Second edition published
Overview
The United Nations Principles for Responsible Investment (UNPRI) has recently released the second edition of Responsible Investment in Private Equity: A Guide for Limited Partners.
This guide seeks to promote the role that institutional investors, fund managers and portfolio companies have to play in ensuring a more consistent integration of environmental, social and corporate governance (ESG) issues in the private equity investment process. The guide, which describes itself as "aspirational", aims to help private equity investors improve their long-term returns and create more sustainable markets through better management of ESG-related risks and opportunities.
The Principles
The six voluntary Principles of Responsible Investment (PRIs) encourage private equity investors to:
- incorporate ESG issues into investment analysis and decision making processes;
- be active owners and incorporate ESG issues into ownership policies and practices;
- seek appropriate disclosure of ESG issues from the entities in which they invest;
- promote acceptance and implementation of the Principles within the investment industry;
- work together to enhance effectiveness in implementing the Principles; and
- report on activities and progress towards implementation of the Principles.
Contents of the guide
Whilst the second edition of the guide covers broadly the same issues as the first, the second edition includes considerably more detail for investors.
Broken down into three parts ("Overview of Responsible Investment and Private Equity", "Guidance for Limited Partners" and "Additional Resources"), the guide outlines key characteristics of private equity which should be considered when developing and implementing an ESG policy. It provides substantive guidance for investors about how they can integrate ESG considerations into their investment decisions, both at the pre and post investment stages, with particular focus on management of ESG disclosure. The guide also provides useful sample questions that investors should consider incorporating into their pre-investment due diligence processes and in their ongoing engagement with fund managers.
According to the guide, to date, over 850 financial institutions from 48 countries with approximately US$ 25 trillion of assets under management have signed up to the PRI Initiative. Further, a PRI Initiative study in 2011 found that 94% of PRI signatories had developed their own policy.
Whilst neither the PRIs nor the accompanying guidance are intended to be a prescriptive "checklist", it offers a guide to institutional investors seeking to develop its own approach to responsible investment. Whilst the guide is targeted at private equity investors, it should be considered by fund managers as it highlights the significance of ESG principles in the current market and the need for fund managers to be able to demonstrate to investors that they have sufficient ESG policies in place.
We at Charles Russell have considerable experience of advising, drafting and negotiating ESG principles across a range of private equity documents and would be happy to advise and assist as required.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.