Before investing in a fund, an LP should assess the degree to which a GP has the policies, systems and resources needed to integrate ESG considerations into its investment decisions and ownership activities.

Prior to investing, an LP should also confirm the ESG-related disclosures that a GP will provide during the life of the fund. An LP should clarify formally its expectations for ESG integration before investment, such as in the investment agreement or side letter, because it may be more difficult for the LP to address its concerns post-investment.

Due diligence

  1. An LP should include questions on ESG integration and/or portfolio company risk management in their formal due diligence process. An LP should consider whether the size of a GP or the nature of its activity justifies a different approach to due diligence.
  2. An LP could ask GPs whether they have an ESG policy and what it entails, the status of implementation, and how regularly changes to this policy are considered and implemented.
  3. An LP could provide a GP with a statement explaining its PRI commitments and responsible investment policy, and request information on how the GP plans to address these commitments within the fund.
  4. An LP could ask for examples of how GPs have identified and addressed ESG-related risks and opportunities in past, existing or potential portfolio companies.
  5. An LP should assess, even through informal discussions, the GP’s understanding of ESG impacts on the financial and non-financial performance of a company, and the GP’s commitment to improving its management of ESG issues.
  6. An LP should not exclude investing with a GP that does not provide adequate responses during the due diligence process if they believe the GP has the willingness and capacity to implement the necessary steps early in the life of the fund. In such cases, recognition by the GP of the importance of ESG issues and/or a formal commitment to meet regularly with the LP to discuss ESG factors should be expected before committing to a fund. The appropriateness of this approach also depends on whether the LP has the capacity to engage actively post-investment to encourage, monitor and/or assist the GP’s integration efforts.
  7. Since an LP may not have the resources to engage actively with all its GPs, they could use the information obtained during the due diligence process to prioritise which GPs warrant engagement on ESG integration post-investment.

Documentation

  1. Before investing in a fund, an LP should ask a GP to describe and, where relevant, make commitments regarding its approach to ESG integration. Where formal documentation is deemed necessary, such commitments could be described in the fund fs memorandum and/or included in the fund fs governing documents or in a side letter. Guidance on side letters is available in the Additional resources section.
  2. An LP could seek information and/or commitments on:
    • how a GP identifies and addresses ESG factors during the investment, ownership and exit processes;
    • the resources, including specialist expertise, that a GP anticipates applying to ESG integration;
    • how a GP intends to implement an LP fs responsible investment policy, including, where relevant, any exclusions (e.g. sector or geographic restrictions on investments);
    • the scope and frequency of ESG-related information that a GP will disclose during the term of a fund, for instance in: . quarterly and/or annual reports on the fund and GP management company: quarterly and/or annual reports on the portfolio companies; capital calls; investment memos;
    • whether, and if so how, a GP plans to provide updates on significant or material ESG issues that may arise in a portfolio company, subject to necessary commercial confidentiality;
    • whether, and if so how, a GP will use the LPAC, the AGM or other channels to seek input from LPs on a GP’s approach to ESG integration and/or portfolio company risk management and ESG performance;
    • right to inspect and/or communicate with certain portfolio companies regarding ESG issues.

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