1. What are your ESG-related policies, and how do ESG factors influence your investment beliefs?

Prior to investing in a fund, an LP could establish whether the GP has the relevant policies and systems in place to align their investment practices with the LP’s responsible investment beliefs and expectations. After investing in a fund, an LP could continue to review this information to assess whether the GP’s policies and systems are applied effectively and are continually improved.

1.1 Do you have a policy that describes your approach to identifying and managing ESG factors within the investment and portfolio management processes? If so, please provide a copy. If not, please indicate whether you would consider adopting a responsible investment policy.

Developed questioning

  • Who has ultimate responsibility for the implementation of your responsible investment policy?
  • Do you communicate your responsible investment policy publicly?

Assessing a responsible investment policy

LPs should have an idea of what they require from a GP’s responsible investment policy in order to assess if and how it aligns with their own policy and investment beliefs. A GP’s responsible investment policy may cover: investment beliefs/motives; adherence to standards or principles; approach and objectives; policy coverage/scope; responsibility and resourcing for policy implementation; policy compliance; thematic focus (if any). LPs may wish to see evidence of a GP’s internal commitment to upholding ESG standards in their own operations.

1.2 What is the current implementation status of your responsible investment policy? Do you have any firm plans to develop your approach toward the management of ESG factors?

Developed questioning

  • When was your responsible investment policy written? What is the process for reviewing your responsible investment policy?
  • How have you historically implemented your responsible investment policy?

Improving approach to ESG integration

  • CDC ESG toolkit for fund managers helps GPs to design an ESG management system, including initial steps and advice on how to develop and communicate an ESG policy.
  • EDF ESG management tool defines the building blocks of a successful ESG management programme and provides GPs with a framework to assess, analyse and improve their ESG performance.
  • PRI Guide for general partners offers practical guidance for GPs on developing a framework for integrating ESG factors within their investment activities, linking this with organisational governance, structure and culture.

In practice: AP7

AP7, one of six national pension funds in Sweden, hopes to be able to contribute to the development of ESG methodology within the private equity sector and to add value to all participants in the investment process by an increased focus on material ESG-risks and opportunities.

AP7 strongly believes in incorporating elements of both assessment and development in their dialogue with GPs on their approach toward the management of ESG factors. In 2014 they launched a three-year ESG Program for Private Equity in order to increase transparency and ESG integration practices within their private equity investments with the aim of continuous improvement throughout the whole investment chain.

As part of the three year program, AP7 has introduced an annual ESG private equity evaluation process with four steps:

  1. Information gathering – the GP receives the questionnaire at the beginning of the year with questions on manager commitment, investment process, ownership engagement and monitoring/ reporting.
  2. Assessment – AP7 evaluates the information collected and gives the GP a rating from 1 to 4 (1: Leader, 2: Developed, 3: Initial, 4: Laggard).
  3. Development – AP7 holds a feed-back meeting with the GP to follow up on the previous year’s targets and to set new ones. Discussion will focus on areas for improvement and what would be required of the manager to improve their rating.
  4. Reporting – AP7 reviews the evaluation process and reports on portfolio progress and lessons learned in their annual sustainability report.

1.3 Do you commit to any international standards, industry (association) guidelines, reporting frameworks, or initiatives that promote responsible investment practices?

Developed questioning

  • Are you a signatory to the PRI? Do you belong to any membership organisations or collaborative initiatives that promote responsible investment? If so, what is your level of participation?
  • Have you incorporated any international or industry standards or guidelines into your responsible investment policy/processes? If so, how?
  • Do you promote responsible investment independently of collaborative initiatives? If so, how?

1.4 Do you make formal commitments relating to ESG integration in fund formation contracts, Limited Partnership Agreements, or in side letters when requested by investors?

In practice: MN

MN is a Dutch fiduciary manager with around €110 billion AUM and a private equity allocation of approximately 5%. MN and their clients have adopted ten Leading Principles of Sustainable Shareholder Return [the Leading Principles]. The Leading Principles seek to ensure that the companies that MN’s clients are invested in are managed according to accepted international treaties and codes, such as the UN Global Compact, the OECD Guidelines for Multinational Enterprises and relevant codes for good corporate governance.

Every GP of the funds that MN invests in is asked to acknowledge and to confirm in a side letter that they will manage the portfolio companies according to these Leading Principles. The side letter is also used for other purposes:

  1. The GP acknowledges the exclusion policy of MN’s clients, which precludes investment in companies active in the production, maintenance, or distribution of products or services that are non-compliant with international treaties, including cluster munitions, anti-personnel mines and chemical or biological weapons.
  2. MN has the right to opt out or be excluded if the Fund intends to make an investment that is not compliant with the exclusion policy.
  3. The GP reports periodically (at least once a year) on its responsible investment activities.
  4. The GP reports any incidents or issues that are of concern to MN on an ongoing basis.
  5. The GP will have established a responsible investment policy before a certain deadline if MN judges the GP does not have a sufficiently strong responsible investment policy, or no investment policy at all.

LP responsible investment DDQ: and how to use it