CAIA L2 - 1.2 - Technical Guide for Limited Partners: Responsible Investing in Private Equity

Question 1

List

Value Creation
And
Risk Mitigation
examples
in Resposible Investment
in private equity

1.2 - Technical Guide for Limited Partners

Answer 1

Value Creation:
- Eficcient energy consumption
- Increased innovation
- Decreased fines probabilities
- Consumption of resources more efficiently
- Ensure access to capital
‘–
Risk Mitigation
- Try to influence decision-making process
- Vocalize their interest in RI
- Review policies and procedures

1.2 - Technical Guide for Limited Partners

Question 2

List

5 actions
LPs can take to build capacity
when applying PRI principles
for private equity

1.2 - Technical Guide for Limited Partners

Answer 2

1. Start a conversation about ESG with GPs
2. Use established principles and processes that might easily transfer from across the organization
3. Engage with peers and other LPs
4. Leverage existing resources
5. Build current ESG processes

1.2 - Technical Guide for Limited Partners

Question 3

List

Miths and Facts
about Responsible Investment
in Private Equity

Answer 3

Miths
1. An exclusionary approach is needed for RI
2. ESG must be excluded because we invest in sectors with negative ESG impacts
3. Top quartile GPs will not want capital from LPs who question ESG practices
4. RI is not my Fiduciary duty. My goal is to deliver return, not social change
5. We can’t afford to be responsible investors; we are too small

Question 4

List and explain

Key drivers for increased interest in ESG
* legal developments
* industry evolution
* increased competition and complexity
* reporting
* industry collaboration

Answer 4

• Legal developments
  They shifted the onus of ESG impacts from governments to companies.
  Dodd-Frank Act and others require firms to account for issues like human trafficking, slavery and climate change
• Industry evolution
  Asset Owners started reporting contributed to its growth
• Increased competition and complexity
• Reporting
• Industry collaboration
  Many GPs engaging in RI
  Standards to reporting were created
  Common taxonomy is increasing

Question 5

List and describe

4 PRI Modules
to Integrate RI
Into Private Equity Investing
-
(Summary of the four modules of the PRI reporting and assessment framework)

1.2 - Technical Guide for Limited Partners

Answer 5

Dica: PRI Modules => PBG GIM

Module 1 - RI Policies, Beliefs, and Goals
1. Know why firm is interested in RI;
if all the firm know why, the message is consistent to other stakeholders;
2. Develop ESG policies
3. Educate internally

Module 2 - Governance
* Understando how ESG will integrate with own governance, to develop the investment process

Module 3 - Investment Processes
* Implement RI in the investment process

Module 4 - Monitoring and Reporting
* monitor and report GP and invested companies

1.2 - Technical Guide for Limited Partners

Question 6

List

Benefits of including provisions
(of Responsible Investing - RI)
in the LPA (Limited Partner Agreement)

1.2 - Technical Guide for Limited Partners

Answer 6

1. Reduced negotiating costs
2. Reduced number of side letters
3. Appreciation for investor concerns
4. Goodwill increased
5. Increased transparency
6. Relationship improved (between investors and fund managers)

1.2 - Technical Guide for Limited Partners

Question 7

Explain

The importance of
monitoring and disclosure
when evaluating responsible investing
in private equity.

1.2 - Technical Guide for Limited Partners

Answer 7

• GPs have full authority over investment decisions
• LP must monitor GP in terms of RI, considering:
  1. Purpose
  2. Frequency
  3. Feasibility
  4. Impact
  5. Change
  6. Published information

1.2 - Technical Guide for Limited Partners