Going into 2023, fundraising continues to be a challenge for general partners (GPs). Demands from limited partners (LPs) and regulators regarding GPs' efforts in relation to environmental, social and governance (ESG) functions are continuing to ramp up. Addressing these factors is fast becoming critical to show differentiation from peers and remaining competitive in a tough market.
In light of this, strong and effective ESG policies can support GPs' fundraising efforts by showing they are willing to go above and beyond for their investors and highlighting the potential impacts of new developments on investment decisions.
Flavia Micilotta, Director of ESG Solutions (Fund Services), at TMF Group elaborates: "A robust ESG policy provides GPs with the opportunity to demonstrate that they 'walk the walk' and not only meet registration requirements, for example, but also use the value of ESG to become more efficient and smarter investors."
Creating an ESG policy is a highly tailored process and each organisation tends to develop their own approach to this. Micilotta notes that legislation can often serve as a useful guide for investors and managers in creating effective ESG policies:
"For certain players in particular, not only norms and standards but also fully fledged directives can help guiding financial market participants on what needs to be reported. It pre-defines what kind of policies need to be in place and what these should look like in terms of reporting and disclosures."
Risk elements
In addition to providing potential value-add, ESG can identify a number of risk elements which GPs need to consider as part of the due diligence of new investments and ongoing monitoring of their investment portfolio.
Systematically considering ESG risks helps investors not only take into account a larger range of material risks but also consider different opportunities that can enrich their investment strategies. Running ESG due diligence either at the pre-investment or at investment level strategically improves the quality and sustainability of the portfolio. Through our 'oversight framework' we help clients identify improvement areas, get a view of what peers are doing and how to ensure their meeting ESG standards leads to value creation.
"There may be companies that are not conforming with several norms and the GP needs to assess their priorities in relation to that. So, engagement is key, coupled with the ability to define the prioritisation of the risks in that respect," Micilotta says. "The GPs will need to get a good view of the situation and understand how to engage with the company. They can outline the things the companies could improve on in order to be aligned with the expected standards. This is when investors and managers have to define their investment universe. They need to decide which angle to use to define their policies and also need to be made aware of potential conflicting areas of investment potential - whether these are best practices in particular industries, or what can they expect based on their existing policies."
Private equity firms can choose to perform these tasks internally, by hiring experts in the field. However, this knowledge is very specific and niche.
"Having the support of a service provider for ESG data and analysis can ensure managers are not only in touch with the latest trends in the sector, but also that they have a good view and understanding of any interesting synergies and different factors which can come into play."
"These decisions based on ESG factors may not impact them today or tomorrow but could affect their business sometime in future, which is something they should be prepared for," advises Micilotta.
Talk to us
TMF Group's ESG experts can help you to design and implement an oversight framework, to assess governance, establish accountabilities and responsibilities, and to shape recommendations for ESG monitoring and reporting.
Learn more about our ESG services, or get in touch to find out how we can help you to become smarter, more efficient investors.
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.