Impactful Ways to Approach ESG as an Asset Owner


Impactful Ways to Approach ESG as an Asset Owner
By Drew Kolb, Vice President

In early March, Private Equity International (PEI) and Principles for Responsible Investing (PRI) co-hosted the Responsible Investment Forum in New York City. I participated, along with other LPs, on a panel entitled "Impactful Ways to Approach ESG as an Asset Owner."  Though the topic has been around for years, Environmental, Social and Governance (ESG) programs are still very much evolving in this asset class, and the panel explored the lack of consistency in approach by LPs and GPs alike. This discussion centered on how LPs are integrating ESG into their decision-making processes, as well as what trends we are seeing from GPs today.

It was immediately apparent that LPs are approaching ESG in a variety of ways and for different reasons. Some want to ensure GPs have a policy for risk mitigation in the areas of ESG, while others go a step further and have specific mandates to pursue impact investing. Others, though in a minority, appear simply to have not taken any major steps toward incorporating ESG, instead focusing exclusively on returns.

The participants noted a trend in the increasing use of PRI's ESG Due Diligence Questionnaire, designed to standardize some of the most common ESG-related questions posed to GPs. Hamilton Lane managing director Ana Lei Ortiz, who was recently appointed to PRI's Private Equity Advisory Committee, was part of the working group responsible for creating the questionnaire, and we have found it to be a helpful resource in our diligence efforts. In fact, the majority of LPs seem to be utilizing the questionnaire responses in their investment decision-making process, as well as engaging in conversations with GPs to ensure that a thoughtful ESG approach is in place.

Exploring the GP side, the panel identified a number of best practices they have observed among fund managers with more mature and robust ESG platforms: 

  • The commitment to expanding knowledge of this evolving and complex subject through participation in industry groups and at conferences.
  • Formal documentation of the firm’s policy toward ESG, which is important in order to thoughtfully define the firm’s intentions.
  • A defined team structure. Although various structures work, the majority of those in attendance thought that ESG leadership should come from senior management and be passed through the deal teams.
  • Both risks and opportunities integrated into investment reports and vetted by the investment committee. LPs want to see that GPs are not just mitigating ESG risks, but also finding ways to create value at organizations through ESG initiatives.
  • The identification of key ESG metrics or Key Performance Indicators for each portfolio. Capturing a handful of the most crucial and measurable of the many intangible benefits of an ESG policy allows GPs to focus their efforts.
  • Consistent reporting to LPs in order to assure accountability. GPs have done this in a variety of ways through annual meetings, advisory board meetings and quarterly or annual reports, though participants agreed that these reports could be more frequent.

A recent study1 found that more than three-quarters of the industry think responsible investing is more important now than it was three years ago, and the dialogue and observations at the Responsible Investment Forum seemed to support that finding. Although it is still an evolving topic, the industry is making progress on incorporating these ideas into the investment decision-making process. 

1 Adveq: Responsible Investing Growing in Importance

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