ESG: A New Wrinkle in Collateral Management

Once viewed as niche, ESG investing now impacts every part of the financial services industry.  According to Morningstar, ESG funds captured $51.1 billion of net new money from investors in 2020, more than double the prior year. As interest rapidly grows, ESG investing is expanding to several new investment products such as European Leveraged Loans. Within collateralized businesses, many firms are increasingly incorporating ESG guidelines to determine what assets they will finance or accept as collateral. However, the relationship between collateral management and ESG adds a new layer of complexity in an already complex environment.

Several data providers now offer ESG scores that allow investors to assess whether an issuer’s activities align with their values. However, the challenges of these offerings are well documented: multiple definitions of ESG, a lack of standardization on company disclosures and data sets, and various scoring mechanisms that may not best support investor goals.

The complexities of ESG criteria can lead to disparate treatment of securities across the market. Furthermore, ESG requirements can change the liquidity profile of certain assets as more financing and trading counterparties limit what they will accept as collateral. ESG adds a new wrinkle to an already intricate ecosystem of markets that require collateral, under varying margin regimes, with differing counterparty agreements and collateral requirements.

Looking to the Future

The future of ESG and collateral management continues to evolve with many market participants waiting for definitive guidance and best practices:

• Which ESG scoring providers will become standard?
• What causes or metrics will be the most relevant for a particular investing community?
• Which agreements will incorporate ESG?
• How can cash investors ensure that their ESG criteria is fulfilled by agent lenders and other collateral providers?

In this nascent market, the future is difficult to predict. Therefore, it is important to leverage flexible technology solutions that can evolve with changing requirements and best practices.

As the relationship between ESG and collateral management unfolds, Transcend is committed to addressing critical collateral challenges, including ESG dimensions, through a flexible architecture. Our innovative and configurable solutions provide the scalability and speed needed to stay on top of a changing ESG and collateral landscape.

Learn more about our ESG Solutions for collateral analytics, validation, optimization.