Section 2: Recent developments



This section covers developments since the 2ND Edition in 2011 including:

  • Key drivers of increased interest in ESG issues such as regulatory, industry and legal changes.
  • Increasing coverage and discussions on specific issues such as gender diversity and climate change.
  • Reputational risk awareness has also heightened.
  • Changes including reporting and industry collaboration.

Recent key developments and trends that impact the landscape in which LPs address ESG issues include expanded and increased:

  • Expectations in regulatory and legal guidance
  • ESG awareness throughout industry actions and perceptions
  • Competition for LPs (with respect to accessing PE funds)
  • Employee expectations that they work for an investor with established responsible investment practices
  • Leadership from the board or management, meaning ESG issues are rising up the corporate agenda
  • Staying abreast of general industry practices, the desire to avoid negative press attention
  • Increasing recognition and identification of material ESG factors.

These are expanded upon in greater detail to the right.

An increasing number of national and supranational regulatory initiatives place the onus for addressing ESG impacts on public and private corporations. Such regulatory developments highlight how ESG issues, once considered non-material or solely reputational risks, are now assessed as investment risks. For example, recent supply chain regulation and legislation, including California’s Transparency in Supply Chains Act, The Dodd-Frank Act and the UK’s Modern Slavery Act, now require firms to account for and monitor specific human rights-related concerns in order to access certain markets. As an example, California’s Transparency in Supply Chains Act requires any manufacturer or retailer with over $100 million in California sales to disclose efforts to eradicate slavery and human trafficking from their direct supply chains

This has heightened the need for ESG risk assessments and due diligence; and ultimately, disclosure. Several governing bodies require that LPs meet mandatory requirements for disclosure on responsible investing.

In North America, the Ontario Pension Benefits Act of 2016 requires6 pension plan administrators to disclose whether, and how, they incorporate ESG factors into their investment practices. This trend will continue as countries look to initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) recommendations as a basis for reporting on climate related risk.

Industry evolution

Awareness and understanding of material ESG issues such as climate change, employee issues and board diversity7 continues to rise. This has led to the increasing adoption of fund-wide responsible investment approaches among  asset owners.

Figure 5; Evolution of an ESG Issue – An Example

The increased understanding of the seriousness of sexual misconduct in the workplace has led to stronger repercussions for perpetrators than previously seen. The potential legal risks and long-term liabilities have prompted investors to respond with protective measures; a “Weinstein clause” is now added to deals to preclude limited partners and general partners from any associated financial impacts.

The interviewees for this guide identified other related drivers such as the desire to retain a leadership position among peers, board leadership, or a response to stakeholder pressure.

ESG staff at LP organisations find they now operate in an industry culture where the concepts of ESG and responsible investment are no longer marginal or second thoughts. For example, one LP interviewed during research for this report stated the increasing and informed media coverage of responsible investing by mainstream financial publications was an important contributor to the growth. LPs now report that GPs engage in conversations around ESG issues more frequently than in the past and that the absence of an ESG policy is now unusual. This marked shift raises baseline expectations for ESG practices. Increased familiarity with responsible investment also allows for a more advanced starting point for internal discussion among investment staff at an LP or GP.

Figure 6; Example - Reputational risks leading to GP engagement

For some limited partners, direct exposure in private equity investments that benefit from catastrophes, like Hurricane Maria in Puerto Rico, led to investment staff’s examination of  whether the implications of ESG risks have been accounted for in a private investment. Resulting engagements with GPs have led to moratoriums on foreclosures in the case of Puerto Rico and a hardship fund for laid off workers when limited partners were concerned about the negative financial repercussions stemming from impacts to local economies and the fund’s reputation. Media coverage and stakeholder pressure, around investments in private prisons have also led to issue-specific engagements  with GPs.

There are other key changes relating to various areas of the PE market that have developed since the last report in areas of competition, reporting and collaboration.

Increased competition and complexity

LPs are also investing in an increasingly competitive market. Access to top performing funds is constrained due to rising allocations to private equity and record numbers of oversubscriptions. Consequently, there may be a perception among some LPs that raising ESG issues with GPs might restrict access. However, anecdotal evidence from industry suggests that dialogue-based approaches do not limit LPs’ access to funds8. Moreover, top quartile GPs are increasingly practicing responsible investment and frequently disclosing this information. 


LPs need to provide clear direction on reporting requests to avoid anecdotal or inconsistent information which lacks standardisation. LPs need to ensure a systematic approach to reporting that clearly defines reporting objectives and sets out processes on how to utilise the data.

The development of industry guidelines such as SASB and the EU proposed taxonomy are two important changes in the market since the publication of the first guide.

Industry collaboration

Various collaborative cross industry initiatives (see appendix 2 for further details) have been developed since the 2nd edition of this guide. These have enabled LPs to develop more sophisticated questioning, understanding and approach to due diligence beyond “do you have a responsible investment policy?” to “how is that policy implemented?” and “can you demonstrate performance?”.

Collaboration across the industry to achieve industry standards or frameworks will continue to develop the practice of responsible investment in the private equity industry. Moving towards a common dialogue or taxonomy will streamline the exchange of ESG information and benefit both LPs and GPs.