ESG has become a topic on ILPA’s agenda in recent months, with the association publishing the Principles 3.0, which include how private equity firms should be incorporating it into their policies and reporting it to LPs.
ESG is a growing, global trend across the private equity industry, “but particularly in Europe,” says Jennifer Choi, ILPA’s managing director of industry affairs. “Developments in ESG policies are often being driven by demand from LPs. Interestingly though, many GPs may be applying ESG factors to their diligence and monitoring but not necessarily labeling it as such.”
ILPA’s Principles 3.0 recommend GPs establish an ESG policy that provides sufficient information “to enable an LP to assess the degree to which the GP’s investment strategy and operations are aligned with an individual LP institution’s ESG policies.” The policy should make specific reference to “procedures and protocols that can be verified,” and the GP needs to adopt “a framework to measure, audit and report on the impacts achieved by the fund.”
The guide highlights ESG reporting frameworks from the International Finance Corporation and the Principles for Responsible Investment, as well as ILPA’s own Portfolio Company Metrics Template, which includes an ESG section. Released earlier this year, the PortCo Template gives the option to list multiple ESG issues and the targets, progress and KPIs associated with each one.
As Choi points out, ESG is “not a monolithic issue.” The difficulty in creating a comprehensive reporting framework is that, when it comes to demonstrating ESG performance, the specific metrics required will depend on the nature of each portfolio company. “KPIs should be a reflection of the unique characteristics of the sector of those companies – KPIs for an energy company could be very different from a retail or industrials investment.” Equally, the ESG data requested varies between investors. “LP attitudes towards ESG may depend on institutional priorities or policies at the program level, or specific expectations of beneficiaries.”
While ILPA is able to exert some influence, Choi says that any lasting change to ESG policies will need to be driven by GPs and LPs themselves, not just by regulatory bodies. “LPs aren’t taking a rigid or unilateral approach, but they are looking for authenticity from their GPs when it comes to ESG.”