Data & Intelligence
New Guidance for Fund Managers on Integrating ESG into the Investment Process
Recognition among private equity investors of the material risks and opportunities posed by environmental, social and governance (ESG) issues has swelled in recent years. As of 2013, more than 130 limited partners and 150 private equity firms had become signatories to the United Nations-supported Principles for Responsible Investment (PRI), signaling this growing acknowledgment of the potential impact of ESG issues on portfolio performance.
Private equity’s long-term nature and a related emphasis on close stewardship of investments make it particularly well suited to a responsible investment approach. However, many fund managers find it challenging to integrate ESG considerations into their investment decision making and organizational management because they lack frameworks for doing so.
In 2014, the PRI released a guide for fund managers titled Integrating ESG in Private Equity: a guide for general partners. The document, which reflects input from a global panel of 50 practitioners and industry stakeholders, including 15 EMPEA members, seeks to address this information gap by providing guidance on how to identify, manage and report ESG-related risks and opportunities.
The document covers the incorporation of ESG factors both within a general partner’s (GP) organizational structure as well as into its investment processes. The guidance aligns with that included in the PRI’s Guide for Limited Partners (LP) and includes suggested practices for integrating ESG considerations into the due diligence, investment decision and agreement and ownership phases of the investment process. It also recommends appropriate disclosure from portfolio companies on ESG risks and opportunities and methods for reporting on this to their investors. The guide includes a number of case studies highlighting the work of fund managers, including several EMPEA members, that have made ESG assessments and action plans a standard component of their due diligence and portfolio company strategic planning activities.
The guide also aims to be useful for LPs seeking information that will help them benchmark the ESG practices being implemented in the market, to yield more informed manager selection, fund evaluation and portfolio monitoring. The report features several appendices, including case studies of GPs at different stages of ESG integration. It also offers a synthesized view of procedures and frameworks in place across the industry and points to a number of publicly available tools and resources on the integration of ESG information into the investment process, including:
- The CDC Toolkit is an overview of issues related to geography, sector and industry that is designed for GPs investing in emerging markets. It features short summaries of the relevant ESG-related international standards and conventions, an extensive list of questions which can be asked during an ESG due diligence, an ESG reporting framework template, an action plan template and advice on ESG reporting.
- The Dutch DFI FMO offers an easy-to-use tool which provides the GP with an initial assessment of E&S risk against IFC Performance Standards regarding a particular investment.
- Environmental Defense Fund offers an ESG Management Tool, a self-assessment whereby a GP’s current ESG-related management practices can be benchmarked against current best practices.
- The ESG Disclosure Framework for Private Equity provides GPs with a better understanding of LP expectations on ESG disclosure and how to meet them. The first five objectives relate to the fund due diligence process and the final three relate to disclosure during the life of the fund.
- The IFC Environmental and Social Management Toolkit for Private Equity offers GPs an extensive overview of templates and tools which can be deployed during the due diligence phase. The toolkit is organized around the threephase investment cycle (screening, appraisal, management) and generates the main environment and social (E&S) issues to be addressed for each investment. The online assessment engine (the ES-gine) offers resources and templates to help tackle the identified E&S issues.
- The Due Diligence Questionnaire Tool produced by the Institutional Limited Partners Association (ILPA) includes sections dedicated to governance, risk, compliance and ESG. The included checklist offers a clearer idea of LPs’ expectations about how ESG is addressed during fundraising and provides metrics that can be used by LPs to assess a GP on ESG issues.
Renuka Ramnath | Founder, Managing Director & Chief Executive Officer, Multiples Alternate Asset Management Private Limited
Brian Lim | Partner and Head of Asia and Emerging Markets, Pantheon Ventures
David Rubenstein | Co-Founder and Co-Executive Chairman, The Carlyle Group
Dr. Andrew Kuper | Founder and CEO, LeapFrog Investments
Torbjorn Caesar | Senior Partner, Actis
Drew Guff | Managing Director & Founding Partner, Siguler Guff & Company