An ESG checklist for in house general counsels

2024 is expected to usher in a number of new overlapping and interacting ESG compliance obligations for private fund sponsors.

For example, many sponsors will have to navigate new requirements imposed by the SEC’s private funds rule with respect to ESG-related redemption rights and side letter commitments. Additionally, the EU’s Sustainable Finance Disclosure Regulation (SFDR) will continue to evolve; the EU’s Corporate Sustainability Reporting Directive (CSRD) and the UK’s Sustainability Disclosure Requirements (SDR) will come online; and the SEC is expected to finalise its ESG disclosure rule for registered investment advisers and funds.

Globally, climate change and human rights disclosures will continue their transition from voluntary to mandatory in some jurisdictions (eg through California’s Corporate Climate Data Accountability Act, Climate-related Financial Risk Act, and Voluntary Carbon Markets Disclosure Act and the SEC’s planned final climate disclosure rule for public companies, plus the EU’s Corporate Sustainability Due Diligence Directive and Canada’s new forced labour law), with nature potentially set to follow thereafter. Against this backdrop of new obligations, the anti-ESG movement in the US may present new legal risks and fundraising challenges, and greenwashing scrutiny from a range of stakeholders (eg regulators, investors, NGOs) may continue.

To prepare for the year ahead, private fund sponsor general counsels can work with their ESG and compliance teams to create a timeline of voluntary, contractual, and regulatory ESG-related reporting deadlines, such as Form ADV and SFDR disclosures, UN PRI reporting and annual reporting to LPs. Then, these GCs can lead the team through a series of questions to further build out and customise the timeline, in order to provide their organisations with a roadmap for navigating the increasingly complex ESG landscape.

Key Planning Questions at the Firm and Fund Levels

The following questions can help position sponsors to successfully balance voluntary initiatives and disclosures at the firm and fund levels with contractual and regulatory requirements and anti-ESG and greenwashing risks.

• ESG Policy: Check when your firm-level ESG Policy was last updated. Are there changes that should be made in response to recent market and regulatory trends (eg anti-ESG and anti-DEI movements, heightened greenwashing risks), and/or in response to changes to your Firm’s ESG commitments, strategy, and goals? If so, consider building a plan for making those changes into the timeline.
• Practices, Procedures, and Recordkeeping: Examine whether your firm’s practices and procedures (including due diligence checklists and annual surveys) reflect its ESG commitments (policy, side letters, and compliance), and whether records are consistently maintained to document that alignment. If not, consider adding steps to improve alignment to the timeline.
• Regulatory Scanning / Preparation: Consider whether your firm needs a system to keep track of and delegate responsibility for compliance with ESG disclosure, due diligence, and other laws and regulations that apply or may apply to the Firm and/or its portfolio companies. Consider also whether your firm’s ESG programme could benefit from uplift around key topics such as climate change, nature, and human rights, in order to meet such regulatory requirements in the future. If so, measures to assess and address these gaps may be added to the timeline.
• Legal and Compliance Integration: Are your Firm’s legal and compliance functions integrated into your ESG governance structure and voluntary reporting, or are there additional steps that would improve coordination between ESG and internal/external legal and compliance advisers? If the latter, consider adding these steps to the timeline, in order to mitigate potential for discrepancies between voluntary and regulatory disclosures and help ensure voluntary disclosures do not trigger unwanted compliance obligations.

Key Planning Questions for Portfolio Companies

The following questions can help sponsors to support portfolio companies in value creation efforts, while also providing support on legal, regulatory, and market trends.

• Data Collection Procedures: Consider whether the current process for collecting ESG data from portfolio companies is working well, or whether quality, auditability or utility could be improved with changes to timing, technology or other processes. Build any helpful changes into the timeline, and also confirm whether any consents are needed from portfolio companies to use and share their data.
• Data to Support Risk Mitigation/Value Creation of ESG Programme: If there is additional data that could be collected from portfolio companies to show investors (including those subject to anti-ESG laws) and future buyers the risk mitigation and/or value creation benefits of your Firm’s ESG efforts, consider adding a plan for collecting this data to the timeline.
• Onboarding, Ongoing Support and Training: Consider whether the timeline should include onboarding, training, and support to portfolio companies on market, legal, and regulatory trends, as well as on your firm’s ESG policies, practices and procedures.
• Exits: To support value creation, if your firm does not have tools to help portfolio companies showcase their ESG compliance, maturity, progress and goals upon exit, while mitigating greenwashing risks, consider adding development of such tools to the timeline.

Leveraging the Customised Roadmap

Once the customised roadmap for 2024 is finalised, GCs, compliance, and ESG teams, as well as others within the firm with responsibility for ESG, can use it as a tool for budgeting, as well as delegating responsibility and keeping track of progress. By taking the time to plan now, private fund sponsors can help ensure they remain proactive, instead of reactive, on ESG and sustainability in year ahead.

The authors of the article are Alex Farmer and Jennie Morawetz, partners at law firm Kirkland and Ellis. Annie Wade also contributed to this article.