The firm is also involved in the structured finance sector as an investor in nonbank lending businesses focused on real estate and vehicle finance, and in late 2021 it acquired an existing SME lending business. It had not previously been active in the SME space but has ambitions to grow its presence.

Environmental, social and governance (ESG) considerations have always been important to Metrics’ business. But its depth of engagement and the granularity of the requirements it places on borrowers have ramped up significantly in recent years.

Andrew Lockhart, managing partner at Metrics in Sydney, explains: “As a private market lender, ESG has been embedded in our business since the very beginning. What has changed recently is the ability better to quantify the ESG performance of companies we finance and a more consistent approach to ESG assessment by lenders across the market.”

Quantifiability is key. Metrics says it is one of Australasia’s first financial institutions to commit to setting a goal through the Science-based Targets Initiative and the first to commit to measure and disclose greenhouse gas (GHG) emissions associated with its loan and investment portfolio using the Global GHG Accounting and Reporting Standard for the Financial Industry.

“We decided we should not require anything of borrowers or impose any conditionality on them unless and until we understood our own emissions targets and rolled them out across the portfolio,” Lockhart explains.

The sectors in which Metrics operates and the nature of the private debt asset class present a unique opportunity set. Private debt is an increasingly important part of Australia’s capital market and affords greater access to and engagement with borrowers than mainstream syndicated lending or public market fixed-income investment.

The corporate bond sector, for example, is yet to convert the exponential growth in sustainability-linked loan (SLL) facilities in Australia into a comparable flow of sustainability-linked bonds – in large part because of the challenges of public disclosure of KPIs and details on how they will be met. Bond investors typically have to decide whether or not to commit to a set of predetermined sustainability performance criteria rather than having the opportunity to devise these in concert with the issuer.

Private debt investors are much closer to the action. Lockhart explains: “It is one thing to have negative screens and to decide which companies we will and will not lend to based on a range of ESG criteria – and we do all this. But there is also a role, as a private markets lender, to encourage and facilitate improvement of ESG factors across the companies we lend to.”

Metrics’ ESG process is about understanding companies, including making sure it gets the information it needs to assess ESG risk. But it also means working with management to explore how a borrower can make ESG commitments and put strategies in place to meet them.

“As a private market lender, we are originating the transaction, structuring the terms and conditions, and controlling the use of proceeds,” Lockhart continues. “We have a far closer relationship with the borrower and the information it provides is confidential to ourselves and to the company providing it.”

The private debt space is not without ESG challenges, though. One is that smaller businesses and those without public disclosure requirements may not have ready access to the type of data needed to make sophisticated ESG assessments.

This does not signify lack of interest, however. Alison Chan, investment director, sustainable finance at Metrics in Sydney, explains: “We know companies understand they should be making ESG commitments as well as measuring and reporting on them – they want to get to the next stage.”

In mid-2021, Metrics asked all its borrowers for emissions data. Chan reveals that only some had this available – and the ones that did were mainly larger, public companies. Others, typically in the middle tier, are actively working toward being able to provide the required data. The rest were not ready to provide it.

Private debt also lends itself to achieving greater impact through sustainable finance across the credit spectrum. SLLs in the investment-grade space offer pricing incentives that are material but not typically game changing for borrowers. The subinvestment-grade market accessible to private debt features somewhat different dynamics.

Chan tells KangaNews Sustainable Finance: “Two things are critical when thinking about sustainability pricing in an SLL: base pricing and the level of ambition. Base pricing is much tighter in the investment-grade market, and this does not lend itself to generous incentives. The subinvestment grade market has more headroom to be generous – at least for the level of ambition we want to see.”

When Metrics makes or structures SLLs, it seeks to ensure pricing is linked to the achievement of ambitious and meaningful ESG objectives. In this context, it demands information demonstrating the borrower’s historical performance against the agreed KPIs and considers the proposed targets against this and independent benchmarks.

“It does not have to be a pricing conversation in our sector,” Lockhart adds. “There are companies that need to improve their ESG performance purely because if they do not they will have difficulty actually accessing finance and capital.”

The flip side of the advantages of private financing is the risk of accusations of greenwashing or more fundamental lack of credibility about sustainability credentials. There is something of a paradox at play here, Chan says. Borrowers that are forced to make their targets public could be less likely to commit to genuine stretch goals they are at risk of missing.

“We have all seen criticism about lack of ambition on sustainability. A lot of this comes when there is a requirement to make ambition very public, which carries a risk,” Chan explains. “In the SLL market, borrowers are talking to a lender that knows its business well and is likely to be willing to work with them to deliver the best outcomes looking forward. This can easily feed into a higher level of ambition.”

Metrics has acted as structuring adviser and lender in SLLs, including some notable breakthrough transactions in which it played an advisory role.

To maintain the credibility of the market, Metrics believes letting external reviewers under the hood of sustainability-linked facilities is critical. “Credible second-party opinions should give comfort that greenwashing is not taking place,” Chan tells KangaNews Sustainable Finance.

In fact, Metrics has developed a raft of external links to verify the legitimacy of its own process and to take its seat at the table of market development. An example of the former is that the firm worked with an external consultant when it was building the methodology for calculating its portfolio-wide emissions.

Elsewhere, Metrics is the only private debt fund manager to be a founding member of the Australian Sustainable Finance Institute, the first nonbank asset manager in Australia to become a Climate Bonds Initiative partner and the only nonbank lender on the Asia Pacific Loan Market Association (APLMA)’s green and sustainable loan committee. It was one of the first investors in Australasia to join the Net Zero Asset Managers Initiative. The firm is also a member of UN Principles for Responsible Investment, Responsible Investment Association Australasia and the Investor Group on Climate Change.

These are not passive commitments. For instance, in its role on the APLMA committee Metrics was involved in the development of an ESG diligence questionnaire for borrowers, designed to help lenders get the information they need while also reducing the burden on borrowers by standardising the information requested of them.

Of Metrics’ role in industry initiatives, Chan says: “The perspective we bring is independent and not burdened by historical legacy relationships. We think from the perspective of our borrowers and our investors.”