This article was written by Ed Hall (partner) and Isabel Rodriguez (partner).
Environmental, social and governance
(ESG) issues have become increasingly
important to private equity and venture
capital fund managers and their investors
over the last few years. And as well as the
various pressures to ensure responsible
investment, there is some evidence that
ESG policies may have a positive effect
on returns. Managers starting the fund
raising process are therefore subject to
numerous due diligence requests, and the
Principles for Responsible Investment (PRI),
an investor initiative in partnership with the
United Nations, have recently released the
"Limited Partners' Responsible Investment
Due Diligence Questionnaire" (DDQ) to assist
investors and encourage more standardised
due diligence.
As well as assisting those investors who may
not have a formal ESG policy, or who have
not previously submitted questions at the
due diligence stage about ESG, standardised
questions could also help managers by
cutting down on the time and cost required
to answer different questions on the same
subject. In fact, the creation of the DDQ was
partly in response to requests from managers
who have signed up to the PRI for more
consistency across the industry. The PRI have
been keen to point out that the DDQ should
not be used as a checklist and is by no means
exhaustive, but more a tool to establish a
dialogue between investors and managers,
and that investors may well want to tailor the
questions or indeed add some of their own.
The DDQ covers four areas: the ESG policy
of the fund and the influence of ESG factors,
management of ESG related risks and value
creation, contribution to ESG management at
portfolio company level, and communication
with LPs on ESG related matters. There
are 21 questions in total, but it is also
accompanied by a guidance document
which provides useful background to the
questions posed as well as case studies and
examples of how some LPs and GPs work
in relation to ESG. The guidance document
also includes further "developed questioning"
that LPs may want to put to GPs, which
expand on the initial questions and many
ask for examples of past situations where
an ESG issue has arisen or descriptions of
procedures that are in place to identify and
manage ESG incidents. There are also links
to publicly available resources to assist LPs,
such as the CDC toolkit for ESG.
There is no doubt that ESG will continue to
be an important issue for managers and their
investors, and resources such as the DDQ
and the CDC toolkit that encourage greater
consistency in approach across the industry
should be welcomed. As with any attempt
to standardise, whether it be reporting, due
diligence questionnaires or other issues, it is
important to remember that a "one-size fits
all" approach may not always be suitable.
And the PRI have made it clear that this is not
the intention, with the aim being to promote
discussions between all parties and that
consideration needs to be given to the diverse
nature of private equity as an asset class when approaching issues such as ESG.
More articles from Made in Africa Issue 15:
Permanent Capital Vehicles - Are they worth it?
Made in China? Financing Nigeria's infrastructure
Asian Influence - Singapore’s increasing role in Africa
Financial regulation in South Africa - New developments
Africa mining M&A in 2016 and beyond