Investors get specific on ESG expectations

A think tank of industry players has developed a list of straight-forward questions for LPs to use when evaluating GPs’ responsible investment practices.

A collection of 41 LPs, 20 private equity trade bodies and 10 buyout firms have concluded a 16-month deliberation process to address the private equity industry's environmental, social and governance (ESG) practices.

The group, which includes such LPs as the California Public Employees' Retirement System and Ontario Teachers' Pension Plan, came up with eight objectives for LPs to keep in mind when evaluating or monitoring a firm’s ESG policies and reporting.

The first five objectives relate to investors’ due diligence processes prior to making a fund commitment. They include specific questions about how ESG factors influence a firm’s investment decisions, to what extent the fund coordinates ESG initiatives with portfolio companies and how LPs can ensure the fund is complying with its own ESG policies.

An LP may also want to understand the mechanisms through which it could raise potential concerns, and any relevant remedies.

ESG report

“An LP may also want to understand the mechanisms through which it could raise potential concerns, and any relevant remedies,” the report advised. “A GP could, for example, outline if ESG issues are included on the agenda of the Limited Partners Advisory Committee and/or Annual General Meeting.”

Other suggestions include stating the circumstances under which an LP could discuss ESG issues with a specific deal partner, or if possible, portfolio company management.

The remaining three objectives relate to disclosures made during the life of a fund. Specifically GPs are asked to inform investors of any changes to the GP’s responsible investment policies and how portfolio companies are faring with ESG-inspired changes made my management.

“LPs may find this information more useful if it includes performance measurements and is presented in a manner that enables comparison over the life of the fund,” the report suggested.

Tom Rotherham, director of private markets at Hermes Equity Ownership Services, who chaired the drafting process, said in a statement the report “is an example of what can be achieved within the private equity sector when there is a common interest, mutual respect and a commitment to finding pragmatic solutions.”