The development, implementation and maintenance of an ESMS has become a prerequisite for receiving funding from Development Finance Institutions (DFIs) and an increasing number of other investors.

Development

Most will find it convenient to have two related, but separate, sets of management system:

(a) Fund environmental and social management system (ESMS)

A fund’s ESMS should include the following key elements:

E&S policy: The framework for the whole management system. The policy should articulate the objectives and principles that guide the fund manager/fund, applicable requirements for the fund and portfolio companies, and accountability and responsibility for its implementation.
Roles, responsibilities and oversight: A clear definition of who is responsible for developing and driving the ESMS and stating who will participate in each element of its implementation.
Procedures: What needs to be done at the various stages of the investment cycle. These should be underpinned by specific tools to ensure consistent application.
Performance management: A periodic review to refine and improve the systems. The fund will need to consider how, when, and by whom these reviews are undertaken.
External communication: The fund should consider the variety of channels available to communicate with its limited partners (LPs) and other stakeholders about how the management system is functioning alongside the E&S performance of the portfolio.

(b) Fund governance and business integrity management system (BIMS)

Policies: The fund manager’s policies form the framework for the whole management system. The policies should clearly and simply set out the objectives and principles that guide the fund manager/fund, applicable requirements for the fund and portfolio companies, and those accountable and responsible for their implementation.

Roles, responsibilities and oversight: A clear definition of who is responsible for developing and driving the policies behind the BIMS and stating who will participate in each element of its implementation. CDC believes that there should always be a nominated individual responsible for each of the policies.
Procedures: What needs to be done at the various stages of the investment cycle. These should be underpinned by specific tools to ensure consistent application.
Performance management: A periodic review to refine and improve the systems. The fund will need to consider how, when and by whom these reviews are undertaken and who they are reported to.
External communication: The fund should consider the variety of channels available to communicate with its Limited Partners (LPs) and other stakeholders about how the policies and management system is functioning alongside the BI performance of the portfolio.

The two systems will intersect at different stages of the investment cycle, and information collected and managed by both sets of procedures will complement and support one another, guiding how the fund conducts its business.

Implementation

Who should lead the process of designing an ESG management system?

Experience has shown that it is best to appoint at least one senior partner to champion and oversee the ESG management system (ESMS), or systems, even if it is to be implemented by other team members. An ESMS will only be effective if it is well implemented. This requires commitment from top management. It is therefore important to ensure that Senior Partners are involved from the beginning to provide the high-level commitment and strong internal support that will be necessary to ensure that: (i) ESG is appropriately integrated into the overall fund’s investment strategy and operations; (ii) that ESG is taken seriously at all levels of the organisation; and (iii) any resourcing requirements are addressed as they arise.

Reviewing needs

A good ESMS should be tailored to the specific strategy and characteristics of each individual fund or fund manager. ‘Off the shelf’ solutions should be avoided. Reviewing each individual context and designing a bespoke ESMS will ensure its continued relevance and use. Fund managers should consider their priority industry sectors and regions, and the associated ESG risks, impacts and opportunities. They should also consider how priorities might change over time and how successor funds may require slightly different approaches.

Assigning roles & responsibilities

Accountability – senior management providing support and oversight: There should also be oversight and support at a high level, for example a Senior Partner who sits on the IC. This person should be able to ensure adequate time, resources and commitment are being paid to ESG matters during the whole investment process and should act as a check and balance to ensure ESG matters are properly managed.

Responsibility – ESG Officer(s): When assigning the ESG Officer role it is important to ensure their work is integrated into the investment process. They should therefore have the ability to talk to company management and be involved in due diligence and monitoring and ideally, have some independence from the Deal Officer leading on the transaction.

ESG management systems