Top 5 ESG-Related Questions Limited Partners Ask During Fundraising
Investor interest in investment funds that integrate Environmental, Social, and Governance (ESG) factors into the investment process has never been higher.
Private Equity Investors Must Consider ESG Factors During Fundraising
The United Nations’ Principles for Responsible Investment (UN PRI) now has over 3000 signatories, who are responsible for over $100 trillion in assets under management. According to Morningstar, over $51.2 billion flowed into sustainable funds in the US in 2020, up from $21.4 billion in 2019.
In the private equity asset class, 9 of the top 10 largest private equity investors (according to Private Equity International’s Top 100 Rankings for 2020) integrate ESG factors into all investment decisions (see table below). In order for private equity funds to continue to gain access to this capital (especially while fundraising), integrating ESG into the investment cycle is necessary. Some initial steps firms can take on their ESG journey include preparing answers to common limited partner questions. The Institutional Limited Partner Association (ILPA) Due Diligence Questionnaire (adopted from UNPRI) can serve as a good starting point.
ESG Questions Asked by Limited Partners
1. What are the Firm’s ESG-related policies and how do ESG factors influence its investment beliefs?
While the firm may not have a formalized ESG Policy, it may already consider some ESG factors (e.g. environmental compliance and management, water management, product quality and safety, employee health and safety, and supply chain management) in its investment decisions.
2. How does the Firm identify and manage material ESG-related risk and use ESG factors to create value?
If the firm has internal procedures and mechanisms to deal with potential ESG issues identified prior to investment, then it can draw on those.
3. Once identified, how might (i) potentially material ESG risks, and (ii) ESG-related opportunities impact the investment decision?
The firm can detail how ESG factors (e.g. environmental compliance, product quality and safety, employee health and safety) play a role in driving the final investment decision outcome.
4. How does the Firm contribute to portfolio companies’ management of ESG-related risks and opportunities?
The firm can describe actions taken to assist portfolio companies in addressing ESG risks (e.g. environmental compliance assistance) or supporting opportunities (e.g. energy efficiency upgrades)
5. How can LPs monitor and, where necessary, ensure that the Fund is operating consistently with agreed-upon ESG-related policies and practices, including disclosure of ESG-related incidents?
Describe how the firm has historically engaged with its investors on ESG-related issues, and what avenues (e.g. annual reporting, investor calls) the firm intends to use in the future to maintain open dialogues with investors.
Strategic ESG Services
Answers to these questions can provide an outline for the firm in adopting and integrating an ESG policy and strategy that is robust and useful for all stakeholders. RPS helps clients align their current practices into a comprehensive strategy to meet these demands.
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