As regulatory pressure transforms leveraged finance, Sustainable Fitch is expanding its analytical frameworks and screening capabilities to help investors navigate disclosure gaps, cross-border ESG expectations, controversies, and the evolving role of leverage loan funds and collateralised loan obligations (CLOs) in sustainable markets.
Environmental Finance: How has Sustainable Fitch (SuF) expanded its assessment framework for sustainability scores and screening for leveraged finance issuers in the past year?
Aman Gupta, associate director, leveraged finance, Sustainable Fitch: In addition to European Leveraged Finance Association (ELFA) and the Loan Syndications and Trading Association (LSTA) template questionnaires that had already introduced structured, voluntary sustainability disclosures for leveraged finance, 2025 has brought disclosures referencing the European Sustainability Reporting Standards (ESRS). Together, these voluntary and mandatory disclosure innovations enable us to capture new data, develop new products, and expand our analytical frameworks.
The EU's Sustainable Finance Disclosure Regulation (SFDR) requirements are a key driver of our recent updates for those marketing funds to EU investors.
We're collecting and creating (where company disclosure is absent) Principal Adverse Impact (PAI) data to support clients with SFDR reporting obligations. We are seeing CLO managers, CLO investors, and leveraged loan fund managers demanding complete, transparent, traceable, robust, and quality-controlled datasets.
This year, we've developed a greenhouse gas emissions estimation process. Rather than using generic industry or location benchmarks, we analyse company specifics informed by our borrower-level sustainability analysis. For instance, a German steel producer using electric arc furnaces and renewable energy (factors influencing our environmental score) would have very different estimated emissions from a similar sized German producer using traditional methods. These analytical insights improve our emissions estimates' accuracy.
Another area where we've seen changes in 2025 has been in our environmental scores, which are informed by science-based taxonomies of sustainable activities. One of those is the EU Taxonomy, which has expanded its scope of eligible and aligned activities in the past couple of years. We regularly adapt our scoring methodologies to capture these additional, scientifically-determined thresholds.
This year, we have seen these changes materialise in companies' 2025 SuF Scores, which, in particular, have led to considerable changes for a variety of companies involved in the circular economy services (e.g., repair & maintenance).
Finally, our governance analysis was refined this year. As shown in our August-updated public methodology, financial reporting transparency and tax management assessments are now more tailored to private market borrowers' jurisdictional considerations. We also assess board committee composition more granularly. Our controversy approach now also aligns more closely with the UN Guiding Principles on Business and Human Rights concepts. These changes are consolidated in our August 2025 methodology refresh, setting a higher benchmark for sustainability ratings transparency.
Thiago Toste, director, ESG leveraged finance, Sustainable Fitch: On the governance side, we've enhanced our assessment of controversies by integrating severity levels, which strengthens both our scoring and screening capabilities. This will soon be supported by a new solution for pre-investment due diligence and post-investment portfolio monitoring. It identifies both controversial activities and involvement in controversial incidents. These insights cover not just ongoing monitoring but also primary market transactions.
We're preparing to roll this out in the EMEA market as a significant expansion of our analytical framework.
EF: How are you integrating PAI indicators into sustainability assessments, particularly for leveraged finance issuers that often lack comprehensive disclosures?
AG: We integrate PAIs at multiple levels and ways. As we conduct business activity analysis and scoring on sustainability factors, we simultaneously collect and create data.
When issuers don't disclose certain PAI indicators, we use Sustainable Fitch's assessments and estimations to fill these gaps. For example, a company may not disclose "fossil fuel-related activities" as defined in SFDR, which we can determine through entity-level analyses. Similarly, we can identify if company policies align with UN Global Compact Principles or OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.
This combination of collected and created data not only strengthens our assessments but also helps market participants meet reporting requirements with more complete datasets.
GHG Emissions disclosures by industry
EF: Are investors actively using PAI-linked insights to differentiate portfolios or is it still more about compliance?
AG: Right now, much of the use is for EU regulatory compliance. However, we are starting to see asset managers use our ESG scores and sustainability data to differentiate their products. For example, one leveraged loan fund we work with has begun incorporating ESG information into their private markets' funds. It is common in public markets, but still quite new in private markets. It's exciting, though still nascent.
Average industry Sustainable Fitch scores by region
EF: How have leveraged loan borrowers' disclosure rates shifted in recent years, and what is driving those changes?
AG: European disclosure rates are about twice as high as North America across all Scope 1-3 emissions. Last year, 40–50% of European issuers disclosed emissions; this year, it's 50–60%. This increase likely reflects European borrowers preparing for ESRS reporting requirements starting in 2026 for the 2025 calendar year.
Despite European progress, globally only 30% of companies (40% in Europe) in our coverage universe reported 2024-end data by the SFDR fund-level reporting deadline of June 30. This misalignment between reporting cycles and regulatory deadlines challenges asset managers.
Our analytically informed emissions estimates, identified separately from and in addition to company disclosures, achieve near-100% portfolio coverage ahead of SFDR reporting deadlines.
North American disclosures remain low, partly because of a patchwork of requirements at the state level, as well as no requirements at the federal level.
Despite these challenges, our approach generates borrower-level and fund-level emissions estimates, particularly useful for investors comparing CLOs or leveraged loan funds. Our analytical methods achieve 97% coverage of the S&P UBS Western European Leveraged Loan Index and about 87% of the S&P UBS Institutional US Leveraged Loan Index.
EF: How do you validate your emissions estimates and reassure investors they're reliable?
AG: To create the model, we use inputs like company size, sector, and location, combined with analytically driven environmental scores. To validate our estimations, we back-test the model output against separately kept company-reported data. Testing results show better than 80% confidence level in the estimations.
EF: How are your sustainability scores being used by investors, particularly within the context of Article 8 funds?
AG: At the CLO investor level, our products can inform selection – helping investors build Article 8-aligned portfolios of CLOs by applying sustainability criteria. At the fund level, particularly in leveraged loan funds, asset managers are integrating not only our scores but also our emissions data, PAI indicators, and SDG-alignment information to build their Article 8 funds.
We are also seeing cross-border interest across the leveraged finance market. US investors and managers are adapting to client ESG demands (largely European and Japanese asset owners) despite weaker domestic regulatory drivers.
EF: Turning to broadly syndicated loan (BSL) CLOs specifically, what trends are emerging at both the CLO and portfolio levels?
AG: At the CLO level, scores depend on the sustainability profile of underlying collateral. European CLOs score better on environmental and social dimensions than US CLOs, partly because US portfolios have greater exposure to high-emitting sectors like oil, gas, and mining, which comprise about 12% of the US CLO market versus 3.5% of the European market. In 2024 and 2025, US CLOs saw their environmental scores increasing through greater exposure to sectors such as business services, software, and finance. This doesn't necessarily mean more positive impact – it's more of a move from poorly-scored borrowers to more neutrally-scored ones.
I mentioned European CLOs consistently outperform US counterparts due to underlying collateral. We've observed interesting sectoral trends at the borrower level:
- Packaging: European firms' greater use of renewable/ recycled materials boosts environmental scores.
- Food: European companies offer healthier, less-processed options with fewer GMO ingredients, leading to better social scores.
- Telecoms: Easier deployment of energy-efficient fibre optic cables in Europe, particularly to rural areas, improves access and digital inclusion, raising environmental and social sector scores
Going back to those high-emitting sectors, encouragingly, where these companies are setting decarbonisation targets and reporting emissions reductions, they show actual year-on-year emissions decreases in both Europe and North America.
EF: You mentioned you have enhanced your capabilities for controversial activities and incidents. What patterns in the data have you observed as a result?
TT: Sustainable Fitch has deepened its analytical approach to controversial activities and incidents with a new solution for sustainability screening, responding to investor demand for clarity on both type and severity of sustainability-related risks. This work leverages synergies between sustainability scores and SFDR PAI products.
Our controversial activities screening covers 37 activities, broken into 119 sub-activities along the value chain. This allows managers to apply their own thresholds while capturing exposure from mining to coal power generation to gambling and alcohol production.
When examining controversial activities, about 30% of companies in the EMEA leveraged finance universe show involvement, primarily in hazardous substances, alcohol, gambling, and military services. While oil and gas exposure exists, unconventional oil and gas remains relatively limited in this market.
The framework estimates involvement levels where companies disclose partial information, providing investors the most complete picture possible. For example, if a company doesn't disclose alcohol sales revenue percentage but provides sales volume and breakdown, including alcohol, we use this data to inform our estimate.
This figure, whilst high, captures any involvement level, and not necessarily breaches of investor-specific thresholds. The dataset empowers asset managers to set and calibrate their own criteria while benchmarking against exclusionary standards. Screening solution coverage currently focuses on EMEA, with North America expansion planned by early 2026.
The methodology is designed to serve a wide spectrum of users – from CLO managers to leveraged loan funds – by providing data that can be tailored to specific exclusionary policies and internal thresholds.
For controversial incidents like pollution or labour rights issues, our screening solution goes beyond headlines to focus on actual adverse impacts. We evaluate severity, remediation efforts, official confirmations, and other factors using methodology inspired by the UN Guiding Principles on Business and Human Rights.
Our data shows about 35% of companies in the European leveraged finance universe are involved in controversies. Most are minor, such as health and safety compliance lapses.
Significant controversies affect around 15% of companies, with only around 3% facing severe or very severe cases, a few confirmed by authorities. Common EMEA issues include competition, privacy/data breaches, working conditions, and chemical pollution.
For more information, see: www.sustainablefitch.com/corporate-finance/leveraged-finance
Disclaimer: SuF Scores indicate an entity's business alignment with sustainability factors, focusing on core business practices, revenue-generating activities, and a view on governance effectiveness, based on confidential and public documentation. Sustainable Fitch's independent, human-powered assessments provide comparable cross-industry data and assessments tailored to private markets for sustainability scoring, SFDR PASIS & Article 8, investor reporting, and screening purposes. SuF Scores do not indicate ESG's financial materiality to an entity's credit profile.
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