4. 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?
Responsible investing requires proactive and transparent disclosure that supports aligning LPs’ and GPs’ interests. A GP should be able to assure an LP of the nature and frequency of ESG-related reporting and disclosures during the life of the fund. An LP could discuss with the GP the types of material ESG incidents for which the GP should provide disclosure, and in what format this disclosure could take.
4.1 Which channels do you use to communicate ESGrelated information to LPs? Can you provide samples of ESG-related disclosures from an earlier fund? If not, please indicate whether you would consider introducing ESG-related disclosures.
- When communicating ESG-related information to LPs, do you use any industry standard for disclosure?
4.2 Is the management of ESG factors included on the agenda of the Limited Partners Advisory Committee and/ or Annual General Meeting?
4.3 Describe your approach to disclosing and following up on material ESG incidents to your LPs.
- What is your definition of a material ESG incident that should be communicated immediately to LPs? Give examples.
- Describe the procedures for:
- Portfolio companies to report ESG incidents to you;
- How you assess the incident and the actions required to address it;
- How you communicate that incident and actions to the LP.
- Explain the types of disclosure that an LP could expect to get at the time of an incident, during its management and after it has been resolved (taking into account related confidentiality considerations).
- Provide redacted examples of previous incident disclosures for review, describing the steps taken to remedy or mitigate the effect of the relevant noncompliance and to ensure that there is no further noncompliance in respect of the same matter in the future.
For an example of a serious incident reporting template, refer to the CDP ESG toolkit for fund managers.
In practice: APG
On behalf of its clients APG manages the pension assets of around 4.5 million Dutch citizens with approximately €400 billion in assets under management, as of August 2015. One of APG’s investment beliefs is that the risk– return profile can be improved by factoring non-financial elements into the investment process. APG takes account of environmental, social and governance (ESG) factors as an integral part of the investment process in order to: contribute to risk-adjusted financial returns, demonstrate social responsibility and contribute to the integrity of financial markets.
For effective monitoring of the ESG impact on their private equity investments, it is essential for APG to understand the GP’s approach to transparency on ESG issues during the life of an investment. A significant piece of this information exchange is the GP’s willingness and ability to adequately disclose and deal with ESG incidents.
During due diligence, APG will enquire about the GP’s awareness of what a material ESG incident is and how the GP would typically respond to it. APG will also take time to explain to the GP why it is important to APG and its clients to have transparency on any material ESG incidents in the portfolio. APG also requires the GP to (i) demonstrate that there is an adequate process in place to respond to an ESG incident in a timely and transparent manner, should there ever be a need to do so, and (ii) describe how an incident could be mitigate and managed.