Pre-investment
Due Diligence
Investment Committee
Post-investment Monitoring
Pre-investment
This stage includes a review of “gating issues” which determines if there are any material or reputational ESG issues within the company targeted for investment. Some GPs have developed a proprietary scoring template which assigns more or less weight to certain ESG issues. While the specific factors assessed vary by company, ESG scoring systems commonly review annual reports, corporate sustainability practices, operational management, board structure, and compensation. Additionally, many managers have a “negative screening list” or an “exclusion list,” which means they might not even consider, and therefore immediately disqualify, certain investments. Investors may also apply certain ESG factors that do not align well with their priorities. For example, this could include industries relating to products that have proven health risks, tobacco, gambling, adult entertainment, genetic engineering, stem cell usage/research, etc.
Pre-investment
Due Diligence
Once the prospective company passes the initial review, a more in-depth analysis of material ESG issues take place. Environmental Impact studies are often carried out by a dedicated internal team, or by external consultants. Governance and social issues might involve a review of historical incidents, breaches of conduct and fraud, lawsuits, or accidents.
Investment Committee
This is the decision-making stage, where due diligence findings are evaluated. The findings determine whether ESG issues at the prospect company are acceptable to the GP. If not acceptable, a plan for mitigating present and potential ESG problems should be put in place. If due diligence of a prospective investment brings to light many ESG concerns, it would likely be rejected by the Investment Committee. The interconnected nature of ESG and investment decisions presents an increasing need for investment professionals to be well versed in ESG topics.
Post-investment monitoring
A GP that invests directly might prescribe a universal code of conduct for its portfolio companies. ESG KPIs, along with other monitoring and review mechanisms, can be put in place. More engaged GPs might even host periodic educational programs on ESG issues for companies within its portfolio.
Due Diligence
Investment Committee
ost-investment Monitoring
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