Mergers & Acquisitions has named the Institutional Limited Partners Association to our 2021 PE Innovators in ESG list We asked Matt Schey, ILPA’s senior director of strategic projects, to share his insights on the organization’s ESG Assessment Framework.

What role is ILPA playing in advancing the state of ESG goals in the private equity industry?

ILPA’s approach to advancing ESG goals in private equity can be broken into three primary objectives:

  1. Empower LPs through education and tools. ILPA seeks to provide LPs with the knowledge and toolkits necessary to successfully integrate ESG considerations across their investment programs and to maximize the impact of peers sharing experiences, insights and results.
  2. Advance ESG standards and best practices. ILPA supports collaborative, industry-led efforts to standardize ESG reporting and provide practical guidance that aligns with widely adopted frameworks.
  3. Educate policy makers and advocate for LPs. ILPA engages with policymakers globally to help demonstrate how proposed policies may impact LPs and how to tailor regulation to the complexities of private markets.
Matt Schey, Senior Director of Strategic Projects, ILPA

What is the biggest obstacle, or challenge, for PE firms to integrate ESG goals into their investment strategies?

In my opinion, the biggest obstacle is access to quality, comparable ESG data and reporting.

The old Peter Drucker adage – you can’t manage what you don’t measure – certainly rings true here. The fact is that an increasing number of organizations now view ESG factors as core to any investment decision making process. While there is clearly a shared appreciation among LPs and GPs for the need to better capture and report key metrics, standards and best practices for how to effectively and efficiently do this are still emerging.

How did the ILPA ESG Assessment Framework come about, and how do you hope PE firms will use it?

ILPA held an ESG-themed Town Hall for our members in late 2020 where we found that only half of attendees were using an ESG scorecard or framework to evaluate their managers. We also receive a fair number of inbound inquiries from GPs who are looking to better understand LP perspectives on ESG integration and how they might better position their organization to meet an evolving and diverse set of expectations. There was a clear opportunity to fill a gap here by adding the ESG Assessment Framework to ILPA’s suite of resources on ESG.

To create the framework, ILPA convened a working group of leading LP organizations to discuss the current state of ESG integration practices observed at GPs and to develop an informed market-based view of what developing, intermediate, and advanced practices look like today. A draft was finalized in July 2021 after receiving input from a number of LP and GP organizations.

Our hope is that LPs will use the Framework as a resource to build a tool to evaluate and understand the various stages of ESG integration among general partners that they are already or considering investing with today. On the decision making side, LPs could use the Framework to benchmark a GP during diligence, for ongoing relationships with managers, LPs can use the Framework to benchmark them today, and in future, can track progress over time. Meanwhile, GPs can use the framework to self-assess, categorize themselves and create a more open dialogue with LPs around goal setting and next steps.

What’s the next step for the PE industry when it comes to ESG?

It’s tough to provide a single answer given the breadth of factors which fall under the ESG umbrella – there is so much exciting work being done – but we’ve seen real momentum with respect to goals and objectives associated with climate considerations and diversity, equity, and inclusion. These are factors which are increasingly viewed as material across an investor’s entire portfolio and circling back to a point I made earlier about data – quality, comparable data will be needed to support future progress in these areas. I hope, and expect, to see the momentum present today lead to lead towards practical, actionable consensus on what the industry expects when it comes to ESG and where it should invest in further progress.