The six Principles for Responsible Investment are nonprescriptive and aspirational.

They are designed to be applicable to investors in any asset class. For private debt investors, the most pertinent features of the Principles are commitments to:

  • Incorporate ESG factors into investment decisions; 
  • Engage investee entities to actively manage ESGrelated risks and opportunities; and
  • Ensure investors and investee entities are transparent and accountable.

Over 2,250 investment organisations, representing over US$85trn, have signed up to the six Principles11. Twenty two of the world’s 50 largest private debt investors are PRI signatories.

Growth of PRI signatories and AUM from 2006 to 2018

Figure 7: growth of PRI signatories and AUM from 2006 to 2018

Environmental, social and governance factors

The investment industry uses a variety of definitions for ESG. The term is generally considered to refer to factors that, while not measured in traditional financial units, are important to corporate financial performance and, therefore, investment performance. Rather than considering an ‘ESG checklist’ of factors that investors should incorporate in their investment analysis, it is more constructive to consider ESG as a lens through which investors can identify potential investment risks and opportunities in a systematic way.

There are a number of angles from which investors can consider ESG factors:

1. Macro ESG – issues that are likely to impact the economy as a whole (either negatively or positively), such as climate change, which represents both physical risks (flooding, drought) and regulatory risks (carbon tax, emissions restrictions).

2. Micro ESG – issues which have the potential to impact individual sectors or companies in different ways. These include social issues (e.g. labour relations) or governance (e.g. board independence).

3. Values or norms-related ESG – issues which are not necessarily deemed financially material but which are not aligned with an investor’s internal viewpoint, such as the production or sales of controversial weapons and tobacco products, or gambling services.

Figure 8: summary of the most commonly practiced responsible investment approaches in terms of objectives, key considerations and examples

 ObjectiveKey considerationsExamples

Negative screening

Do no harm. Excludes entities from investment universe based on sector, products or services, or certain behaviours that an investor deems undesirable for moral reasons.

  • Clearly defined screening criteria
  • Possible implications for investment returns
  • Regular reviews of portfolio for compliance to screening policy
  • Tobacco-free portfolios
  • Controversial weapons screening

Positive screening*

Do well by doing good. Actively targets companies which score well on ESG metrics relative to benchmarks with the objective of generating positive financial, environmental or social outcomes, or all three.

  • Determine balance of desired financial, environmental or social outcomes
  • Identify ESG value drivers
  • Sector or universe-level ESG benchmarks
  • ESG leaders exchange-traded fund
  • Clean energy fund
  • Social enterprise fund


Seek to address a specific problem. Actively targets companies which demonstrate ability to address specific environmental or social challenges via specific products or services.

  • Broad versus specific ESG themes
  • Clear definition of ESG themes to be addressed
  • Options for measuring positive impacts of investment
  • Microfinance lending
  • Clean energy assets
  • Social housing fund

Impact investing*

Do good (and do well). Actively targets positive environmental or social impacts where intentionality, additionality and impact reporting are explicit. Targeted investment returns may be competitive or below market rates.

  • Potential trade-offs between positive impact and financial returns
  • Impact reporting criteria
  • Trade-offs between negative ESG impacts and positive outcomes
  • Venture funding for social enterprise
  • Low-cost healthcare fund


Key considerations


ESG integration

Manage risk holistically. Integrates qualitative and quantitative ESG information into traditional investment decision-making processes, such as valuation and portfolio construction, with the objective of enhancing investment decision-making.

  • Source quality ESG data
  • Understand materiality of individual ESG factors
  • Ensure ESG analysis leads to meaningful decisions
  • Adjusting internal credit ratings for heavy emitters based on shadow carbon price


Monitor and manage ESG challenges. Uses investor influence as lenders of capital to manage exposures to ESG risks and/or enhance transparency of a borrower.

  • Efficiency of implementation
  • Sharing engagement outcomes among investment team
  • Tracking and reporting success of engagement activity
  • Engaging a food and beverage company to disclose plans to address regulation on sugar content
  • Requiring a manufacturer to produce regular reports on health and safety


Ensuring transparency on ESG factors up the investment chain from portfolio company to investment manager to asset owner

  • Objectivity, timeliness, incident reporting, adherence to investor policies
  • Investor reporting in alignment with Task Force on Climate-related Financial Disclosures recommendations
  • ESG questionnaires for portfolio companies

There remains a misconception about ESG that the term relates exclusively to an investor’s moral or norms-based views, and might therefore harm investment performance. In fact, rather than excluding undesirable companies from their investment universe, PRI signatories more commonly apply an ESG integration approach as a way to avoid risk or enhance investment value over the long term. In most cases, however, these different approaches overlap, as they are not mutually exclusive.

Drivers for implementing responsible investment

The growth in responsible investment activity globally has been driven by a number of complementary factors:

ESG analysis can enhance risk analysis

The analysis and integration of ESG factors into investment decisions has been embraced by a growing number of investors because it provides an additional level of risk analysis, helping to identify exposures that can be financially material. It is particularly complementary to private debt investment given these investors’ primary focus on downside risk.

This approach helps investors to consider risk in a more holistic way to identify hidden drivers of risk which may impact a borrower’s credit strength. When considering the typical hold-to-maturity approach for relatively illiquid markets, the case for considering ESG factors becomes stronger, especially over medium- or long-term investment horizons. There are a number of academic studies which support the case for ESG integration, such as Barclays’ research on sustainable investing and bond returns, and Friede, Busch, and Bassen’s research on ESG and financial performance. However, previous studies have predominantly focused on public markets.

From a business standpoint, [borrowers] with better ESG practices are lower risk investments.

Partners Group

Responsible investment has become part of the normative framework

Much of the growth in the breadth and depth of responsible investment activity over the last 10 years can be put down to demand from large institutional investors such as public pension funds and insurers. When the six Principles were launched in 2006, responsible investment was a niche activity, but it is now considered to be critical for all but the smallest funds.

Some interviewees suggested that increased responsible investment activity among private debt funds has been led more by their own internal drivers than pressure from investors – which tends to be a more prominent driver in other asset classes. This is explained by the fact that many private debt investment management teams have been keen to better understand how ESG issues are linked to credit risk. Nonetheless, interviewees consistently noted a steady increase from almost no investor questions about ESG five years ago to such questions becoming the norm today.

We see it as not only necessary but also a competitive advantage, so we like being asked about responsible investment.

BlueBay Asset Management

The regulatory environment is increasingly supportive of responsible investment

Policy makers are increasingly codifying ESG requirements in financial sector regulation. In the largest 50 economies in the world, the PRI has identified almost 400 policy instruments which encourage or require investors to consider long-term value drivers, including ESG factors. More than half of these were introduced in the last three years. Recent developments, including the Paris climate agreement, the recommendations of the EU Action Plan for Financing Sustainable Growth, as well as regulations in California, Ontario, Brazil and South Africa, point towards increasing regulatory focus on responsible investment over the coming years.

Managing reputational risks

The burgeoning use of social media and changing views of the role of business in addressing the world’s problems has sharpened investor minds about managing reputational risks. Analysing ESG factors by directly engaging borrowers and monitoring media feeds for negative news coverage, for example, can help investors identify potential reputational hazards relating to undesirable corporate behaviour. Such risks require regular tracking as they may develop through the life of the investment. Consideration should also be given to issues of emerging importance, such as cyber risk.


If you compromise on the covenants, you have to live with that and, if you take on too much leverage, there will also be consequences to suffer. You do not want to be a forced seller.

M&G Investments