Aligning ESG and Investment Strategy

P&I: What role does ESG play in Antares’ investment strategy?

Richard Aldrich: We’re a signatory to the PRI and we consider assessment of ESG factors as being critical to mitigating risk and enhancing our returns. When you think about it, most of the fundamental elements of ESG like potential environmental liabilities, social concerns like product or worker safety, or governance concerns around potential fraud or corruption, have all been on lender due diligence checklists for quite some time. But what's really new is increasing scrutiny around some areas of risk that have come to the forefront of late, like cybersecurity and, of course, climate change. And there's also been simply increased demand from investors for more rigor around measuring and reporting on ESG generally.

P&I: To what extent does ESG inform decisions around security selection, asset allocation and how you work with sponsors and borrowers?

Aldrich: Most of the time sponsors we work with will have filtered out companies with egregious issues. But our ESG assessments can be critical to whether we make a loan or not. We’ve developed our own proprietary ESG scorecard which we use for underwriting and of course, we do leverage sponsor due diligence and also often will engage our own independent third-party experts, depending on the circumstances. In terms of asset allocation, we tend to pursue recession resistant areas with growing or at least stable cash flows. So we have very little exposure to, say, oil and gas. But you know, that’s primarily due to boom-bust cyclicality concerns. We do have a few explicit negative ESG screen areas listed in our policy, like tobacco or pornography. But frankly, we don't see a lot of deal flow in those areas in any case.

P&I: Is there tension between ESG factors and maintaining a healthy portfolio in challenging economic times?

Aldrich: We believe that companies that manage ESG issues well tend to be more resilient and better managed generally. And that doing good from a values perspective and doing well financially are by no means mutually exclusive. In fact, ESG risks can often be areas of opportunity for value creation. One great example of this in our portfolio is a company called ProAmpac. On the product side, they have focused on innovation and bringing to market a suite of sustainable, flexible packaging solutions that today account for about half their revenues. And on the operation side, they have focused on reducing energy, materials, waste, water consumption, increasing recycling. Now, of course, all of that is great for the planet and they’ve also been good to the communities they work in by donating their time and talent. But ProAmpac has also very much been a huge success story financially, having more than doubled its revenues since we underwrote the company back in 2015.