Invest Europe GP ESG Due Diligence Guide

Published 7 May 2024

PrintCategory: Impact and ESG

Invest Europe has published a revised GP ESG Due Diligence Guide (the “ESG DD Guide”). It provides guidance on how ESG factors can be incorporated into general partner’s (“GP”) management and decision-making processes.

The purpose of the ESG DD Guide is to be a practical guide and to provide Invest Europe’s members with ESG assessment tools. It can be used within different asset class strategies and transactions as well as a supporting tool for ESG investment processes already in place.

Overall, the ESG DD Guide covers good practice within the following three processes:

  • ESG screening and due diligence prior to investment
  • ESG integration and engagement with portfolio company during the period of ownership
  • Reporting and continuous monitoring going forward, including due diligence questionnaire

ESG screening and due diligence processes

Invest Europe has defined the following good practice steps for GPs when incorporating ESG factors in due diligence processes prior to investment:

  • Consistency with the investment policy. GPs need to formulate some questions to ensure that the potential investment does not conflict with the investment policy.
  • First high-level screening. Prior to due diligence, initial screening can be conducted to highlight possible material ESG-related issues or involvement in lawsuits.
  • Due diligence – Early stage. Identification and assessment of ESG risks and opportunities with potential impact on the investment.
  • Due diligence – Confirmatory. Further due diligence steps to achieve more in-depth information about the company’s ESG risks and opportunities as well as its position compared to its peers and the sector.
  • Investment recommendations. Recommendations on what could be done after the due diligence(s) to evaluate the potential investment.
  • Address ESG findings in the post-investment decision process. GPs can take steps to ensure that ESG findings are addressed and included in for instance investment documents and other contractual agreements.
  • Preparation of engagement. Steps to be taken after investment to engage with the portfolio company in relation to performance on ESG matters such as including ESG issues in transaction documents to secure a formal commitment or agreeing with the portfolio company on a ESG process-plan.

Ownership practices and portfolio company engagement

Following the steps for pre-investment ESG screening and due diligence, Invest Europe has gathered the following good practice steps for GPs and management teams to follow when incorporating ESG in portfolio company’s operations as well as monitoring and reporting in general:

  • Initial engagement. GPs shall as a start engage with portfolio companies on their ESG performance and approach as well as their expectations. This could be done through an ESG action plan with improvement actions and goals.
  • Drafting an ESG action plan. Based on the ESG topics that are material to the portfolio company and the resources in place, an ESG action plan can be agreed upon with the portfolio company. It may include regulation on ESG governance, adoption of ESG-related policies, specific targets etc.
  • Establishment of an ESG governance. The portfolio company’s roles and responsibilities in relation to ESG-related activities shall be clarified. This may include appointing an ESG responsible person or working group at the portfolio company to handle ESG activities and matters on a day-to-day level.
  • Communication channel. A system for reporting on ESG performance, incidents etc. may be established.
  • Monitoring KPIs. A process for collecting and monitoring KPIs at portfolio company level may be established in cooperation with the portfolio company to ensure management of ESG risks and opportunities.
  • Pre-exit considerations. The GP may prior to exit assess the value ESG has created, the necessary level of ESG reporting etc.

ESG due diligence questionnaire

Further, Invest Europe has prepared an ESG due diligence questionnaire covering various ESG areas. In general, the questionnaire is useful to identify a portfolio company’s risks and opportunities. On that basis, it can be determined what actions are considered as necessary to implement and have appropriate processes, policies and reporting systems in place.

A four-pillar materiality assessment framework has been developed to help qualifying what questions in the questionnaire that must be considered as relevant when performing due diligence of a specific portfolio company. It includes recommendations and forces the analysing fund and/or GP to go through the following:

  • What do I want to do? (alignment with GP’s own strategy, frameworks and commitments)
  • What must I do? (the regulatory context)
  • What should I do? (Sector and operations lens)
  • What can I do? (due diligence limits and boundaries)

The ESG DD Guide is available here (for members only).

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