Sustainable Investment Awards 2024

Showing leadership in private debt

Michael Kashani, managing director & head of ESG credit at Apollo Global Management, explains how its commitment to engagement and transparency in the private credit space is helping to meet stakeholder needs.

Environmental Finance: How are environmental, social and governance (ESG) considerations being addressed in the private credit space?

Michael KashaniMichael Kashani (MK): Private credit is an alternative option to public credit and can include various options, such as direct lending, mid-cap lending, credit infrastructure, real estate credit or private investment grade. Across each of these types of assets, our ESG Credit team collaborates with investment teams to produce assessments of environmental, social and governance factors and how they may financially impact our investment.

Within private credit at Apollo, we believe we can develop long-term relationships with borrowers, sponsors, and placement agents to think about their challenges and potential solutions.

EF: What are the biggest challenges and opportunities for investors?

MK: Apollo's philosophy is that we are here to support the integration of robust risk assessment and stewardship to help generate financial returns for our clients. Often, in private credit, these processes focus only on risk mitigation. However, we also believe there are instances where integrating ESG considerations can help to drive investment opportunities. Integration of ESG factors also helps us meet the diverse needs of our stakeholders. We see value creation and meeting stakeholders' needs as the two north stars of our efforts.

My background is in the public credit market, but the unique challenges of the private credit market has been eye-opening. When I joined [Apollo], there were nearly three dozen private credit ESG questionnaires that had been developed by various stakeholders. That heterogeneity made responding to these questions challenging.

So, we helped form the ESG Integrated Disclosure Project (ESG IDP), which, alongside standard-setting bodies and in partnership with our peers, created a new template to obtain relevant and material environmental, social, and governance information from borrowers. The ESG IDP template includes both qualitative and quantitative data points. We believe having both types of disclosure give a company the opportunity to explain its approach and can help to open the door for thoughtful engagement between Apollo and prospective borrowers.

EF: Can you explain Apollo's four key engagement pillars and why they are important?

MK: In our white paper, "The Evolution of ESG Credit at Apollo: From Managing Risks to Seizing Opportunities", we thought it was very important to be clear about our engagement pillars: transparency and disclosure, thematic engagement, financing the energy transition, and value creation.

Transparency and disclosure are highly correlated and align with our involvement in the ESG IDP. It is challenging to engage on these issues without the data or disclosure.

Thematic engagement is an area of differentiation for our platform. We have noticed that themes can rotate or evolve. When we think about a theme, we engage with S&P 500 listed companies down to the mid-market and have helped to drive value.

Financing the energy transition is also very important because many companies face challenges or may not have actionable plans currently in place. Apollo can play a unique role in discussing and formulating different financing structures to meet the wide-ranging needs of the energy transition. We have done that in our deal with AirFrance-KLM, where a portion of the proceeds went to develop or purchase sustainable aviation fuel.

Value creation is very much in line with our ESG risk assessments or enhanced due diligence. If we see a risk or an opportunity for the investment team or the ESG Credit team to engage with the borrower on a particular issue, it can allow for strategic and targeted engagement.

EF: How has Apollo innovated for clients in ESG private credit?

MK: We believe we are meeting our stakeholders' expectations in a few ways. We have scaled our reporting for over 100 credit products and continue to improve our ability to provide quality reporting to our LPs and clients.

Secondly, we have many conversations about what integration of core ESG issues means to us as part of our everyday investment processes. We do it because we believe it can be a value-creation driver and being transparent about it is something we consider an opportunity to differentiate.

Thirdly, we are building strategies and products that meet our clients' needs across commingled funds and separately managed accounts. One of the most visible ways we've met clients' needs and driven innovation is in the launch of specific products focused on climate and transition investments. This also includes working with third-party data providers MSCI and Persefoni to develop tools designed to aid issuers or their representatives in the disclosure process.

EF: How does Apollo demonstrate leadership in this part of the market?

MK: We believe our transparency and processes are areas of leadership in the market, as is our involvement in organisations like ESG IDP that drive change in the industry. We are also excited by the ability to work with industry data providers to improve data collection and aggregation.

The team is fortunate to have leadership from the top: a chief sustainability officer, Dave Stangis, who brings decades of operational expertise. Further, Apollo sustainability leaders have regular interactions with the most senior leaders of the firm, which illustrates our commitment to strong governance while building approaches to enable the energy transition and decarbonisation of industry.

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