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Creating Value with ESG Standards: 7 Recommendations for Private Debt Investors in Central Europe – article by Gabriella Kindert and Magdalena Śniegocka published in AltAssets

Creating Value with ESG Standards: 7 Recommendations for Private Debt Investors in Central Europe – article by Gabriella Kindert and Magdalena Śniegocka published in AltAssets

Environmental, social and governance (ESG) standards are increasingly important in the evaluation of private debt investments worldwide. This implies clear duties for General Partners (GPs) in terms of implementing ESG-related policies, evaluating investment projects, and portfolio monitoring.

Create awareness.

There is an increasing awareness about responsible investing in Central Europe, but the implementation of ESG policies requires further improvement, both in private and public markets.

For instance in public market in Poland, the launch of the new WIG-ESG index by the Warsaw Stock Exchange (WSE) together with Sustainalytics, is a positive step towards increasing ESG awareness in the local ecosystem. It remains to be seen to what extent it can become a relevant benchmark for ESG-driven strategies, as some of its constituents are just at the beginning of their ESG journey.

Since 2012, the Polish Association of Listed Companies (SEG) together with Global  Engagement Service (acquired by Sustainalytics in Jan 2019) and E&Y have been publishing the annual ESG Analysis of Companies in Poland in an attempt to make a quantitative assessment of ESG reporting standards in listed companies. The conclusions indicate a strong need for improvement in transparency and reporting quality for the majority of listed businesses in every area of “E”, “S”, and “G”.

In private markets, The Polish Private Equity and Venture Capital Association (PSIK) has recently launched an initiative to educate its members on global ESG trends and on practical implementation tools by showcasing best practices from Limited Partners (LPs), GPs and advisors. Central European GPs started to realise that ESG is no longer just a “nice to have” feature. There are a few regional private equity and private debt funds that have taken active steps to formalize their ESG policies, developed internal expertise or already implemented ESG within their investment process. For many LPs, ESG has become a mandatory due diligence item and a firm reporting requirement.

Commit to industry standards and capture consistent data.

There is a growing number of institutions that help in navigating the evolving complexity of ESG standards. One such organisation is the United Nations-supported Principles for Responsible Investment (PRI), which is very active in promoting responsible investing topics and has successfully attracted over 2600 signatories (investment managers, asset owners, and service providers).

These include asset managers from Poland, Czech Republic, Latvia, Lithuania, Estonia, Bulgaria – representing about 20 organisations in Central Europe. Althought this number is low compared to UK and Ireland (432), Benelux (184), Nordics (238) or France (220),  it should be considered relative to the size of investment market in the region. For example, the value of Private Equity investments into CEE in 2018 accounted for 3% of all investments by PE into European firms.

Still, we believe there could be significantly more firms from Central Europe joining PRI. As more signatories become bound by standardized data gathering and reporting tools, the higher transparency and accuracy of such data. It will also help to create aligned expectations from potential investment targets and portfolio companies.

Utilise the data to measure the impact of ESG strategies.

Once we overcome the challenge of availability and consistency of ESG data in private markets (in Central Europe included), both GPs and LPs should be able to better assess the benefits and costs of responsible investing.

More data should be available on the effectiveness and performance of responsible investing strategies compared to the non-ESG projects. Such data will help the LPs in evaluating the ESG value proposition. We believe that Central Europe could present an interesting opportunity for those LPs who want their capital to generate attractive risk-adjusted returns as well as measurable improvements over the investment horizon in environmental, social or governance metrics. This could potentially attract new pools of capital to the region.

Provide feedback about local implementation dynamics.

ESG implementation is not a one-size-fits-all solution. It needs to be adjusted to the specificity of the asset class and the local dynamics.

Many factors influence its success: the challenges of small-versus-large cap deals, the geographic location of business activity, the materiality and respective weights of “E”, “S” or “G”, the risk profile, the availability of data, the cultural affinity of other stakeholders with the ESG agenda, flexibility of terms, number of investors, and the extent of influence of the underwriter.

We believe GPs can make a significant contribution by providing ESG implementation feedback and helping to fine-tune the guidelines accordingly. This will enhance PRI’s effort to provide tools for investors on ESG implementation.

Take a proactive approach towards portfolio companies.

The most popular and fastest growing ESG strategy in Central Europe is via “exclusions” where investors avoid certain sectors. In private markets, we believe there is space for a more active role for GPs in facilitating sustainable practices in portfolio companies. The commitment to ESG in due diligence, execution and monitoring can protect private debt investors and the portfolio companies from potential downside scenarios that can have a financial and reputational impact, for instance environmental penalties, mis-selling claims or investigations concerning law infringement. We are of a view that GPs have to be even more hands-on while investing in SMEs, i.e., they should guide, educate, and demonstrate to the companies the benefits of proposed ESG requirements.

As the convergence and harmonization to Western European standards are ongoing, the SMEs in Central Europe have different levels of organisational readiness and means to commit to sustainability. In this context, the critical engagement levers for GPs remain in the field of governance. We believe that without strong corporate governance, the execution of ESG strategy in portfolio companies in Central Europe will fail.

The ability to implement strong ESG covenants in the private debt context depends, among other things, on the extent of influence which can be derived from credit demand-supply dynamics. In Central Europe where SMEs are underserved from the perspective of debt capital supply and sponsorless transactions dominate the landscape, a private debt investor has some negotiation advantage. This creates a potential for GPs to embrace and implement ESG covenants and well-defined reporting standards. We listed suggestions for the ESG-related KPIs, covenants and reporting obligations in Table 1 below. Some of these requirements are generic and broadly applicable, while a few are company- or industry-specific.

Table 1. Examples of ESG KPIs, covenants and reporting obligations


Compliance with company-specific environmental requirements; Measuring air pollution or energy efficiency in the production process; Measuring water usage or waste generation in the production process; Requirements around waste disposal; Control of necessary provisions for environmental liabilities or plant decomissioning; Maintenance of relevant insurance policies; Maintenance of patents or licences; etc.


Compliance with labor laws, employee protections, health & safety policies; Measuring employee or contractor turnover rates; Monitoring of raw materials sourcing; Monitoring of production incidents; Reporting on major accidents; etc.


ESG reporting requirements, including reporting on relevant ESG KPIs; Limitations on dividend payments; Limitations on related parties’ transactions; Caps on management remuneration; Auditor’s opinion on covenant calculations; Additional audit as bondholders’ option; Periodic review of incentive plans and remuneration policies; Reporting on major litigations; Monitoring of management board changes; etc.

Share case studies on ESG value creation and examples of lessons-learnt.

Besides having strong intrinsic motivations, we believe the industry can benefit from sharing best practices on ESG value creation and the consequences from an absence of ESG policies or a failed oversight.  Sharing both aspects, can demonstrate on one hand that the lack of ESG or an inappropriate implementation can lead to a default or have detrimental impact on the valuation. On the other hand, the positive examples on value creation can present the benefits of ESG and attract both the investors and SME companies towards embracing the ESG-related policies.

Set an example by starting from within.

ESG principles should begin inside an investment firm by demonstrating commitment to sustainable values, particularly by the firm’s leadership. For example, the management board or partners should be involved in ESG implementation and later in an ESG oversight.

Internal ESG activities can include initiatives that attract and retain talent, provide for alignment of incentives across teams, and promote inclusion and diversity. Day-to-day practices such as daily commuting, recycling policies, or office procurement also impact sustainability.

We believe that the attitude of the GP towards ESG has an influence not only on its reputation,  the LPs’ future commitments, but has consequences for a wide range of stakeholders (e.g., local investment ecosystems and communities, employees, suppliers, etc.).


With our recommendations, we highlight that:

  • ESG requires GPs to share the responsibility of educating and sharing implementation tools with industry associations, policymakers, banks, and advisors.
  • ESG implementation is critical if Central Europe wants to keep attracting capital from institutional investors.
  • ESG aspects can become financially meaningful, particularly for buy-and-hold investors. Therefore, ESG has to be implementated across the investment cycle – not only in due diligence and execution but also in monitoring of the portfolio companies.
  • for ESG to have meaningful impact, the investment community needs to take into account broader, longer-term stakeholder interests, not just purely financial targets.

If, after all of that, both the investment firm and SME are transformed into what ESG is all about, – i.e., a company that values the environment, its employees and business relationships, embraces appropriate governance practices and accurate and transparent accounting, then we’re all better for it.

(Our perspective is shaped by our experience at CVI, a leading private debt platform in Central Europe with EUR 1.2B in AUM. CVI is headquartered in Poland and is committed to implementing and promoting ESG practices in the region.)
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