What is inside?

1. Pre-investment: A step-by-step action plan for ESG screening and due diligence during the pre-investment stage
2. Post-transaction: Best practice steps to support ESG integration into portfolio company operations, monitoring and reporting processes
3. Due Diligence Questionnaire: A comprehensive list of questions covering common themes across the ESG agenda, supplemented with a four-pillar materiality assessment framework  

This members-only guide, prepared in cooperation with a dedicated Taskforce under the umbrella of the Invest Europe ESG Committee, aims to help private equity and venture capital managers create and enhance their own best practice frameworks, whether they are still early in their ESG journeys or fine-tuning established approaches.

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ESG (Environmental, Social, and Governance) due diligence has become critical in today’s business landscape. Beyond traditional financial metrics, companies are now also evaluated, by both regulators and broader society, on their sustainability practices, environmental and social impact, and governance structures.

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Why does ESG due diligence matter?

There are various reasons why ESG due diligence is important, including:

• Risk mitigation: ESG due diligence helps identify and manage various risks associated with environmental, social, and governance factors. This includes regulatory compliance risks, supply chain disruptions, reputational damage, and potential legal liabilities.
• Long-term value creation: Integrating ESG considerations into due diligence processes can enhance long-term value creation. By addressing ESG issues, companies can improve operational efficiency, foster innovation, and attract sustainable investments.
• Stakeholder expectations: Stakeholders, including investors, customers, employees, and communities, increasingly expect companies to demonstrate responsible business practices. ESG due diligence helps companies to align with stakeholder expectations, build trust, and enhance brand reputation.
• Access to capital: Investors are placing greater emphasis on ESG performance when making investment decisions. Companies with strong ESG credentials are better positioned to access capital, secure favourable financing terms, and attract a broader investor base.
• Regulatory compliance: Regulatory requirements related to ESG disclosure and reporting are evolving rapidly worldwide (e.g., the Corporate Sustainability Reporting Directive (CSRD) and Sustainable Finance Disclosure Regulation (SFDR) in the EU). Conducting ESG due diligence contributes to ensuring compliance with existing regulations and prepares companies for emerging regulatory frameworks.

In essence, ESG due diligence transcends a mere box-ticking exercise; it embodies a commitment to holistic value creation, resilience, and responsible stewardship.

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What does this Guide offer?

This revised GP ESG Due Diligence Guide provides an overview of actionable steps and tips on how GPs can integrate ESG factors into their investment decision-making and management process – ranging from (i) pre-investment screening and due diligence, and (ii) addressing material ESG risks and opportunities during the ownership period, to (iii) monitoring and reporting processes.

The guide is intended to be of practical use in a variety of different transactional contexts and should be applicable to all asset class strategies. It should also support existing ESG investment processes.

The guide is divided into three sections, largely following the typical PE/VC investment management process:

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1. The first chapter offers an overview of good practice steps that you may wish to follow as a GP during pre-investment ESG screening and due diligence processes.
2. The second chapter dives into good practice steps that you may wish to incorporate into ownership practices and engagement with company management.
3. The third chapter encompasses an actual due diligence questionnaire, covering all common themes across the ESG agenda and intended to facilitate the identification of material ESG risks and opportunities. The accompanying, comprehensive four-pillar materiality assessment framework aims to help you identify and prioritise the most material questions to the potential portfolio company (target) and the fund, which can be included in the due diligence process.

It should be noted that:

• The questions reflect current good practice, are by no means exhaustive, and may not all be relevant (for example, they may be too specific for a company that is just starting to implement an ESG programme for the first time). Therefore, they should be considered on a case-by-case basis, as appropriate to the particular transaction and investment (company) circumstances.
• In addition, it may not be possible to ask some of the more detailed questions when access to management/the company may be limited.
• The ESG questions may also be relevant for use post-initial investment as part of the GP’s portfolio management/active ownership programme.

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