PRI finalises ESG questionnaire

A new standardised ESG questionnaire from the UN's responsible investment unit seeks to lighten reporting workloads for GPs and LPs alike.

After 10 months of work, the UN-supported Principles for Responsible Investment (PRI) has released its LP Responsible Investment Due Diligence Questionnaire (DDQ), a tool aiming to streamline the due diligence process for environmental, social and governance (ESG) considerations in private equity.

The DDQ includes an adaptable list of questions that LPs can ask their GPs pre-commitment in order to understand and evaluate how managers integrate ESG factors into their investment practices.

A working group of 41 LPs, funds of funds and GPs had been crafting the document since February in response to an increase in the number of LP requests for ESG disclosure and the growing demand from GP PRI signatories for industry consistency in these requests.

The 21-question DDQ is accompanied by additional materials, including short case studies and links to publicly available resources that detail the guidance further.

The PRI worked with a number of industry trade associations including the Institutional Limited Partners’ Association and Invest Europe on the project, who will encourage their own members to adopt and circulate the questionnaire.

The DDQ is “not intended to be used as a check-list,” the PRI said in a statement, instead describing it as a “tool to establish dialogue.”

The DDQ serves as a follow-up to the ESG Disclosure Framework for Private Equity, a workbook published by the PRI in 2012 containing guidance for private fund advisers wanting to better integrate ESG considerations into the dealmaking process. While the framework provides high-level guidance, the DDQ drills down on specific information like how GPs identify and manage material ESG-related risks and how GPs contribute to their portfolio companies’ ESG management.

Notably, the DDQ also includes a question on how LPs can monitor ESG post-commitment to ensure that GPs are following any agreed-upon policies and procedures.

A recent PwC survey revealed that while investors feel strongly about ESG practices when mulling investment decisions, most do not engage with industry ESG benchmarking tools or consider ESG issues as grounds for which to withdraw an investment once committed.