing board diversity”.
Megan Starr, Carlyle’s global head of impact, spoke to Real Estate Capital about the latest European facility, the rationale behind the firm’s focus on diversity in its borrowings, and its broader ESG goals.
What targets are incorporated into the facility?
The European facility was linked to a diversity goal of achieving 30 percent board diversity across our majority-owned portfolio companies over the next three years. It is also linked to a goal aimed at tackling climate change by having more accurate and comprehensive measurements of greenhouse gas emissions across those same portfolio companies. Our target is to get 100 percent of our majority-owned companies to disclose carbon emissions footprint data that is directly associated with their activities. We already increased by 20 percent last year the number of companies in our European portfolio that disclosed such data.
The third target is focused on improving ESG outcomes through better governance by providing ESG-competent board training for all Carlyle board directors. We want to prioritise training for our board directors on the material ESG topics that our companies are facing.
How is the loan structured?
It is a line of credit for European private equity investing, so it is an umbrella facility that covers a few of our different funds. It is a three-year facility that we will renew, for which the cost is linked to the correct fulfilment of the set targets. Meeting these KPIs would lead to a margin discount and depending on the number of KPIs reached each year, the margin adjustment ratchets up proportionally. Not meeting any of the KPIs would mean we do not apply any margin adjustment. We want to maximise the financial benefit because we think that helps incentivise behaviour and change faster. We are not interested in doing things for the appearance of it.
How does ESG-linked finance fit with the company’s corporate strategy?
We think of impact as a process, rather than as a product. We are really focused on driving change over time within our portfolio companies as we believe that sometimes there can be a false binary between ‘good ESG’ companies and ‘bad’ ones. Our focus, therefore, is on how we can invest in companies that may still need to improve their sustainability credentials – which is why we really like ESG-linked credit financings, because they are a great example of one of the many tools available in a private equity toolkit to embed financial incentives and help that ESG transition by driving environmental and social progress.
Why did you put a keener focus on diversity?
We believe board diversity contributes to more deliberative decision-making processes and more effective governance. Our own research has shown the average earnings growth of Carlyle portfolio companies with two or more diverse board members is approximately 12 percent greater per year than companies that lack diversity. Our dedicated diversity, equity, and inclusion team works with our portfolio companies to help them source diverse board members, establish best practices and build DE&I strategies to support this work.
Has covid changed the sustainable finance landscape?
Before the coronavirus hit the world, everyone was talking about climate change and corporate action was gaining momentum. But when the pandemic hit, there was a concern among the industry that ESG would become less relevant. However, quite the reverse happened. If anything, we believe the coronavirus pandemic accelerated the focus on ESG, particularly putting a renewed spotlight on social issues.
Was it difficult to source a financing of this size?
We have seen an increased demand in the market for credible ESG-linked debt facilities, so we received significant interest from lenders, who were actively looking to allocate capital in credible and high-quality facilities.