PRI and ERM launch guidance on ESG monitoring, reporting and dialogue in private equity

The guidance:

• Builds the business case and provides context for the increasing requests for ESG disclosure in private equity;
• Gives an overview of how LPs are currently monitoring GPs on ESG integration and how they use the information that they receive;
• Proposes a flexible ESG monitoring and reporting framework that builds on existing information collected during fundraising and streamlines the information exchange, and is supported by examples of how GPs might respond to the disclosure requests.

Launched at the 9th annual Responsible Investment Forum, co-hosted by the PRI and Private Equity International in London on 12-13 June, it marks the culmination of a four year project to support industry-consistent approaches to incorporating responsible investment considerations across the three stages of fund due diligence, commitment and monitoring with a trilogy of tools for both Limited Partners (LPs) and General Partners (GPs).

Our intention with these tools is to drive a more systematic and accountable approach towards responsible investment in private equity. With each project, the PRI has consulted its industry association partners (notably the ILPA, Invest Europe and EMPEA) to leverage their pivotal role in raising awareness and promoting standards of best practice in private equity,

In November 2015, the PRI published the LP Responsible Investment Due Diligence Questionnaire; it is an adaptable list of questions intended to streamline LP ESG requests during fundraising. Accepted as the industry standard for LP ESG due diligence, it has been incorporated into the ILPA Standardized DDQ; and is also increasingly used by GPs to proactively disclose their responsible investment approaches in their fundraising documents.

In July 2017, the PRI published guidance on Incorporating ESG provisions in private equity, which gives an overview of emerging and current practice on this aspect of responsible investment, and options for both LPs and GPs to consider when negotiating the terms of a private equity fund.

Last year, the PRI appointed ERM to conduct research and help develop a framework for ESG disclosure during the lifetime of the private equity fund. Over 70 practitioners contributed to the guidance through interviews, consultation and through a dedicated PRI signatory working group representing 39 LP and GP organisations.

The LP Responsible Investment Due Diligence Questionnaire and this guidance build on Sections 1 and 2 of the ESG Disclosure Framework for Private Equity. Published in 2013, after a 16-month consultation and drafting process that involved a group of more than 40 LPs, 20 industry associations (including the PRI), this established LP objectives for ESG disclosure both during fundraising and during the life of a fund. It has always been the intention of the PRI to build on existing efforts to achieve LP-GP alignment and dialogue, including the PRI’s Reporting Framework, and to streamline reporting wherever possible.

Fiona Reynolds, CEO of the PRI, said: “Throughout this project we have experienced an enormous amount of goodwill and collaboration from both LPs and GPs who share a common aim to strengthen and standardise responsible investment practices in private equity.

”As ESG integration continues to gain credence in the private equity industry, disclosure and dialogue remains crucial to understanding when it is being done well and how it is adding value.”

Keryn James, Group Chief Executive of ERM, said: “It has been our pleasure to partner with the PRI and the private equity industry to develop this guidance. The guidance outlines the underlying business case, provides a framework for a more consistent and streamlined approach to dialogue and disclosures between LPs and GPs, and includes examples and case studies to support implementation.

”It is our hope that this guidance will help drive the monitoring and reporting agenda forward and, in doing so, deliver not only improved ESG performance but also protection and enhancement of the value of underlying investments.”