With a rapidly-evolving ESG landscape, coupled with an increasingly stringent set of requirements from regulators, navigating the ESG environment has become something of a minefield for LPs.
Findings from Private Debt Investor’s LP Perspectives 2021 Study reveal a greater proportion of investors are now factoring in ESG considerations as part of their due diligence process. 88% of those surveyed say that ESG now forms a part of evaluating managers, compared to 81% last year. In this context, the International Limited Partners Association (ILPA) has identified that LPs are looking for alignment with their managers on ESG integration, while GPs are looking for clarity on what LPs expect.
To help solve these issues, ILPA – with member institutions including asset owners such as pension funds, endowments and foundations, family offices, insurance companies and other institutional investors – has released the ESG Assessment Framework (“the Framework”). This was released as a resource for Limited Partners to better evaluate and compare the ESG integration of their managers. ILPA noted that the Framework itself was prompted by increasing interest from ESG-minded asset owners to ensure their fund managers are in alignment with their goals. The Framework is designed to help asset owners evaluate and benchmark the responses of fund managers due diligence efforts, inform goal-setting conversations, and measure the ESG integration progress over time.
Overview of the new Framework
The Framework covers the following sections, and allows LPs to obtain a bird’s eye view of how far a manager has come on their ESG journey, while flagging areas that should be explored in greater depth:
- Policies and commitments to standards, covering the status of current policy, the approach to policy review, industry standards and best practices as well as contractual commitments
- Governance, encompassing ESG ownership, ESG capacity building and training
- Communication and Reporting, including the approach to communication, incident reporting, ESG KPIs and external reporting
- Investment process, covering due diligence, post-investment management, exit and after sale reviews
- Responsiveness to Diversity, Equity and Inclusion (DEI), including policies and governance, diversity metrics at GP level and at portfolio company level, recruiting and employee engagement; and
- Responsiveness to climate risks and opportunities, taking into consideration governance, strategy, risk management, metrics and targets
The Framework sets out what practice looks like at four different levels of sophistication: Not Present, Developing, Intermediate and Advanced. It is emphasised that ILPA’s focus has been to promote transparency around ESG integration practices observed in the market in a way that enhances investor dialogue and drives further progress.
Furthermore, ILPA underlines that while the Framework may serve as a useful starting point for evaluating managers in other private markets asset classes (venture capital, real estate, infrastructure, private credit, etc.), it was not designed with these asset classes in mind. In addition, it is noted that although smaller managers may not have the resources to land in the intermediate or advanced categories, they may take actions which place them at the forefront of their peer group. For this reason, it is seen as important to consider manager size and resources and adjust expectations accordingly.
Overall, the Framework is not meant to suggest a “one-size-fits-all” approach but to provide a starting point for analysis and dialogues with GPs. While it is not meant to be an exhaustive list, it will be adapted and updated alongside changing practices, with feedback from market participants to be encouraged.
How IQ-EQ’s ESG Healthcheck can help
At IQ-EQ, we welcome this release from ILPA, as it echoes a solution that we have been providing to clients throughout 2021. Our ESG Healthcheck utilises a similar set of criteria, targeted directly to the fund managers themselves, allowing them to understand where they currently sit on the ESG spectrum, and supporting them in their journey to becoming “Advanced Achievers”. This additional insight gives managers comfort in their current operations, allows them to benchmark against similar groups, and can provide them with a clear process on how to become a best-in-class ESG manager.
As this Framework begins to see an increase in adoption, we recommend that private equity managers, especially those who are- or are aiming- to manage Article 8 or Article 9 type funds under SFDR, start reviewing these questions. This could perhaps be aided with the support of an ESG Healthcheck, to ensure that when asked by LPs, they can provide first rate information, and are not left scrambling to draft and implement a policy which has not been fully developed.
For more information on how IQ-EQ is supporting managers on their ESG journey, please reach out to Alex Stickler, Commercial Manager, Investor Solutions, or get in touch here.