Responsible Investing: Asking the right questions

At the end of November 2015, the United Nations-backed Principles for Responsible Investment (PRI) initiative finalised a standardised due diligence questionnaire that investors can use to evaluate fund managers on their commitment to environmental, social and corporate governance issues.

The UN’s LP Responsible Investment Due Diligence Questionnaire (DDQ) was drawn up by a working group of PRI signatories comprising 41 LPs, funds of funds and general partners to build consensus around the questions already touched upon in various sources. These sources included the ESG Disclosure Framework for Private Equity, published in 2013, its own existing PRI LP guide and parts of the Institutional Limited Partners Association’s existing DDQ.

After three months of what Natasha Buckley, manager of the private equity programme at the UN-supported PRI and author of the DDQ, describes as “stringent pressure testing” by a project group of PRI signatories a draft was launched for public consultation at the Responsible Investment Forum co-hosted by the PRI and Private Equity International, last June.

The questionnaire then entered a phase of feedback from an online consultation and various LP roundtables to determine whether the DDQ questions were necessary and fair, and, most importantly, whether the outcome would help LPs in their decision making. A final version was published in November, alongside an accompanying guidance document to explain some of the trickier questions: in particular those around scope, due diligence and materiality.

As ESG has become an increasingly prominent factor in LP decision-making, GPs have been faced with an increasing variety of disparate information requests from among their prospective investor base. Different LPs ask different due diligence questions, often covering the same areas. At the same time, smaller LPs – or those whose ESG framework is still in the early stages of its development – have been seeking guidance on how they should tackle ESG diligence in a manner that is efficient for both them and the manager.

“A lot of LPs are only recently starting to look at [ESG] and don’t know where to start. Now that they have a list of questions to send out, they need to understand why they are asking these questions and what they can do with the information once it comes back to them,” says Buckley.

The DDQ should help address these challenges and go a step further, adds Buckley, as well as helping some LPs that are currently “struggling to understand what they should be doing with the information that fund managers send back to them”.

Thomas Kristensen, executive director of fund investor LGT Capital Partners, is a member of the DDQ signatory working group; his firm, he says, recognised “the need for an industry standard, a single questionnaire which LPs can send out to all of their GPs, to help them gain a better understanding of the GP’s ESG polices, what GPs are doing well and how they can improve”.

In reality, many sophisticated LPs and funds of funds already have responsible investment strategies in place, which include their own questionnaires. However, the purpose of the DDQ is to create one centralised questionnaire that can act as a starting point and reduce the amount of time GPs spend filling out separate forms.

“Despite having our own questionnaire, we realised that GPs receive a multitude of ESG questionnaires from a large subset of their LPs, which is not the most efficient process for them,” says Kristensen.

APG, a Dutch pension fund with assets of €428 billon, has included ESG-related questions in its fund due diligence process for “a number of years”, says Marta Jankovic, a senior sustainability and governance specialist at the scheme.

Jankovic, also a member of the DDQ signatory working group, says APG will integrate the DDQ into its wider ESG strategy: “We have been asking ESG questions in our due diligence of private equity investments for a number of years and now plan to use the new LP DDQ for this purpose, adding more specific questions we deem necessary.”

Susan Flynn, partner at secondaries investor Coller Capital and DDQ signatory working group member, believes many LPs will continue to send GPs their own questionnaires, but the existence of the DDQ will create a more standardised approach. “A lot of LPs will still send in their own questionnaires, but the DDQ will provide them with the tools to help them shape the type of questions to ask,” says Flynn.

However, Jankovic adds that when it comes to how much information GPs should be disclosing, APG prefers quality (and depth) over quantity. “The final due diligence assessment for us really comes from the totality of the responses, where we focus on the quality of the information received, both via the DDQ and via direct contact with GPs. So if we get vague answers back in the DDQ then this is not going to be helpful and can result in more work for everyone involved,” she says.


The challenge for GPs, then, is the difficulty in collecting large amounts of data and the increased burden this places on the back office.

Kristensen believes, however, that this will be reduced with the introduction of a standardised DDQ. “These questionnaires have already increased the burden on GP back office staff because someone is responsible for filling them out, but hopefully over the next two to three years, with a standard DDQ, we can reduce this burden by everyone sticking to one questionnaire,” he says.

LPs, meanwhile, should also be aware of how much information they can handle, warns Flynn. “The amount of information GPs have on ESG varies greatly and can sometimes be overwhelming. LPs have to consider what they will do with this information, and how to get it into a collated format that provides an overall picture of how their portfolio is doing,” she says.

Buckley says the UN PRI has received plenty of positive feedback about the exercise itself and hopes that the document will help LPs and GPs find a common approach towards ESG.

However, according to Kristensen, during the drafting process some GPs questioned the practicality of the questionnaire and there was confusion around the amount of detail they should go into. “Some GPs were worried about the practicality of filling out certain questions, how detailed they should be and how much detail should come from portfolio companies,” he says.

The UN PRI reiterates that the DDQ is intended to be used as a guide not a checklist, which Flynn says should be really helpful for smaller investors. “I think the DDQ will provide a really good guide for some of the smaller pension funds or investors that are just starting out on the ESG journey and want to do something but don’t know where to begin,” she says.

The creation of the DDQ comes at a time when ESG is becoming an increasingly important factor in private equity fund selection; 76 percent of institutional investors now have ESG on their list of selection criteria, according to research conducted by Mercer and LGT Capital Partners, and a similar number would reject a fund on ESG grounds, according to PwC. It is in the interest of GPs, therefore, to get their answers straight.