How Private Equity Firms Can Develop Responsible Investing Policies

Authors

• Nandini Hampole

  Former Associate Director, BSR

• 

  David Korngold

  Managing Director of BSR Innovation Group, BSR

  

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  David Korngold

  Managing Director of BSR Innovation Group, BSR

  

  New York

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  David partners with corporate boards, executives, and investors to develop high-impact sustainability strategies. As part of BSR’s Transformation team, he co-leads engagement with boards of directors to promote effective board governance and leadership ambition on sustainability. 

  Having previously led BSR's Financial Services team, David continues to work closely with financial companies on sustainability, ESG integration, and impact investing. David has led engagements in nearly all of BSR’s focus areas and major industry groups. This includes leading climate scenarios workshops with boards, creating net-zero road maps for investment firms, designing and operationalizing a leading impact investing fund, conducting materiality assessments, undertaking human rights impact assessments, and co-authoring research on topics like ESG for emerging public companies and responsible investment policies for private equity firms.

  Before joining BSR, David worked in strategy and management consulting at Bain & Company.

  David holds a BA in History from Amherst College.

  Close

Over the past 10 years, the private equity sector has seen responsible investment approaches move from exception to expectation. Recently, PRI reported that over 60% of its private equity firm signatories surveyed have implemented responsible investment strategies, an increase of 25% from 2015—and over a third are linking responsible investment objectives to key performance indicators of their investment staff. It’s clear that the formalized integration of environmental, social, and governance (ESG) considerations is becoming the norm. 

As a result, General Partners (GPs) that do not yet have these formalized approaches to responsible investment are moving quickly to develop the policies, management systems, reporting tools, and follow-up initiatives to meet evolving stakeholder expectations. For all firms, a meaningful policy is fundamental to responsible investment and ESG integration.

Furthermore, while there has been some useful guidance for asset owners, there is limited current guidance for GPs about what should go into a responsible investment policy.  Many firms end up using generic language, leading to policies that are not well-tailored to the individual firm’s investment profile, creating a disconnect between the firm’s investment strategy and ultimate ESG objectives, leading to less effective and less efficient approaches.

That’s why we have developed a white paper that outlines guidance on a straightforward approach, relevant principles, and practical tips to use in developing a responsible investment policy.

Why Firms Need a Responsible Investing Policy

A responsible investment policy is a firm's commitment to incorporate ESG factors into investment decisions to better manage risk and generate sustainable, long-term returns. The policy serves as the cornerstone of a firm's responsible investment efforts in the following ways:

• Establishes a “North Star” by providing direction to employees and other external stakeholders in understanding the firm’s core investment beliefs
• Communicates commitments to Limited Partners in a clear, consolidated, effective statement
• Aligns expectations and builds trust with broader stakeholders including investors, investment professionals, regulators, portfolio company employees and local communities where portfolio companies operate
• Establishes the framework for a consistent approach to implementation by clearly describing the scope, governance structure, actions, and reporting to support the integration.

Who Develops the Responsible Investing Policy

Typically, an executive or member of senior management will lead the process of drafting the policy, securing buy-in, and assigning resources needed for its implementation. This person ought to work in tandem with a cross-functional working group of committee to help steer the policy through the different steps of policy development. In all cases, it is essential for investment and portfolio teams to play a role in policy development and sign-off in order to develop a policy that can be successfully operationalized.

What a Responsible Investment Policy Includes

There is no one-size-fits-all approach to responsible investment—the investment strategy of the fund will be key to determine the responsible investment approach, and the policy ought to be tailored to the investment profile and beliefs of the fund.  BSR recommends that policies indicate that the firm will focus on “material” ESG issues. At the same time, several foundational elements are considered best practice to include in the policy. Our paper delves further both into definitions of materiality as well as the elements of a responsible investment policy listed below.

• Title and approval date
• Purpose and priorities
• Scope
• Governance structure
• Implementation approach
• Reporting
• Regular revisions of the policy
• External collaboration

How To Implement a Responsible Investment Policy

Once the policy is finalized, the real work starts. The firm ought to act to implement and uphold the policy, including developing an implementing plan, effective governance structures, regular teach-ins for investment professionals, and taking action to enhance portfolio performance. The policy should not sit on a shelf—it should be the impetus for action and results.

We hope our paper will provide GPs a blueprint to write policies that align with their unique investment principles and strategies.  If you’d like to reach out to us with feedback or start a conversation about developing your own policy, please contact us at web@bsr.org.