Response to the European Commission Public Consultation on Long-Term and Sustainable Investment

Transcription

1 25 March 2016 Respnse t the Eurpean Cmmissin Public Cnsultatin n Lng-Term and Sustainable Investment Abut Invest Eurpe Invest Eurpe is the assciatin representing Eurpe s private equity, venture capital and infrastructure sectrs, as well as their investrs. Our members take a lng-term apprach t investing in privately-held cmpanies, frm start-ups t established firms. They inject nt nly capital but dynamism, innvatin and expertise. This cmmitment helps deliver strng and sustainable grwth, resulting in healthy returns fr Eurpe s leading pensin funds and insurers, t the benefit f the millins f Eurpean citizens wh depend n them. Invest Eurpe aims t make a cnstructive cntributin t plicy affecting private capital investment in Eurpe. We prvide infrmatin t the public n ur members rle in the ecnmy. Our research prvides the mst authritative surce f data n trends and develpments in ur industry. Invest Eurpe is the guardian f the industry s prfessinal standards, demanding accuntability, gd gvernance and transparency frm ur members. Invest Eurpe is a nn-prfit rganisatin with 25 emplyees in Brussels, Belgium. Fr mre infrmatin abut Invest Eurpe, please visit

2 Table f Cntents Opening Remarks... 3 Intrductin... 5 Cnsultatin respnse

3 Opening Remarks Invest Eurpe welcmes and supprts the Eurpean Cmmissin s pririty t fster grwth and investment, and appreciates the pprtunity t respnd t the public cnsultatin n Lng-Term and Sustainable Investment. Invest Eurpe is the assciatin representing Eurpe s private equity, venture capital and infrastructure sectrs, as well as their investrs. Our members prvide an essential surce f funding fr innvative businesses at key stages f their grwth jurney, taking a lng-term apprach t investing in privately-held cmpanies, frm start-ups t established firms. They inject nt nly capital but dynamism, innvatin and expertise. This cmmitment helps deliver strng and sustainable grwth, resulting in healthy returns fr Eurpe s leading pensin funds and insurers, t the benefit f the millins f Eurpean citizens wh depend n them. Ethical behaviur is fundamental t the success f the private equity, venture capital and infrastructure industry (hereafter referred t as industry ). Industry participants must perate in an envirnment f trust. Invest Eurpe members are entitled t expect their peers t act in accrdance with the highest ethical and prfessinal standards and are expected t behave in a similar manner twards the cmpanies int which investments are made, service prviders and ther stakehlders. Membership f Invest Eurpe brings with it a respnsibility t act in a manner that is bth ethical and beneficial t the interests f the industry and its stakehlders. Invest Eurpe is at the frefrnt f prmting the highest ethical and prfessinal standards within the industry. All f these standards and guidelines cme tgether in the Invest Eurpe Prfessinal Standards Handbk (available here), which prvides slid guidance and best practice standards n all aspects f the business thrughut the life cycle f the fund and brings tgether the key elements f gvernance, transparency and accuntability that are expected f industry participants. Mre cncretely, and designed t help practitiners exercise business judgment and act with integrity, the Handbk prvides guidance n the principles that shuld gvern prfessinal cnduct and the relatinships between all thse engaged in the industry, with a particular fcus n the relatinship between thse perating the funds (fund managers, usually knwn as General Partners r GPs) and their investrs (usually knwn as Limited Partners r LPs), and between GPs and prtfli cmpanies (i.e. the cmpanies, a majrity f which are SMEs, int which investments are made), whilst als taking int accunt the imprtance f the rle the industry plays in sciety at large. The Handbk is the nly set f industry prfessinal standards written and endrsed by bth investrs and fund managers, with the strng input f the service prviders wh supprt them. It was mst recently updated in

4 One f the key areas f fcus during the mst recent review was Respnsible Investment. ESG 1 factrs are a cre cnsideratin thrughut the Handbk and are deeply integrated int the verall investment and fund management prcess. Transparency and reprting n ESG items als becme mre prminent in the 2015 update t the Handbk recmmendatins, including requirements fr enhanced disclsure in Invest Eurpe s updated Investr Reprting Guidelines (which are an integral part f the Handbk). The tpic f respnsible investment 2 is f great significance t Invest Eurpe s members and the industry as a whle; it is nt just a specialist tpic fr certain investrs. As sciety is addressing the sustainability agenda, the cnsideratin and management f ESG pprtunities and risks in the investment prcess are becming mre imprtant t fund managers and LPs alike bth t safeguard the lng-term perfrmance f their investments and t enable them t fulfil the brader scial rle that stakehlders expect. Individual fund managers and LPs will, nnetheless, be at different stages in their integratin f ESG cnsideratins, with sme mre develped than thers. But the industry as a whle is develping rapidly in this area. In this cnsultatin respnse, we have answered the questins frm the perspective f the Eurpean private equity, venture capital and infrastructure industry as a whle, based n the industry s prfessinal standards and guidelines. Our respnses d nt therefre reflect specific strategies f individual member firms. The prfessinal standards set ut in the Handbk prvide a general framewrk, leaving sufficient flexibility fr GPs and LPs t implement them in a tailred way, adapted t their business s wn mdel and prcesses. In this submissin, we have als chsen t cncentrate n thse questins where we have a specific cntributin t make as the private equity industry. Many institutinal investrs will have brader cntributins t make t the discussin arund ESG than is captured by their rle as LPs in private equity, but in this respnse we are restricting urselves t the particular private equity dimensin. As always, we stand ready t prvide whatever further cntributin t this wrk the Eurpean Cmmissin might find helpful, including attending meetings and cntributing additinal materials in writing. 1 As defined in the Invest Eurpe Prfessinal Standards Handbk, ESG stands fr the envirnmental, scial and gvernance factrs that can impact (the perfrmance f) a prtfli cmpany and thus als an investment, including the GP itself. It is a phrase cmmnly used alngside respnsible investment. 2 Accrding t the Invest Eurpe Prfessinal Standards Handbk, respnsible investment invlves an investment apprach that integrates ESG factrs int crprate cnduct, investment decisins and wnership activities. A respnsible investr will cmmnly be interested in the ESG cnduct, impact r perfrmance f a prtfli cmpany it invests in, and in case f an LP, this may als include ESG aspects related t the GP. 4

5 Intrductin Private equity 3 is fremst an wnership mdel fr investments in privately held cmpanies f all sizes and at all stages f develpment. The nature f the lng-term partnerships frmed thrugh negtiatins and nging interactins between GPs and LPs as well as GPs and their prtfli cmpanies is fundamental t hw the industry perates and sets it apart frm ther asset classes. Given this hands-n active stewardship f businesses and lng-term wnership timeframe, as an asset class private equity is particularly well suited t integrating and managing ESG matters. The private equity industry is based n this active investment and wnership mdel invlving the tw key relatinships: 1. The lng-term partnership between investment managers (GPs) and investrs (LPs) Private equity funds typically have a lifespan f at least 10 years. During the life f a fund the GPs and LPs actively engage t ensure high prfessinal and ethical standards are fllwed in all aspects f the investment and management f the fund. LPs expect accuntability, transparency and alignment f interest frm the GPs and the GPs expect accuntability, transparency and timely engagement frm the LPs. 2. The active and respnsible wnership f prtfli cmpanies by GPs Private equity is generally characterised by a high level f engagement between the GPs and the prtfli cmpanies int which investments have been made. GPs are able t bring nt nly investment capital, but als experience and knwledge as well as their valuable industry netwrks (e.g. bard members; access t new markets; suppliers and/r new custmer grups) t the prtfli cmpanies. In rder t create lasting value fr stakehlders, GPs play an active rle in the strategy and directin f the prtfli cmpany, thrugh their bard representatin and/r their dealings with prtfli cmpanies utside the bardrm. GPs demand rigrus accuntability, transparency (thrugh mnitring and reprting), and adptin f best practices by their prtfli cmpanies. T exercise this active and respnsible investment and create lasting value, putting in place gd crprate gvernance is key fr private equity, which in turn is instrumental in develping gd crprate gvernance standards acrss the unlisted cmpnent f the crprate wrld. Successful investment requires well-infrmed decisin-making at all levels and by all parties. At its cre, gd gvernance creates alignment f interests and the envirnment fr the attitudes, mechanisms and behaviurs that allw this well-infrmed decisin-making t take place. Pr gvernance can lead t misalignment f interests, bad decisins and business failures. 3 Fr the purpses f this cnsultatin, private equity is used as a generic term t refer t and t encmpass venture capital, infrastructure and private equity. 5

6 The diagram belw sets ut a typical private equity fund structure shwing the relatinship between LPs and GP and fund and prtfli cmpanies. This is illustrative nly. There are many variatins t this mdel. 6

7 Cnsultatin respnse 1. Ratinale fr ESG inclusin int investment decisins Questin 1.a. D ESG factrs play a rle in the investment decisins f investrs? If nt, why? If yes, please specify which cnsideratins are reflecting in yur investment plicy and mandates? In what frm is this cmmitment expressed? Yes. The respnsible investment agenda is a key cmpnent f private equity industry practice. Respnsible investment has increasingly becme a tp-f-mind issue fr fund managers and investrs in the private equity industry. ESG factrs cntinue t play an imprtant rle in their investment decisins and the n-ging develpment f the cmpany after investment. Set ut belw is an verview f the respnsible investment and ESG aspects/issues that are being cnsidered and reflected in the different stages f a private equity fund s life, frm early-stage planning t making investments and prtfli management. Please nte that all f the issues cvered belw are als addressed in mre depth in the Invest Eurpe Prfessinal Standards Handbk. Mre infrmatin can be fund here. Fund frmatin: Early-stage planning at the GP grup Apprpriate early-stage design and planning f a fund is vital t its success. The structural elements f the fund must match the intended investment strategy. Respnsible investment cnsideratins including their incrpratin int the GP s rganisatin and its investment and prtfli mnitring prcesses and plicies, are already taken int accunt by fund managers when ding their early-stage planning. The same applies t the marketing strategy including what type f LPs will be targeted fr the fund and the resulting regulatry requirements fr marketing, the structural impact n the fund, and ther specific requirements f the targeted grup (such as envirnmental, scial and gvernance ( ESG ) r ther reprting needs). Fundraising: Due Diligence at LPs The due diligence that a prspective investr will undertake befre deciding t cmmit t a fund (the perid knwn as fundraising ) will nrmally lk at a number f factrs relating t the GP s peratins: crprate gvernance prcesses, culture and values; plicies and prcedures (including in the field f respnsible investment); investment, divestment and prtfli cmpany decisin-making prcesses; 7

8 reprting prcesses; cmpliance and risk management prcesses; business cntinuity plans; and cnflicts f interest management and reslutin prcedures. Making investments the GP As detailed in the Handbk, when making investments n behalf f the fund, the GP shuld implement the fund s investment plicy with due skill, care and diligence and in accrdance with the agreements the GP has made with the LPs in the fund. Given that the success f an investment may be impacted nt nly by its financial perfrmance but als by ther perfrmance criteria, a GP shuld be mindful f: the risks psed and pprtunities presented t its prtfli cmpanies by ESG factrs. It is als imprtant that ESG risks and pprtunities are cnsidered acrss prtfli cmpanies value chains; its wn LPs appraches t respnsible investment and shuld seek t cmply with their requirements, which may include expectatins in relatin t reprting n respnsible investment factrs in the investment and wnership prcesses and in sme cases exclusin frm investing in certain sectrs; the respnsible investment impact f the cnduct f its business and shuld give due cnsideratin t material risks and pprtunities assciated with ESG and ptential ther respnsible investment factrs thrughut the perid f its investment in each respective prtfli cmpany and mre generally thrughut the life f the fund. Against this backgrund, GPs shuld integrate cnsideratin f respnsible investment risks and pprtunities int their due diligence and investment apprval prcesses and keep their investment dcuments and prcesses under peridic review. Any staff training needs n respnsible investment and ESG matters shuld be identified, addressed and kept under regular review. Evaluatin f respnsible investment matters shuld nt be limited t legal cmpliance, but culd als include any additinal standards and practices that culd materially impact an investment frm an ESG perspective; ptential future regulatin and marketplace factrs such as existing r emerging vluntary standards; cnsumer expectatins and client requirements; lngterm ESG value creatin prjects; materiality and cnsistency with the investment prject; and brader peratinal issues that culd have a reputatinal as well as value creatin r preservatin impact. Prtfli investment A GP shuld aim t ensure that its wn and its prtfli cmpanies awareness and due 8

9 cnsideratin f respnsible investment and ESG guidance and cdes f cnduct as applicable t the sectrs and gegraphic regins in which each prtfli cmpany perates are maintained thrughut the life f the investment. Mre cncretely, the GP shuld ensure that at prtfli cmpany bard and management level there is apprpriate awareness and adequate knwledge f respnsible investment and ESG matters relevant t the cuntry and sectr the prtfli cmpany perates in, including familiarity with apprpriate external guidance issued by natinal, supranatinal and private bdies. Where the GP has identified ESG risks and pprtunities that are deemed (ptentially) material t the success f the investment r are particular fcus areas f LPs, the GP shuld ensure that practices are develped t mitigate assciated risks and pursue pprtunities. These practices shuld als be included in pst-investment actin plans. The implementatin and effectiveness f these practices shuld be mnitred (and reprted n) as apprpriate, and therefre the GP shuld cnsider hw it will btain relevant ESG data frm the prtfli cmpanies. Nting that the ESG cntext culd evlve, the GP shuld undertake t regularly review and update its respnsible investment risk/pprtunity analysis and revise, remve r add gvernance and mnitring framewrks (including plicies, prcedures and tls fr implementatin) as apprpriate. A GP may be in a psitin f cnsiderable influence as regards the develpment, implementatin and mnitring f ESG strategies, plicies and practices in place at prtfli cmpanies. The GP, ideally thrugh the infrmatin prduced and prvided by the prtfli cmpany, shuld be in a psitin t identify, mnitr and supprt the mitigatin f relevant risks and the recgnitin and pursuit f pprtunities in respnsible investment matters within the prtfli cmpany. Where apprpriate, the GP, thrugh its bard representatin r thrugh the exercise f sharehlder vting r cntractual rights, where s permitted, shuld be available t assist and advise the prtfli cmpany n hw t investigate and address the ESG factrs that are relevant fr the business. The GP shuld ensure that it remains infrmed f the prgress being made twards achievement f ESG bjectives. Examples f sme f the practical arrangements fr achieving integratin f respnsible investment include: using ESG infrmatin requests/questinnaires fr the prtfli cmpany; using a standardised r industry-specific ESG investment checklist and frmally addressing ESG factrs in the investment prcess; putting in place an ESG value creatin and/r ESG risk mitigatin actin plan based n these due diligence findings; including ESG site visits during the due diligence and wnership phase; 9

10 defining an ESG business plan with expected savings and value creatin; and tracking and evidencing ESG value creatin. Guidance by ther rganisatins In additin t Invest Eurpe, ther industry assciatins and internatinal rganisatins and financial institutins have prduced standards and/r ther materials n respnsible investment in the private equity industry. Fr a cmprehensive verview, please see the Invest Eurpe Respnsible Investment Bibligraphy (available here). One example is the PRI s Respnsible investment in private equity A guide fr Limited Partners, which includes substantive guidance fr hw an LP might integrate ESG cnsideratins int: investment plicy and investment decisins; wnership activities, i.e. mnitring and engagement; and the disclsures sught frm a GP and underlying prtfli cmpanies. Invest Eurpe (at that time, the EVCA) was directly invlved in the develpment f the first editin f this guide. Anther example is the PRI s Integrating ESG in private equity A guide fr General Partners, which prvides practical guidance n hw GPs can develp a framewrk fr the integratin f ESG factrs within their rganisatin and investment cycle and pints t industry resurces and case studies. The guide is divided int tw sectins cvering bth the integratin f ESG factrs within a GP rganisatin and its investment prcess. GPs are encuraged t use the practices and examples presented in the guide as a starting pint and adapt them t their rganisatins and investment styles. LPs can use the guide t understand the different ESG integratin practices being implemented in the market, which will in turn facilitate a mre infrmed discussin with their GPs during bth fund selectin and mnitring. Questin 1.b. What is the main ratinale fr institutinal investrs and asset managers t take ESG risks and pprtunities int accunt in their investment decisins? Please indicate all the relevant issues (multiple chice) All f the ptins prvided. The specific ratinales in any given case will depend n the particular investr. The pprtunities fr value creatin is anther relevant ratinale nt included in the prpsed list. a) ii identifying value creatin pprtunities b) c) 10

11 d) e) f) - The legal requirements may be simple cmpliance with relevant envirnmental, wrks, health and safety legislatin. Examples include the Grenelle law and Energy Transitin law in France. g) - Fr example, additinal lng-term value creatin. Althugh the wider impact f their activities is smething that investrs and the prtfli cmpanies int which they invest have been taking int accunt fr sme time, GPs are mre and mre aware f the benefit that the management f ESG can bring fr value prtectin and creatin. Putting systems in place t systematically reduce csts and minimise risks and t explit pprtunities, such as prmting supply chain sustainability and imprving emplyee engagement, all generate benefits. LPs have similarly encuraged private equity firms and managers t cnsider this dimensin t their activity, nt least because f increasing demands n these investrs frm their stakehlders and frm regulatin. 2. Infrmatin n ESG risks and pprtunities Questin2.a. Which ESG risks d yu perceive as material t investrs? The Invest Eurpe Prfessinal Standards Handbk (available here) includes mre infrmatin n the envirnmental, scial and gvernance factrs (risks and pprtunities) that the GP shuld cnsider in relatin t the management f the fund s prtfli cmpanies, as well as guidance n hw t deal with this and take this frward. An verview is set ut belw. Envirnmental factrs Envirnmental risks culd cncern a range f factrs including resurce use/depletin, water scarcity, waste prductin and dispsal; emissins t air, land and water; energy use, cst f carbn and climate change; bidiversity and habitat cnservatin. Cnversely, envirnmental pprtunities may include energy (r ther resurce) efficiencies, waste reductin r the develpment f new prducts with psitive envirnmental attributes (e.g. using timber labelled as being frm sustainably managed frests). 11

12 Scial factrs Generally, factrs which affect the wrkfrce, custmers, suppliers and cmmunities f a prtfli cmpany shuld be evaluated at bard level. Scial factrs can include stakehlder dialgue and human rights issues, such as the right f assciatin and freedm t bargain cllectively, bservance f cre labur standards in areas including health and safety, child labur, illegal r frced labur, emplyment f migrant labur, trade unin rights and discriminatin in the labur market. Managed badly, scial factrs can give rise t risks t brand and reputatin (e.g. a key supplier attracting negative publicity fr pr labur practices), t the attractin and retentin f high quality staff, and t prductivity (e.g. strikes at prductin facilities). There may als be legal cnsequences fr the cmpany and its directrs. Cnversely, when managed well, scial factrs can add real value. Examples include establishing a reputatin as an emplyer f chice thrugh prgressive emplyment plicies and practices (thereby reducing recruitment csts and imprving prductivity), maintaining a scial licence t perate (thrugh strng cmmunity relatins), and ensuring cntinuity f supply (thrugh effective supplier selectin, engagement and auditing). Gvernance factrs Anther key area f due diligence that shuld be cmpleted by a GP prir t investment is crprate gvernance at the prspective prtfli cmpany. Risk factrs include fraud, bribery, crruptin and ther breaches f legal rules applying t the cmpany. Prly structured incentivisatin packages can als adversely affect gvernance. The crprate gvernance systems, prcesses and cntrls applied by the senir management team at the prtfli cmpany will reveal much abut the effective running f the business t be invested in. A business with effective crprate gvernance in place will prvide a strng platfrm fr the rapid implementatin f value building initiatives. A business with weak, ineffective crprate gvernance will make a higher risk investment but is likely t reap cnsiderable benefit frm the implementatin f rbust new gvernance systems and prcesses. Hw t deal with all f this? Generally, GPs are expected t supprt a prudent and sustainable apprach, and t influence the management f envirnmental and scial risk and pprtunity factrs in prtfli cmpanies s as t reduce risk and/r create value, with a view t lng-term sustainable change. 12

13 Envirnmental Scial Management f investments shuld include: an nging evaluatin f the likely impact f prtfli cmpanies, their prducts and their supply chains n the envirnment. such evaluatin shuld take int accunt the efficacy f envirnmental risk management plicies and prcedures (e.g. leading cmpanies institute full envirnmental management systems, certified t ISO14001). cnsideratin shuld als be given as t the likely impact f envirnmental factrs n the prtfli cmpanies and their supply chains (e.g. climate change, extreme weather events, etc.). an nging evaluatin f the likely impact f scial factrs n the businesses (e.g. availability/quality f wrkers, cnduct f staff r business partners, trends in custmer attitudes, etc.) as well as the scial impact f prducts (e.g. respnsible marketing, r health and safety cncerns) r peratins. cnsideratin shuld be given t the cmpleteness and effectiveness f any existing scially related plicies and prcedures, t manage risks and leverage pprtunities and t the need fr, and implicatins f change. GPs shuld recmmend t the bards f prtfli cmpanies, pursuant t sharehlder dcuments, t identify and take material envirnmental factrs int accunt in the frmulatin f the prtfli cmpany s business plan. t identify and take material scial factrs int accunt in the frmulatin f the prtfli cmpany s business plan. human rights (cvering wrkplace and supply chain issues) are likely t be an integral part f the scial factrs and bard level discussins may include develpment f strategies t prevent direct and indirect invlvement in human rights vilatins. depending n the size and nature f the business, a prtfli cmpany shuld als cnsider integrating its management f scial factrs int a full crprate sustainability prgramme and publishing prgress reprts 13

14 n a regular basis, as part f a defined external stakehlder engagement strategy. A GP shuld ensure that such items are put n the agenda fr bard discussin where apprpriate. A prtfli cmpany is likely t be prvided with guidance n gvernance requirements by the GP at initial investment. In sme cases, the implementatin f specific requirements will be a cnditin f clsing the transactin. If nt already in place, the GP shuld typically ensure that each prtfli cmpany has apprpriate gvernance structures t safeguard against fraud, bribery, crruptin and ther breaches f legal rules applying t the cmpany and t ensure internal financial cntrl, quality assurance, risk and cnflict management and transparent reprting and cmmunicatin. The GP shuld als cnsider the incentivisatin packages in light f their impact n alignment with the bjectives f lng-term grwth and gd crprate gvernance. T ensure that prtfli cmpanies are applying apprpriate gd gvernance practices and standards, the GP shuld ensure it remains up t date and familiar with legal rules, gd practice and guidance in the respective cuntries and industries in which its prtfli cmpanies are based. Typically, the GP shuld peridically review the adequacy f its practices and standards. Effective crprate gvernance, nce installed, shuld supprt the decisin-making prcess and fllw-thrugh within the rganisatin and the alignment f interests acrss the stakehlders in the business including management, emplyees, the GP and investrs in the fund. Such alignment f interest is als part f a respnsible investment framewrk. Ensuring the GP s gvernance bjectives are achieved, whilst preserving the autnmy f the prtfli cmpany bard t drive business grwth and nt hamper it with bureaucratic prcesses and cntrls, is an imprtant balance t achieve. Questin 2.b. What are the main surces f reliable and relevant infrmatin fr investrs n material medium t lng-term risks and pprtunities, particularly n ESG issues? As a relatinship-based investment mdel, the main surce f infrmatin fr private equity LPs and GPs n their investments is the direct questining and diligence by the managers f their investments. The increased awareness f ESG risks and pprtunities has resulted in increased expertise within prfessinal investment rganisatins, including in sme cases dedicated ESG prfessinals, wh utilise develped diligence tls and appraches t identifying these risks. 14

15 The private equity mdel f direct engagement prvides cntinuus pprtunities thrughut the investment cycle t btain and act n ESG-related infrmatin. The Invest Eurpe Prfessinal Standards Handbk, including the revised Investr Reprting Guidelines, prvide detailed guidance n ESG transparency and reprting in the private equity industry. As utlined belw, thrughut the entire life f a fund and the investment prcess, there is a high level f transparency and disclsure between fund managers and their investrs n these issues. A website is a gd starting pint fr the GP t generally prvide basic infrmatin regarding themselves and their investments in a timely fashin. The GP s website culd include infrmatin n: descriptin f the firm and key elements f its rganisatin; senir management r senir investment prfessinals; size and investment strategy f the different funds; investments made with the fllwing infrmatin abut each prtfli cmpany: date f investment date f divestment type f industry link t the prtfli cmpany s website plicies regarding respnsible investment; press releases issued by the GP; public relatins cntact details. Many GPs als prvide their investrs with access t a secure specific investr relatins website where mre detailed infrmatin is regularly made available. Fundraising dcuments Due diligence materials The cre infrmatin n the ESG plicies and practices is btained during the fundraising prcess. The use f due diligence data rms can als be an effective and efficient way t prvide infrmatin t prspective LPs. The GP s fundraising team will nrmally assemble a cmprehensive data pack f dcuments abut the fund, its investment strategy and the GP s prir track recrd, cllectively cmprising the due diligence materials. This material will ften cntain cnfidential and prprietary infrmatin frm the GP as well as, ptentially, n current prtfli cmpanies and their ESG situatin. In additin, the fundraising team may respnd t specific investr questinnaires cvering a variety f tpics, including fr example ESG disclsure. Within this cntext, it is wrth nting that in Nvember 2015, the PRI published a Limited Partners Respnsible Investment Due Diligence Questinnaire (available here), which aims t 15

16 understand and evaluate a GP s prcesses fr integrating material ESG factrs int their investment practices and t understand where respnsibility fr ding s lies. The Questinnaire, which was prepared with input frm several industry assciatins including Invest Eurpe, builds upn the ESG Disclsure Framewrk fr Private Equity (see belw). Where the Disclsure Framewrk prvides high-level guidance and explains the ratinale behind asking ESG-related questins, the LP Respnsible Investment DDQ prvides a detailed list f such questins that LPs can ask GPs pre-cmmitment. The Questinnaire fcuses n 4 areas: 1. Sectin 1 aims t establish the GP s apprach twards ESG integratin; 2. Sectins 2 and 3 aim t establish the GP s prcesses fr ESG integratin; and 3. Sectin 4 aims t establish the GP s cmmunicatin practices n managing ESG factrs. Fr mre infrmatin, please see: Fund dcuments The fund dcuments shuld set ut the key terms and prvide the legal/cntractual framewrk within which the GP will perate the fund. As per the Handbk, ne f the matters that the fund dcuments shuld address is the respnsible investment apprach f the GP and/r the fund and the prcedures fr ensuring cmpliance with any assciated plicies. In additin, the fund dcuments shuld cntain prvisins regarding the GP s bligatins t prvide reprts t LPs. These prvisins shuld address inter alia the frm and frequency f respnsible investment reprting. Annual LP meetings The Prfessinal Standards Handbk recmmends that an annual meeting f LPs be held. An annual meeting prvides an excellent pprtunity fr the GP and LPs t meet tgether in persn. GPs increasingly include ESG updates and reprts as a cre part f their presentatins t investrs as well as updating LPs n the prgress f the fund(s) and prviding an verview f develpments in the market, alng with any relevant updates n the GP s team r prcesses. Regular cnference calls r webcasts are an efficient methd f keeping all LPs up-t-date between annual meetings. Having a secure area n the GP s website, r using ne f the secure electrnic data site prviders is an increasingly cmmn way fr GPs t make dcuments and ntices available t LPs. 16

17 Making investments A GP that has created gvernance structures and due diligence prcesses fr respnsible investment factrs shuld, as per the Handbk, reprt t LPs n its findings n a suitably regular basis. The GP may als chse t send unslicited reprts n respnsible investment factrs and perfrmance t all LPs, r reprt fllwing a significant incident with ESG implicatins. Questin 2.c. Is it difficult fr investrs t access such infrmatin? If s, please specify. N. Private equity funds increasingly have cntractual prvisins fr disclsure f ESG matters. See als questin 2.b. Overall, as utlined in the Handbk, GPs shuld have an apprpriate cmmunicatin strategy, reflective f their peratins and scale, and shuld clearly define and dcument their respnsible investment plicy and the prcedures fr cmpliance with such plicy. GPs will typically be asked by LPs t prvide infrmatin bth during due diligence and thrughut the life f the fund. Suitable arrangements shuld be made t respnd t queries frm LPs prmptly as they arise, as well as cmplying with the bligatins in the fund dcuments n reprting and, if relevant, meetings. During fundraising, as set ut in the ESG Disclsure Framewrk fr Private Equity 4, a GP shuld seek t disclse infrmatin sufficient t enable an LP that has expressed an interest in ESG management t: 1. assess if the GP is aligned with the LP s ESG-related plicy and investment beliefs; 2. assess the GP s plicies, prcesses, and systems fr identifying ESG-related value drivers and managing material ESG-related risks; and t identify pssible areas fr future develpment; 3. understand if and hw the GP influences and supprts its prtfli cmpanies management f ESG-related risks and pursuit f ESG-related pprtunities; 4. assess hw the GP will help the LP t mnitr and, where necessary, ensure that the GP is acting cnsistently with the agreed-upn ESG-related plicies and practices as set frth at fund frmatin; 4 The Envirnmental, Scial and Crprate Gvernance (ESG) Disclsure Framewrk fr Private Equity helps managers reprt ESG-related infrmatin t their investrs. It sets frth due diligence questins (which may be effective fr many LPs when cnsidering whether r nt t invest in a fund), and disclsure questins (which may be applicable during the life f a fund). Invest Eurpe supprted the develpment f the Framewrk, alngside mre than 20 Private Equity Assciatins, 10 private equity firms and 40 investrs in private equity frm 11 cuntries. 17

18 5. assess the GP s apprach t managing and disclsing material incidents at the GP and prtfli cmpanies. During the life f a fund, as per the ESG Disclsure Framewrk fr Private Equity, a GP shuld seek t disclse infrmatin sufficient t enable an LP that has expressed an interest in ESG management t: 1. establish if a GP is acting in a manner cnsistent with the GP s investment plicies, prcesses, and agreed-upn fund terms regarding ESG management. 2. understand psitive and negative ESG-related develpments that may impact prtfli cmpanies in the fund. 3. determine if respnses t GP and prtfli cmpany incidents and incident reprting are cnsistent with relevant investment terms, the fund s plicies, and the LP-stated bjectives regarding incident disclsure. As indicated in ur respnse t Questin 2.b., in Nvember 2015, the PRI als published an LP Respnsible Investment Due Diligence Questinnaire, which builds upn the ESG Disclsure Framewrk fr Private Equity and prvides a detailed list f questins that LPs can ask GPs precmmitment. Questin 2.d. Is access t such data expensive? If s, please specify. N. See abve. We nte that the cst implicatins are in relatin t the cllectin and prcessing f the underlying infrmatin rather than accessing it. As the prcess fr ESG diligence and reprting becmes mre standardised and GPs and their prtfli cmpanies increasingly integrate them thrughut their peratins, these csts will becme less imprtant cmpared t the benefits f mitigating the risks and identifying the pprtunities. Questin 2.e. What factrs may prevent r discurage cmpanies frm disclsing such data? Cnfidentiality bligatins are always imprtant t take int accunt and may in certain circumstances limit the infrmatin that can be disclsed utside f the prtfli cmpany. In situatins where disclsure may be damaging t the prtfli cmpany, fiduciary duties t prtfli cmpanies may als need t be cnsidered. Accrding t the Invest Eurpe Prfessinal Standards Handbk, the GP shuld seek transparency in its relatinship with LPs by ensuring that all LPs receive all significant infrmatin regarding the fund in a clear and timely manner, prvided that cmmunicating such 18

19 infrmatin is permitted by law. The GP shuld nt breach cnfidentiality bligatins binding n it but shuld seek t be relieved f such bligatins if they prevent prper reprting t LPs. Certain LPs and types f investr will require custm-made infrmatin, r infrmatin presented in a different way, t satisfy their wn tax, regulatry, cmmercial r respnsible investment plicy (including infrmatin in line with the ESG Disclsure Framewrk see abve) bligatins. As explained previusly, GPs shuld be receptive t such requests which are typically at the investrs expense - but shuld als take care nt t cmprmise fiduciary duties t prtfli cmpanies (and thereby their ther investrs). Finally, the GP shuld als pay attentin t lcal transparency requirements in cnsidering the infrmatin made available n its website r therwise. Questin 2.f. What is the main ratinale fr cmpanies t publish such infrmatin? Please indicate all the relevant issues. (multiple chice) Frm a prtfli cmpany perspective: a), d), and e) tend t be relevant fr mst cmpanies; b) nly fr sme; and c) is f curse critical as cmpanies will cmply with whatever legal r regulatry requirements t publish are applicable t them. Frm a GP pint f view: a), b), c), d), e), and f) - fr example, sund gvernance practice (internal cmmunicatin and transparency) All f the factrs identified play a rle in encuraging publicatin f ESG infrmatin. The imprtance f each may vary accrding t the circumstances. Invest Eurpe believes that it is imprtant fr ur industry that the GP demnstrates t its wider stakehlder cmmunity sund ESG practices and standards that are bth apprpriate and prprtinate t its wn business and encurages a similar apprach at its prtfli cmpanies. Questin 2.g. Is there sufficient accuntability fr the disclsure by cmpanies f such infrmatin? As prfessinal investrs LPs hld GPs accuntable fr their disclsure and actively engage with the GPs in discussing material reprted. The clse relatinship between LPs and GPs facilitates this accuntability. 19

20 Questin 2.h. What are the best practices as regards internal crprate gvernance prcesses t ensure prper reliability f the disclsed infrmatin? There are a number f cmmn practices: third party certificatin f the ESG infrmatin disclsed; cllectin prcesses that are in line with existing financial reprting prcedures with the same managers in charge; and the use f a structured reprting tl. Questin 2.i. What is the rle f specific ESG investment instruments, like green bnds? T match green savings and green investment pprtunities. It als helps investrs identify investment pprtunities that match their respnsible investment plicies and envirnmental risk standards. 3. Integrating ESG infrmatin int risk assessment mdels f institutinal investrs and asset managers Questin 3.a. What shuld an apprpriate lng-term risk assessment methdlgy lk like? Please indicate sme examples f gd practice. Nt applicable. Questin 3.b. Are there specific barriers, ther than thse f a regulatry nature (see questin 9) fr investrs t integrate medium-t lng-term risk indicatrs, including ESG matters in their risk assessment? If s, please indicate what yu cnsider t be the main barriers. Expertise is the primary limitatin. In the shrt term ne culd prbably als include lack f experience and knw-hw within the rganisatin and the need t recruit mre specific cmpetence. ESG lng-term risk assessment may be mre difficult: the relatinship between individual behaviurs and glbal lng-term envirnmental and scial impacts. 20

21 4. Integratin f ESG aspects in financial incentives Questin 4.a. When selecting and remunerating asset managers, hw d institutinal investrs take int accunt asset managers integratin f ESG issues int investment strategies? What are the best practices in this area? The private equity investment mdel is there t build lng-term sustainable value. This will nt be pssible if ESG matters are nt cnsidered and an integrated part f the peratinal value creatin and preservatin agenda. As explained thrughut this cnsultatin respnse, ESG frms an integrated part f the investment decisin and value creatin strategy, and the assessment f the respnsible investment plicies fr cmpliance with the investr s wn expectatins is a part f the decisin prcess fr many. Selectin f asset managers LPs increasingly include respnsible investment in their due diligence and the utcmes will t a greater r lesser extent be a factr in their selectin f managers. Remuneratin ESG secures bth lng-term value creatin and a GP s licence t perate: in bth cases it accrdingly has an impact n carried interest lng-term entitlement and perfrmance (althugh, strictly speaking, currently nly financial returns affect the carry). There is n need t elabrate additinal incentive instruments. Private equity manager remuneratin is based primarily n incentives aligned t the return made by investrs. As a sund ESG apprach enhances the value f the business and enables it t identify ESG pprtunities and address ESG risks, the implementatin f ESG is rewarded thrugh the greater success f the business. In ther wrds, ESG s psitive cntributin t lng-term perfrmance will translate int better investment returns and hence remuneratin fr managers. Questin 4.b. Is ESG perfrmance and active asset wnership taken int accunt in the remuneratin f the executives and/r bard members f institutinal investrs? What are the best practices in this area? Nt applicable. 21

22 5. Capacity f institutinal investrs Questin 5.a. D yu think that the lack f scale r the lack f skills and resurces f sme institutinal investrs may affect their ability t integrate ESG factrs in investment decisinmaking and engage n such issues? If s, hw? Please prvide evidence if pssible. Institutinal investrs are cnstantly imprving their knwledge thanks t the wrk f reginal and glbal rganisatins (PRI, GRI, Glbal Cmpact, CDP, Integrated Reprting, etc.). Hwever, there remain cntrasts between jurisdictins and between investrs as t their level f engagement with these issues. While the situatin will vary frm ne investr t anther, generally speaking investment managers at institutinal investrs (whether they invest int listed securities r private equity funds) have mre f a financial backgrund rather than an peratinal ne and will have less experience in understanding hw cmpanies perate and hw value is created thrugh the different prcesses. Hence, they will als have less understanding f ESG factrs as such. At mst institutinal investrs ESG matters will nt be integrated but will be dealt with by the persn respnsible fr ESG. Overall, larger rganisatins can deply mre resurces and mre specialised resurces. Invest Eurpe and ther rganisatins are addressing this thrugh the develpment and disseminatin f industry standards (fr example, the Invest Eurpe Prfessinal Standards Handbk) and tls (such as questinnaires) t better empwer smaller rganisatins and specifically thse with limited resurces. Questin 5.b. Please indicate measures/practices that have cntributed t enhance institutinal investrs capacity and ability t integrate ESG factrs in investment decisin-making and engage n such issues. As the pan-eurpean assciatin fr the private equity, venture capital and infrastructure industry, Invest Eurpe has been ding a lt t prmte and increase members awareness, and t facilitate the integratin f respnsible investment and ESG issues. Tgether with ur sister assciatins acrss the EU and indeed als the wrld, we will cntinue t blster this imprtant cause by highlighting best practice and disseminating guidance thrugh the publicatin f guides and ther materials, the develpment f training curses and thrugh the rganisatin f wrkshps and ther events. Mst f this wrk is dne under the umbrella f the Invest Eurpe Prfessinal Standards Cmmittee and its Respnsible Investment Rundtable. 22

23 1. Prfessinal Standards Cmmittee and Respnsible Investment Rundtable The Invest Eurpe Prfessinal Standards Cmmittee develps and maintains strng guidelines and wrking practices fr the industry. The Cmmittee als makes direct recmmendatins t the Invest Eurpe Bard f Directrs n prfessinal standards and respnsible investment issues. The Invest Eurpe Respnsible Investment Rundtable, set up in 2013, is a permanent frum dedicated t respnsible investment practices and envirnmental, scial and gvernance issues in Eurpe s private equity industry. A sub-cmmittee f the Invest Eurpe Prfessinal Standards Cmmittee, the Rundtable aims t prmte respnsible investment practices and the cnsideratin f ESG issues within the Invest Eurpe membership and the brader private equity cmmunity. The Rundtable encurages the pen exchange f ideas and prmtes infrmed discussin abut respnsible investment practices and ESG issues in Eurpean private equity t better enable industry participants t understand, adpt and implement existing and emerging practices. In terms f cncrete utput, the Rundtable is keen t generate materials that disseminate respnsible investment practice frm the leading firms t thers and find a way t share the experiences f peple fcused n the tpic with thse that are nly nw cming up the curve. Examples include the prductin f a Respnsible Investment Bibligraphy (available here) and a GP ESG DDQ (clse t being finalised sn). 2. The rganisatin f an annual training curse dedicated t respnsible investment The Invest Eurpe Handbk f Prfessinal Standards is used extensively in Invest Eurpe training curses, which supply first class tuitin t all industry participants and practitiners, including new entrants as well as seasned veterans. Fr several years in a rw, Invest Eurpe rganises an annual training curse with a particular fcus n respnsible investment. The Integrating Respnsible Investment Master Class fcuses n understanding and integrating respnsible investment in the daily peratins f a fund. The emphasis is n practical examples, discussin f case studies and day-t-day challenges. Issues cvered during the curse include: Respnsible investment and cnduct f business, including GP-level ESG integratin, what cnstitutes a gd ESG plicy, putting a framewrk in place t translate principles int practice; Integrating ESG factrs in investment, due diligence, including envirnmental, health and safety, scial, gvernance, and litigatin risk aspects; 23

24 Integrating respnsible investment int fundraising including: what questins LPs ask, what requirements LPs may have, hw can a GP prve and explain its respnsible investment strategy, what t put int marketing dcumentatin and legal agreements, data rm, website; and Integrating respnsible investment int mnitring and reprting: What t expect frm and hw t effectively mnitr prtfli cmpanies n ESG? Hw t effectively disclse ESG infrmatin t yur LPs? Hw d LPs mnitr GPs? 3. The rganisatin f ESG wrkshps Over the last five years Invest Eurpe, in clse cperatin with the Respnsible Investment Rundtable and natinal private equity and venture capital assciatins acrss the EU, has rganised a series f ESG wrkshps and seminars in several cities, including Lndn, Munich, Frankfurt, Amsterdam and Stckhlm. The last ne tk place in Warsaw in February 2015 and was rganised in cperatin with PSIK, the Plish Private Equity and Venture Capital Assciatin. In 2013 and 2014 Invest Eurpe als rganised a Respnsible Investment Summit in Brussels, bringing tgether industry practitiners and plicymakers t discuss ESG and respnsible investment. 6. Internal gvernance and accuntability f the institutinal investr Questin 6.a. T what extent can gd internal gvernance f institutinal investrs, such as mechanisms aiming t align interests between beneficiaries, bard and key executives, influence their ability and willingness t integrate ESG factrs in investment decisin-making and engage n these issues? Please prvide evidence r gd practices if pssible. Nt applicable. Questin 6.b. D beneficiaries f pensin funds and ther institutinal investrs with lng-term liabilities btain sufficient and clear infrmatin abut hw the fund r investr is managing ESG risks? Can they give their pinin/be cnsulted n these aspects? Please prvide examples f gd practice. Private equity is increasing its fcus n and the infrmatin prvided t its investrs n ESG tpics. As nted abve, the Handbk specifically identifies this as a key issue. Investrs in private equity can and d have substantial access t ESG infrmatin frm GPs that are incrprating ESG risks and pprtunities int their investment prcesses. The develpment f standards and framewrks fr reprting, such as the Invest Eurpe Investr Reprting Guidelines, 24

25 a cnsensus dcument f GPs and LPs, enhances the exchanges. Further, as investment int private equity funds is ften based n a direct relatinship between the GP and its LPs, we believe this asset class prvides a very direct way fr lng-term investrs t btain ESG infrmatin, ften in additin t the standard disclsures, ensuring the specific needs f investrs are addressed. As the fund investment is a private transactin, investrs can agree the specific infrmatin exchanges and ESG fcus that cncerns them in the cntractual dcuments establishing the fund. As the Handbk makes clear, infrmatin prvisin is a key tpic t agree up-frnt between the manager and its investrs. We als nte that direct dialgue ften takes place between the fund manager and their investrs after investment. Questin 6.c. Are beneficiaries interested in matters referred t abve? Please prvide evidence if pssible. Nt applicable. 7. The rle f ther service prviders Questin 7.a. Is there sufficient lng-term riented, reliable and relevant external investment research? Are there barriers t gd quality external investment research n ESG risks and pprtunities? If s, please explain. What rle, if any, d financial incentives r cnflicts f interests f sme service prviders play? Nt nly trade assciatins but als internatinal institutins and independent parties regularly prduce studies, reprts and/r ther tls n respnsible investment and ESG in private equity. An verview is set ut in the Invest Eurpe Respnsible Investment Bibligraphy, available here. Questin 7.b. T what extent d investment banks, investments analysts and brkers prvide infrmatin n medium-t lng-term cmpany perfrmance, including crprate gvernance and crprate sustainability factrs, when they make, buy, sell and hld recmmendatins t investrs? Nt applicable. 25