LP expectations of ESG investment programs and reporting: What GPs need to know


The following insights are based, in part, on a recent panel discussion hosted by CohnReznick. An on-demand recording is available now.

As limited partners increasingly are using an environmental, social, and governance (ESG) lens in their due diligence and ongoing monitoring of their private markets investment managers, financial sponsors are understandably eager to gain intelligence regarding ESG investment programs and reporting.

To better understand LP expectations of these programs, general partners (GPs) must first understand what ESG is and what it is not. 

Rather than an investment strategy, like impact investing, ESG is a subset of risk management. An impact investor aims to invest exclusively in opportunities that can drive meaningful change (e.g., technologies that decrease carbon emissions or businesses that increase employment of an underemployed group). On the other hand, a GP with an ESG program assesses the environmental, social, and governance risks and opportunities of each of their investments, regardless of the nature of the investments. Many of the elements assessed for ESG are things that GPs have always looked at: appropriate governance, fair labor practices. ESG brings those business-as-usual elements together with attention to broader issues related to social and environmental impact. 

Despite the proliferation of discussions about ESG (also called “responsible investing” by some), no single standard yet exists. The United Nations-backed Principles for Responsible Investment (PRI), with more than 3,000 signatories that collectively have more than $100 trillion in assets under management, is the closest thing to a globally accepted ESG framework. PRI was founded on the belief that “an economically efficient, sustainable global financial system is necessary for long-term value creation.” In other words, rather than a sacrifice of attractive investment returns, ESG is a way to protect those returns well into the future. PRI’s guidelines now incorporate metrics from the Sustainability Accounting Standards Board (SASB), part of an effort to develop widely accepted standards. (Learn more about PRI’s suggested questions for due diligence at the end of this article.) 

What LPs expect

LPs will want to know that ESG is embedded in your firm’s investment processes, not just an attempt to check some boxes in an LP agreement. Are you “walking the walk” and putting consistent effort into addressing ESG considerations alongside driving financial returns in your portfolio? While your LPs’ primary focus is on the ESG risks and opportunities for improvement in your portfolio companies, because that is where their capital is deployed, they are also expecting their GPs to apply appropriate ESG measures within their own firms. Are you managing your company the way you expect your portfolio companies to be managing ESG factors? For example, have you adopted diversity and inclusion (D&I) initiatives, and are you making changes to reduce your environmental footprint? If ESG measuring and monitoring is integrated with your everyday business management, then that orientation will naturally flow through your investment strategy and the way you manage your portfolio companies.

LPs are looking for progress, not perfection. They expect to see progression from baseline-level monitoring and reporting to more comprehensive ESG programs to “leader” or “champion” level with best-in-class monitoring and reporting. But don’t let fear of failure overwhelm you or stop your progress in its tracks. Rest assured that at this stage of the game, most GPs are closer to baseline than champion level, and very few GPs globally have developed ESG programs that would be considered champion level. 

Also, LPs expect that different types of GPs will be at different stages in their ESG development. For example: 

  • Many European LPs and GPs began implementing responsible investing programs earlier than most U.S. LPs and GPs. Therefore, expectations on this front can be higher for European GPs. 
  • LPs understand that ESG programs require time and resources to fully implement. Because of that, large GPs are expected to be more advanced in their ESG programs and quality of reporting than are smaller GPs. 
  • LPs also take into consideration the nature of the strategy. GPs with energy-related strategies will be expected to have a tight grasp on the ESG risks at their portfolio companies. On the other end of the spectrum, private credit funds, where the GP does not directly control the portfolio company, will be expected to focus their ESG efforts on the upfront diligence of each investment opportunity, because credit managers do not control the portfolio companies directly.  

In terms of exactly what LPs want to see, this is where standards are truly lacking. Even among institutional investors, many ESG programs – and therefore definition of specific expectations for monitoring and reporting – are in fairly early stages. Most LPs want to see 1) evidence that ESG factors were considered during the investment due diligence process, 2) evidence that the relevant factors are being regularly monitored (ideally quarterly) for each portfolio company, and 3) an annual report, showing status for each investment, for the GP’s firm, and progress relative to the prior year. 

In a world with evolving standards, attitude goes a long way. A GP’s willingness to jump in and get an ESG program underway – no matter how imperfect – speaks volumes about the level of your commitment. The one proviso is that even nascent ESG programs should have senior leadership and sponsorship. As an integral component of a GP’s investment processes, LPs expect to see senior investment professionals at the helm of responsible investing efforts. 

Getting started with ESG investment

There is no perfect equation for an ESG investment program. That said, there are certain steps that LPs will expect and that speak to a GP’s commitment to ESG.

  • Adopt a policy. There is a reason that the first item on PRI’s “Limited Partners’ Responsible Investment Due Diligence Questionnaire” (see below) is about ESG-related policies. Whether or not your firm has signed the PRI, investors with an ESG mandate will look for a defined approach to identifying and managing ESG factors during the investment process and in ongoing management of portfolio companies. 
  • Establish a governance structure. Accountability is crucial. A senior, respected individual needs to be responsible for making sure the ESG policy is carried out within your firm and across your portfolio companies. This senior sponsorship sends a strong message that ESG is an integral part of your investment process, rather than a standalone silo. In addition to this internal ESG champion, consider forming an ESG committee that includes team members from different functional areas. 
  • Decide on key performance indicators (KPIs) and start tracking. Start with a core set of metrics that you feel confident you can track in your own company and in each portfolio company. While certain fundamentals will be applied across all of your portfolio companies, you will need to work closely with each management team to customize the KPIs to be most appropriate for them. For example, an industrial business will have more and different environmental KPIs compared to a business services company.
  • Get buy-in. ESG will remain lip service unless and until your team and the management teams of your portfolio companies are on board. Make sure each portfolio company has an ESG coordinator – someone like a CFO, COO, or director of HR – who can make the case for why ESG is important and how it will impact the company’s success. Communicate about ESG monitoring and reporting during the onboarding process, if not sooner, and be prepared to give portfolio companies the training, templates, and support they need to meet your expectations. Buy-in from portfolio companies is especially important when it comes devoting time to tracking ESG progress, which could otherwise be seen as a burdensome exercise.
  • Establish a reporting framework. Once you have some baseline data, it’s time to start reporting. While some LPs have defined their own scorecards, most don’t mandate that GPs report in a particular format, which opens the door for you to develop reporting that makes the most sense for your firm. Ideally, you want a simple, commonsense framework with a set of qualitative and quantitative factors that you can report on consistently over time. The point is to show that you are making year-over-year progress on the ESG issues that are relevant to you and your portfolio companies and are important to your LP investors.

Show your commitment

With rising interest in responsible investing issues, now is a great time to integrate environmental, social, and governance considerations into your investment and business management processes. At this stage, as the standards are still being established, you truly have an opportunity to adopt a program and reporting framework that makes sense for your firm.

But first, you have to embrace ESG – including assessments, monitoring, and reporting – as a logical extension of the risk management that is already embedded in your everyday operations. Once that has happened, you can send a strong message to your LP investors by putting in place an ESG program that works for your firm. 

PRI’s recommended questions for responsible investment due diligence

The PRI’s “Limited Partners’ Responsible Investment Due Diligence Questionnaire” is intended to help LPs “understand and evaluate a General Partner’s (GP) processes for integrating material environmental, social, and governance (ESG) factors into their investment practices and to understand where responsibility for doing so lies.” It includes these high-level questions:

  • What are your ESG-related policies, and how do ESG factors influence your investment beliefs?
  • How do you identify and manage material ESG-related risks and use ESG factors to create value?
  • How do you contribute to portfolio companies’ management of ESG-related risks and opportunities?
  • How can LPs monitor and, where necessary, ensure that the fund is operating consistently with agreed-upon ESG-related policies and practices, including disclosure of ESG-related incidents?


Claudine M. Cohen, Managing Principal, Transactions & Turnaround Advisory



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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.