PRI: Fund terms must balance GP and LP ESG needs

Guidance will recommend where to include ESG provisions in a fund’s terms and conditions.

The inclusion of environmental, social and governance provisions in fund terms is increasingly a balancing act between LPs and GPs requirements, according to Natasha Buckley, the manager of the Principle for Responsible Investments' private equity program.

Her organization’s guidance on ESG provisions in fund terms will be released on Thursday.

“LPs find it challenging to protect their ESG objectives in the current LPA system: the time pressure, the need to prioritize, not knowing who the other LPs in the fund are and whether they share similar objectives, or are requesting similar provisions that might be available through the Most Favored Nation process,” Buckley told pfm.

On the GP side, there’s a need for more harmonization from LPs, as individual requests pose make life harder for managers.

“The guidance is an attempt at moving towards that harmonization,” added Buckley.

PRI has also argued there is a need for more commitment to ESG provisions by service providers such as legal teams.

“It’s imperative that external counsel understands what are the responsible investment objectives of both parties so that they are adequately negotiated into the fund terms and not so watered down as to be meaningless. That is not helpful to anyone,” Buckley said.

The guidance, drawn up after a year-long consultation with PRI signatories, recommends how and where to include ESG provisions in a fund’s terms.

“The PRI guidance aims to highlight the evolving practice in the market on the topic of responsible investment provisions, explaining what drives LPs to have certain requirements and how these are implemented in practice,” said Marta Jankovic, head of ESG integration for alternatives at APG, a Dutch pension fund, and chair of Invest Europe, the European private equity trade body.

The guidance is being launched at an event on Thursday at law firm Ropes & Gray in London.