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ILPA: An Overview and Why it Matters

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Investor demand for meaningful ESG policies and genuine transparency is undeniable. Coupled with oncoming regulation, it is a demand the private equity industry must satisfy in order to flourish in a new economy that expects socially responsible businesses.

The Institutional Limited Partners Association, or ILPA, is yet more evidence of this push for ESG. In November 2011, it expanded its responsible investment due diligence questionnaire to gather data from private equity firms on their diversity and inclusion (DEI) metrics. In the words of ILPA’s director of standards and best practices, the DDQ “is designed specifically to help LPs make decisions during the investment process.”

Elaborated ILPA’s CEO, “While DEI is a comparatively newer area of focus for LPs, the industry is experiencing a sea change in LPs’ appetite for more nuanced information about team diversity and GP actions to advance DEI.”

LPA: a brief overview

Founded in 2002, ILPA is an influential trade association of over 500 institutional investors, or limited partners, in the private equity asset class. Headquartered in Washington DC, about 60% of its members are based in the United States, while the remaining 40% come from Canada, Europe and the rest of the world. Together, its members (comprising pension funds, endowments, family offices, foundations, insurance companies and others) represent over USD$2 trillion in assets under management. Given its 97% retention rate, ILPA is an effective body.

Main policy objectives

ILPA’s main objective is to ensure that its investees “deliver maximum governance and transparency benefits to LPs.” Or, in other words, to standardize and simplify appropriate disclosures from GPs to LPs and ensure a proper alignment of interests between LPs and general partners (GPs). It provides guidance on adopting and enacting best practices within the private equity industry, for which it plays a stewardship role, and supplies a number of resources, reporting frameworks and templates to help GPs collect and submit relevant financial and ESG data to investors.

ILPA also promotes the implementation of ESG and diversity and inclusion policies for both GPs and their portfolio companies, as well as government policies that support portfolio company workers (such as stimulus or relief packages) to enable them to continue their roles during unprecedented times or emergencies (such as COVID-19).

ILPA and ESG

ILPA’s most downloaded document, its due diligence questionnaire, or DDQ mentioned above, aims to relieve the reporting burden on LPs and GPs by standardizing common and pertinent due diligence considerations. Notably, since being updated late last year, its ESG section now fully aligns ILPA with the United Nations Principles of Responsible Investment (UNPRI).

The organization’s ESG assessment framework is a useful tool for GPs to understand how their investors prioritize and parse the data they receive, and thus guide their own efforts to evaluate and disclose their ESG standing.

Relevant material ESG indicators

The relevant DDQ questions pertaining to ESG can be summarized below:

  • Policy – does the firm have an ESG investment policy? Is it aligned with any international standards or frameworks? How is it monitored and implemented?
  • Fundraising – what are the firm’s ESG commitments when fundraising?
  • Pre-investment – how does the firm determine material ESG risks or opportunities in its portfolio investments?
  • Post-investment – how does the firm contribute to its portfolio companies’ efforts on ESG risk mitigation and value creation?
  • Reporting and disclosure – how does the firm disclose data and provide evidence for its claims?
  • Climate change – how does the firm measure its portfolio companies’ carbon emissions? What are its climate-related commitments and/ targets? (Include a TCFD report if it reports in line with this framework.)

Steadfast LP demand for transparent ESG practices is being heard, as evidenced not only by the growing number of sustainability jobs but by the significant raising of their salaries as well.

However, conceiving and implementing an ESG roadmap begins with data, something this new class of professionals will have to contend with. The world is still at a point where differing sustainability frameworks and ESG rating systems are slowly coalescing, helped along by regulation, into something more concrete. In such an environment, GPs can stay ahead of the curve, and save themselves much hassle and headache, by automating their data and using cloud-based systems to collect, analyze and report it.

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Summary

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What is ILPA

What are ILPA’s main policy objectives?

How does ILPA support ESG?

What is ILPA’s responsible investment due diligence questionnaire
(DDQ)?