Background
In September 2022, LBP AM European Private Markets launched its first Article 9 corporate debt fund: LBP AM Midcap Senior Debt Fund. The objective was clear: finance the sustainable transformation of French SMEs, with a strong focus on decarbonizing their business models. In a market segment that is still relatively lacking tools in terms of climate action and monitoring, the investment and ESG teams wanted to experiment a rigorous and innovative approach.
Challenge
To encourage companies to decarbonize their business model, LBP AM European Private Markets structures loans indexed to impact indicators: Sustainability-Linked Loans (SLLs), most of which include CO2 emission reduction targets. Achieving or failing to achieve these targets triggers an upward or downward impact on the interest margin, thus incentivizing borrowers to commit to their decarbonization.
However, assessing the consolidated climate trajectory of a portfolio as heterogeneous as LBP AM's remained a challenge. The team sought to implement a rigorous and robust approach to account for the contribution of this strategy to the reduction of CO2 emissions by the financed companies. The objective was to provide its teams with concrete analyses and visualization tools to facilitate the long-term monitoring of the climate commitments of its borrowers and its portfolio.
Carbometrix' role
For five months, our climate consultants worked hand-in-hand with the investment and ESG teams. Our work was structured in four key objectives :
Compute the financed emissions of the fund, based on the GHG Protocol and PCAF standards;
Harmonize decarbonization data of the loans, in spite of different formats and granularity;
Consolidate an aggregated trajectory at portfolio level, on different time scales;
Compare results to reference scenarios especially those brought by the CDP-WWF methodology (temperature score) and SBTi
We have also set the basis of a monitoring tool and year-on-year comparison on our platform to integrate this analysis in the day-to-day operations of LBP AM European Private Markets.
Outcomes of the collaboration
This project made it possible to contextualize the carbon performance of LBP AM's Article 9 fund. Our analysis allowed us to assess the portfolio's implied temperature and identify levers to strengthen its alignment with a trajectory consistent with the Paris Agreement's objectives.
The goal of this approach was to:
Objectify the ambitions carried by the existing Sustainability-Linked Loans (SLLs);
Structure a more strategic dialogue framework with borrowers;
Create an internal benchmark for future negotiations of loans indexed to impact indicators.
Internally, this work also brought a new dynamic: 'This type of project can only succeed by breaking down the silos between investment and ESG,' emphasizes Sophie Normand. This required a cross-reading of financial and extra-financial data, revealing the importance of this dual expertise in sustainable growth projects.
Why it matters
The decarbonization of private debt cannot happen without a clear, shared, and measurable strategy. This project is proof that it's possible to apply demanding international standards to unlisted financing contexts through an approach that combines methodological advice, data transparency, and digital tools.
LBP AM European Private Markets demonstrates that it is possible to take action in a constrained framework - where you don't set the KPIs alone - while still raising market standards. For the continuation of our partnership, the ambition is now to generalize the monitoring of the climate performance of portfolios and accelerate the transformation at scale.