Robust ESG Policies Elevate GPs' Value-add

• Published date: 15 February 2023
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Corporate and Company Law
• Law Firm: TMF Group BV
• Author: Flavia Micilotta

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...