How GP Should Approach Responsible Investments Risks and Opportunities?

Explanation

A GP should be aware of the risks and opportunities that ESG factors bring to its portfolio companies. The success of an investment may be influenced not only by financial performance but also by other performance criteria. A GP must also take into account its own LPs' approaches to responsible investment and seek to comply with their requirements, which may include expectations regarding the reporting of responsible investment factors in the investment and ownership processes and, in some cases, the exclusion of investments in certain sectors. Examples of some of the practical arrangements for achieving the integration of responsible investment include the following:

• Using of ESG information requests/questionnaires for the portfolio company;
• Using of a standardized ESG investment checklist and formal consideration of ESG factors in the investment process;
• Inclusion of ESG site visits during due diligence and ownership stages;
• Inclusion of a dedicated ESG section in investment proposals.

Recommendation

GPs should integrate consideration of responsible investment risks and opportunities into their due diligence and investment approval processes and regularly review their investment documents and processes.

The assessment of responsible investments should not be limited to regulatory compliance, but could also include any additional standards and practices that could have a material impact on an investment from an ESG perspective, as well as potential future regulation and market factors such as existing or emerging voluntary standards, consumer expectations and customer requirements, and broader issues that could impact reputation. It is also important that ESG risks and opportunities are considered across the portfolio companies' value chain.

Where GP has identified ESG risks and opportunities that are considered potentially material to the success of the investment or are particular areas of focus for LPs, GP should ensure that practices are developed to mitigate the associated risks and pursue opportunities. These practices should also be included in post-investment action plans. The implementation and effectiveness of these practices should be monitored as appropriate, and therefore the GP should consider how it will obtain relevant ESG data from portfolio companies. Given that the ESG context may evolve, GP should commit to regularly updating and revising, removing or adding to its analysis of the risks and opportunities of responsible investing opportunity analysis on a regular basis and to revise, remove or add governance and monitoring frameworks as appropriate.

A GP, which has established governance structures and due diligence processes for responsible investment factors, should report to the LPs on its findings at appropriate intervals. The GP may also choose to send unsolicited reports on responsible investment factors and performance to all LPs or report after a significant ESG incident.