Post-investment, an LP should focus on monitoring how a GP integrates ESG issues into its investment decisions and ownership activities, and engaging with a GP on specific areas for improvement or concern.

Many funds establish an LPAC to enable a GP to engage with LPs, but overall responsibility for decision-making remains with the GP. While a GP may be able to provide a broad range of ESG-related information at both fund and portfolio company-level, an LP should only request information that it intends to analyse and utilise, and should recognise that commercially sensitive information may in some instances have to remain confidential. An LP should be prepared to justify the need for additional information and to provide a reasonable timeframe for the GP to respond to such requests.

Monitoring

  1. An LP could request information from a GP either formally (such as email, meeting minutes, annual report, fund reports, portfolio company reports) or informally (such as telephone calls, un-minuted meetings). This information may include processes and activities within both a GP and the portfolio companies, and ESG performance within portfolio companies.
  2. Where a GP has made a specific ESG integration commitment to an LP, formal or informal reports on progress could be requested. Where formal updates are desired, an LP should, wherever possible, accept the use of existing channels for the communication of these reports.
  3. An LP should encourage a GP to report and seek input on its ESG integration approach and ESGrelated risks and opportunities within portfolio companies at annual meetings or in the LPAC.
  4. An LP could request that a GP develops criteria and procedures for notifying the LP on significant or material ESG-related risks arising during ownership. An LP could encourage a GP to clarify what constitutes “significant or material” through discussion with the LPAC or during annual meetings.
  5. In accordance with PRI Principles 3 and 6, an LP should encourage GPs to provide broader disclosure of non-confidential information on ESG-related issues to other stakeholders.

Engagement

  1. An LP could engage with a GP, whether formally or informally as appropriate, to highlight the importance of, and approaches to, responsible investment. Wherever possible, engagement should relate specifically to a GP’s portfolio of companies.
  2. An LP should encourage a GP to develop and improve its own ESG policy and implementation, using the PRI, the UN Global Compact and ESG-related documents produced by private equity associations and others.
  3. If the applicable regulatory regime(s) and contractual confidentiality provisions permit, an LP could share ESG-related research, including issue- and sector-based analysis, with its GPs.
  4. Where an LP believes that it has identified a material ESG risk or opportunity, the LP could alert the GP, request that a GP address the issue and, where relevant, decide on a course of action. Such course of action could include: seeking additional information, engaging with relevant portfolio companies, and reporting back to the LP.
  5. Within legal constraints, an LP within a fund could work collaboratively to provide input to a GP on potential improvements to ESG integration at the fund level and within specific portfolio companies and encourage reporting about such integration.
  6. An LP could work with peers and GPs to develop further and improve ESG standards and promote sustainability within the private equity sector.
  7. An LP could encourage a GP with which it invests to become a PRI signatory and to participate in the PRI Private Equity Work Stream.

Disclosure

All those within the investment chain should be accountable for the effective application of their fiduciary duties. This applies as much to an LP, who is accountable to their clients and beneficiaries, as it does to GPs and portfolio companies.

Although the confidentiality of commercially sensitive information is paramount, disclosure to an LP and by an LP is necessary for accountability and reporting to beneficiaries. Without relevant ESG disclosure from investment entities, an LP cannot effectively monitor how ESG factors are being addressed and, where necessary, engage to seek improvements in ESG integration. Some guidance on disclosure has already been provided above under “Pre-investment – Due diligence” and “Post-investment – Monitoring”. This section outlines more generally the type of information an LP could seek disclosure on, and could themselves disclose to their beneficiaries. Consideration should be given to avoiding unnecessary complexity and volume – in many cases aggregated disclosure may be adequate. Some disclosure could be proactively communicated, while other information may be more appropriate when required or requested.

Disclosure by LPs

  1. Subject to regulatory, contractual and fiduciary duty obligations, an LP should disclose relevant information to the parties to which it is accountable, such as its board of trustees, investment committee, executive committee, clients and beneficiaries.
  2. An LP could disclose any responsible investment policy applicable to private equity investments, as well as the tools, systems and resources used to implement and monitor the effectiveness of such policies.
  3. Subject to regulatory, contractual and fiduciary duty obligations, an LP could maintain a record of, and/or disclose, whether a GP fs approach to ESG integration is aligned with the LP fs own policies and effectively implemented. This analysis could be aggregated by categorising GPs into a variety of bands or grades.
  4. An LP could maintain a record of information on: material breaches of the LP;s ESG policy or the ESG-related terms contained in a side letter; ESG-related incidents that could be expected to have a material impact on the company or created headline risks; areas for improvement.
  5. An LP should seek to integrate ESG-related information into its internal risk reporting, noting that this may be a qualitative assessment.

Disclosure by GPs

  1. Both before and on an ongoing basis after investment, an LP should seek from each GP an assessment of, among other things:
    • whether a GP fs overall approach to ESG integration is consistent with the LP’s interests;
    • whether a GP has committed appropriate resources to the integration of ESG factors, including both general staff training and specialist expertise;
    • whether a GP consistently and effectively improves its ESG integration methods;
    • whether a GP consistently and effectively ensures its portfolio company boards pay appropriate attention to, and have sufficient expertise in, ESG factors;
    • whether a GP consistently and effectively assesses ESG-related risks and opportunities considered by its portfolio companies;
    • what the overall ESG risks or opportunities are across a GP fs portfolio.

Disclosure by portfolio companies

  1. An LP should seek ESG information on underlying portfolio companies to assess how GPs and portfolio companies are effectively identifying and managing material ESG risks and opportunities. This may involve knowing:
    • whether the portfolio company integrates ESG factors into strategic planning and risk management;
    • what material ESG-related risks and opportunities are facing the company;
    • what policies and procedures the company has put in place to mitigate material risks and to capitalise on material opportunities;
    • what KPIs the company uses to monitor the success of ESG-related policies and procedures.
  2. An LP could explain to its GPs how it uses portfolio company ESG information and the most appropriate form and frequency of disclosure. An LP should collaborate with the GP and other LPs to develop approaches to ESG disclosure that are suitable for all interested LPs.
  3. Where a GP discloses only aggregate ESG data or information on selected portfolio companies, an LP could ensure that the GP is also willing to provide, upon request, specific ESG information from any company within the portfolio.
  4. Without unnecessarily limiting the scope of disclosure, and wherever possible, an LP fs request for ESG-related information should be consistent with the relevant guidance in the ILPA Principles 2.0 and the ILPA annual and quarterly reporting templates.

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A limited partner's guide to responsible investment in private equity