February 23, 2021

Board Diversity: Carlyle Puts Its Money Where Its Mouth Is

In response to the events of last summer, many companies announced actions designed to showcase their commitment to racial & ethnic diversity. Global private equity colossus The Carlyle Group was one of them. Last August, Carlyle announced a new policy calling for at least one candidate who is Black, Latino, Pacific Islander or Native American to be interviewed for every new position. Carlyle also committed to ensuring that that 30% of its portfolio companies’ boards were ethnically diverse.

Corporate commitments like these were a dime a dozen in the long, hot summer of 2020, but Carlyle looks like it just might mean business. This recent NYT article describes a new  $4.1 billion credit facility that the firm established for its portfolio companies that ties pricing to the diversity of a company’s board:

The credit facility is an extension of Carlyle’s goal for the boards of the companies in its portfolio to have a diversity rate of at least 30 percent by next year. Nearly 90 percent of its companies now meet its 2016 goal of having at least one director who is a woman or ethnic minority for companies in the United States or, for companies outside the United States, one director who is a woman.

The firm says the effort is good for business: In a study of its portfolio companies, Carlyle found that firms with two or more diverse board members recorded annual earnings growth 12 percent higher than those with fewer diverse directors.

The Times article says that Carlyle’s effort to use the tools of private equity to promote diversity initiatives is part of a broader trend in ESG investments. It points out that debt issuance in support of sustainability efforts hit a record $732 billion last year – a 26% increase from the prior year.

ESG: The Rise of Sustainable Finance

If that $732 billion number caught your eye, check out this Wachtell Lipton memo, which highlights how rapidly the market for ESG-related debt financing is growing and broadening. Here’s the intro:

In the midst of the Covid pandemic, issuances of green, social, sustainable and sustainability-linked financing products have surged. Once solely available in the investment grade space, ESG-related debt issuance has expanded into the high-yield market. Likewise, sustainable finance is not just for European issuers anymore; it has jumped the pond and landed in the mainstream in the United States. Notably, private equity sponsors and their portfolio companies have recently joined strategic companies as ESG issuers.

As we expected, the credit markets have sent two unequivocal messages as companies increasingly signal their commitment to accountability on ESG issues: (i) ESG risk is credit risk and (ii) investors are willing to pay modest subsidies to support progress on ESG issues. Massive inflows into ESG-oriented investment funds and seemingly insatiable demand for ESG-related issuances have led to “greenium” pricing (i.e., a lower cost of capital for issuers) of many ESG-related issuances. Moreover, credit rating agencies are increasingly factoring ESG risks – including related regulatory risks – into their ratings, as are credit committees at banks into their determinations.

The memo reviews common sustainable finance product types and urges companies considering tapping into this financing to consider in advance what KPIs could form the basis for an ESG-related bond or loan. Those companies also need to consider how their existing sustainability reporting can support sustainable finance, because investors will want periodic disclosure on the relevant metrics & their drivers.

Key Performance Indicators: Recent Staff Comments

Early last year, the SEC issued an interpretive release providing guidance on disclosure of key performance indicators in MD&A. Just to make sure they had everyone’s attention, they quickly followed that up with an enforcement action targeting allegedly misleading KPI disclosures. KPI disclosures have remained the subject of close Staff scrutiny since that time, and this recent Bass Berry blog looks at recent Staff comments touching on these disclosures.

The blog focuses on comments directed at the determination of whether a KPI was a non-GAAP financial measure or an operational metric & on disclosure of KPI trends, and includes excerpts from Staff comment letters & responses. It’s definitely worth reading before your next SEC filing.

John Jenkins