Against what metrics can limited partners evaluate general partners’ commitment to environmental, social and governance goals? The Institutional Limited Partners Association’s newly released ESG assessment framework provides a starting point, with important caveats. “Many best practices are still being developed,” the document reads, and the framework is “not exhaustive.” Nevertheless, let’s have a look at its contents.
Guide-compliant investments have GP-led ESG diligence focused on identifying risks which are then used as factors in the investment decision. This doesn’t seem to only highlight downsides, however. Advanced practitioners also identify ESG-related value creation opportunities in a potential portfolio company, with legal and HR buy-in.
Once acquired, portfolio company progress should be measured by KPIs, assessed at least annually, and monitored by board members “trained and accountable for material ESG considerations.” Progress toward such goals is then marketed alongside sale materials on exit.
The starting point ILPA provides represents needs progress, but a large gap between LP expectations and current portfolio company reporting will likely persist. In addition to its admitted shortcomings, the framework doesn’t specify which metrics GPs should measure, potentially leaving LPs in the same position they’re in today when evaluating performance across companies.
Remember, an LP with positions across numerous funds could be inundated with ESG reports citing disparate measures, Women’s Association of Venture and Equity board member and Fordham University private equity professor Sheryl Schwartz previously told Mergers & Acquisitions. “One of the challenges as an LP is you’re getting all different formats and all different information,” Schwartz said. “To get 120 quarterly reports and then each fund has 20 to 40 companies, there has to be a way of aggregating that data and coming up with conclusions. And that process has not yet been fully developed.”
Specifying oversight and the creation of performance indicators does, however, move the needle in the right direction.