The effectiveness of an LP’s investment decision-making and responsible investment policy will depend on a range of internal and external parties.
For example, because a GP must act in multiple LP interests, an effective ESG approach may depend on its consistency with the expectations of other LPs.
- An LP should develop a policy statement (and related implementation tools) that defines its approach to responsible investment in private equity. The policy statement should include:
- the LP’s expectations of its GPs (noting that expectations could differ based on the size of a GP or the nature of their activity);
- factors the LP includes within the scope of ESG issues;
- where relevant, an indication of which specific ESG factors are a priority.
- An LP could share their RI policy and implementation tools with other LPs and GPs, and consider making them available publicly.
- An LP could seek input on its ESG policies from other LPs, GPs, investment consultants, and in-house teams with experience integrating ESG issues in public equities and private markets.
- An LP could review ESG policies used by GPs and other LPs and, wherever possible, make efforts to promote compatibility, particularly with respect to due diligence questionnaires, relevant terms in limited partnership agreements or side letters, and reporting requirements. See Additional resources for sample questions and side letters that can help promote more consistent approaches to ESG integration.
- An LP could ensure that staff, consultants, service providers, intermediaries and GPs are aware of their approach to responsible investment, and obtain relevant training and/or have access to sources of expertise.
- An LP should give due regard to ESG criteria in their internal due diligence and fund selection processes. This may include developing investment analysis criteria or a section in the investment recommendation report assessing a GP fs ESG approach.
- An LP could include ESG criteria in their mandates with intermediaries (such as investment consultants and funds of funds) or service providers acting on their behalf in the fund selection, due diligence or monitoring processes.
- An LP could determine whether GPs, intermediaries and service providers are able to integrate adequately ESG factors by assessing their policies, systems and/or access to relevant expertise, and/or by reviewing past examples.
- An LP could encourage a GP to use the LPAC and AGM (or similar fund governance bodies) to provide regular information on ESG integration to seek the LP’s input. (The ILPA Principles 2.0 provide useful guidance on the role and operation of LPACs.) If the LPAC oversees ESG integration, an LP should ensure that:
- such a role is consistent with the scope of the LPAC mandate;
- LPAC members have a commitment to, and competence in, ESG integration;
- the minutes of LPAC meetings are accessible to all LPs.
- An LP could work with other LPs in the same fund to provide input on a GP’s ESG policies and implementation. When acting collaboratively, LPs should respect commercial confidentiality and avoid controlling the decision-making process on issues that lie within the GP’s domain.