Reed Smith Client Alerts

The Institutional Limited Partners Association (ILPA) released a framework last month to help limited partners assess the ESG approach and integration adopted by fund managers.

In tune with the rise in global social consciousness, investors are increasingly minded (and in some cases obliged) to hold fund managers to account on a wide range of ESG matters.  Different practices are being developed and employed in doing so, with varying levels of rigour and sophistication.

Authors: Shervin Shameli

For example, a new investor might request to examine a fund manager’s ESG policy at the start of the diligence process. It may then potentially request that the fund manager adopts a set of ESG industry standards or signs up to a certain code of conduct, such as the Principles for Responsible Investment. It might also negotiate excuse rights in its side letter for investments it deems environmentally or ethically distasteful or unacceptable, or might ask for regular updates on the fund’s, and each individual portfolio company’s, compliance with various ESG metrics.

ILPA’s framework gives a standardised structure by which a limited partner can evaluate and benchmark fund manager practices regarding ESG matters. The different levels of sophistication set out below are consistent with the level of diligence undertaken and extent of requests made by investors, and map out what investors can achieve in practice and what can be expected from fund managers.

The framework is separated into six categories, each of which can be graded on a sliding scale from ‘not present’, to ‘developing’, to ‘intermediate’, to ‘advanced’. Questions for limited partners to ask, and goals for general partners to meet, are clearly presented.