AllianzGI: Using NZIF to enhance mid-market direct lending

June 4, 2026

Applying the Net Zero Investment Framework in mid-market direct lending enables lenders to assess climate alignment, manage transition risks, and actively support borrowers on credible net-zero pathways.

By Diane Mak, Head of Impact & Sustainability Private Markets, Daniel Staudegger, ESG Private Markets Specialist, and Niels Kleijn, Senior Portfolio Manager, all at Allianz Global Investors

Mid-market companies sit at the centre of Europe’s economy. They drive employment, power regional supply chains and are a source of innovation. Since these companies rely increasingly on private credit markets to finance growth, acquisitions, and operational improvements, lenders are well positioned to encourage long-term resilience. As the transition to a low carbon economy accelerates, understanding how these companies manage their climate impact – and how lenders can support credible transition pathways – becomes increasingly important. In this context, the Net Zero Investment Framework (NZIF) provides a structured, science-based reference to assess alignment and guide engagement.

The Net Zero Investment Framework

The NZIF aims to provide investors with a robust, science-based framework for aligning portfolios with the Paris Agreement. Its core idea is to drive real economy emissions reductions through assessments of asset-level alignment, combined with structured, targeted engagement efforts to help companies advance on their net-zero journeys. Rather than reducing the portfolio carbon footprint by investing only in lowemitting companies – thereby restricting the investment universe – the NZIF encourages investors to take a forward-looking perspective and invest in companies that are well positioned to align their business models with a low-carbon economy. This allows investors to maintain well-diversified portfolios while supporting real-world reductions in greenhouse gas (GHG) emissions. The NZIF summarises this philosophy nicely as ‘finance reduced emissions instead of reducing financed emissions’.

Key principles of the NZIF include:

• Impact: prioritising real-economy GHG emissions reductions;
• Rigour: using sciencebased pathways and transparent criteria;
• Practicality: enabling implementation despite data limitations.

In an iterative process, the NZIF has evolved to include asset class specific guidance including dedicated recommendations for private debt, recognising the asset class’s unique characteristics: limited data availability, shorter engagement windows and varying levels of lender influence. 

NZIF methodology

The NZIF provides a clear methodology for assessing a company’s net-zero alignment status based on six criteria: net-zero ambition, governance around climate risk and strategy, GHG emissions disclosures, short- to mid-term GHG reduction targets, performance against these targets, and overall climate strategy. These elements build on each other, with stronger expectations for companies in high-impact sectors. Depending on how many of these criteria a company satisfies, it is classified into one of five net-zero alignment statuses:

1. Achieving net zero
2. Aligned to net zero
3. Aligning to net zero
4. Committed to aligning to net zero
5. Not aligned to net zero

This methodology helps investors understand how advanced a company is on its net-zero journey and identify the areas to improve upon. This makes it not only a helpful analytical tool for due diligence and asset monitoring but also supports the targeting of engagement activities to where they matter most.
 

The NZIF encourages investors to take a forward-looking perspective and invest in companies that are well positioned to align their business models with a low-carbon economy.

 
Application in mid-market lending

Direct lenders often operate in bilateral or concentrated club structures, allowing for meaningful engagement even without equity control. Certain lenders have already used this position to engage with borrowers on ESG improvements, for instance through incorporating ESG features in credit documentation and active dialogue. Lenders can further develop these efforts by aligning their approach with the NZIF guidance.

The starting point is an initial net-zero alignment assessment based on the NZIF methodology. While a preliminary assessment can be performed during the due diligence phase, the NZIF recognises the challenges private debt investors face in collecting the required data given the typically tight transactions timelines. It therefore introduces a ‘grace period’ – the first 12 months post-closing – for investors to collect the necessary information from the borrowers and complete the assessment. Subsequently, lenders can enter targeted engagement discussions with the borrowers, focusing on the areas with room for improvement and using the six NZIF criteria to define a clear roadmap for the company to meaningfully advance on its net-zero journey.
 

The ultimate objective for investors is to have as many companies as possible in the portfolio which are either ‘achieving’ or ‘aligned’ to net zero.

 
The ultimate objective for investors is to have as many companies as possible in the portfolio which are either ‘achieving’ or ‘aligned’ to net zero, and to engage, encourage and incentivise all other portfolio companies to improve their net-zero alignment status during the lifetime of the investment.

Sustainability linked loans as a key enabler

One powerful tool at the disposal of a direct lender to support these endeavours are sustainability-linked loans (SLLs). By linking interest margins to the achievement of predefined sustainability performance targets (SPTs), SLLs allow lenders to embed incentives directly into financing structures. These structures have been well accepted by borrowers, especially in countries with strong ESG awareness. Because direct lending transactions allow for highly bespoke structuring and tailored negotiation of financing terms, SLLs are a natural and effective tool which allow direct lenders to exert influence over portfolio companies even as a debt investor. By structuring the SLLs in a way that links the SPTs with the NZIF criteria, targeting measurable improvements in the area(s) where borrowers lag, investors can provide an additional incentive for borrowers to follow through with the identified action points and thereby improve their net-zero alignment status.

Challenges and opportunities

Lenders must first build robust internal capabilities, combining sustainability expertise with sectorspecific knowledge and strong regional presence to understand local market dynamics and be able to meaningfully engage with borrowers. Capabilities in aspects of methodologies and implementation can play an important role, both in assessing the extent of borrowers’ alignment with the NZIF, as well as mapping out the most practical next steps to progress on the alignment journey. There is no one-size-fits-all solution to net-zero alignment as effective implementation requires bespoke engagement that accounts for each company’s sector, geography and unique business model. Equally, it is crucial to bring borrowers on board and demonstrate to them that net‑zero alignment is a strategic lever to strengthen resilience, protect margins and support long‑term cash flow stability.

When applied thoughtfully, the NZIF offers compelling benefits across the value chain with the ability to support a broad group of companies during their transition. Borrowers gain more resilient and futureproof business models, lenders benefit from enhanced risk management and more robust portfolios, and clients gain access to improved risk‑adjusted returns while contributing to real‑economy decarbonisation. In this way, the NZIF provides a credible framework through which private capital can support both financial performance and the net‑zero transition.
 

Read the full article in Financial Investigator magazine