Private fund managers are accustomed to addressing traditional social responsibility concerns of investors focused on avoiding investments in "sin" industries (such as alcohol, tobacco, gambling and firearms) or "bad actor" countries (such as Cuba, Iran and Sudan). Recently, however, the focus of many investors is shifting beyond negative restrictions on investment to the integration of environmental, social and corporate governance ("ESG") considerations into investment activities. Although many fund managers have often taken certain ESG considerations into consideration when evaluating investment risk, as more pension plans and other institutional investors increasingly incorporate ESG principles as core components of their business practices (including as criteria for fund manager selection), managers are facing increasing pressure from investors to include ESG considerations as primary considerations in their investment decision-making rather than as isolated risk management or ethical considerations. In today's world, investors are focused on ESG issues not solely for altruistic reasons, but because they believe that ESGsensitive investing can have a positive impact on investment returns.

The increased focus on ESG considerations in the private equity market has been driven in large part by institutional investors and fund managers that are signatories to the United Nations Principles for Responsible Investment (the "PRI"), an initiative launched in 2006 by the United Nations Global Compact and the United Nations Environment Programme Finance Initiative, together with an international group of institutional investors. The PRI provides a framework for investors and asset managers to incorporate ESG considerations into their investment process, with the intended goal that doing so will achieve better long-term returns and more sustainable markets. A signatory1 to the PRI pledges to apply the following six principles to its investment activities, subject at all times to the signatory's fiduciary responsibilities: (i) to incorporate ESG considerations into its investment analysis and decision-making processes; (ii) to be an active owner and incorporate ESG considerations into its ownership policies and practices; (iii) to seek appropriate disclosure on ESG considerations by the entities in which it invests; (iv) to promote acceptance and implementation of the PRI principles within the investment industry; (v) to work to enhance its effectiveness in implementing the PRI principles; and (vi) to report on its activities and progress towards implementing the PRI principles. Although the PRI does not impose legal or regulatory sanctions for non-compliance, before a fund manager or investor decides to become a signatory to the PRI, it should recognize that there may be reputational risks associated with signing up and failing to take action. In February 2009, the members of the Private Equity Council (the "PEC")2 adopted a set of comprehensive guidelines intended to encourage private equity industry participants to discuss principles of ESG investing more formally. Specifically, the PEC guidelines call for its members to: (i) consider environmental, public health, safety and social issues associated with target companies and portfolio companies; (ii) seek to be accessible to, and engage with, relevant stakeholders either directly or through representatives of portfolio companies; (iii) seek to grow and improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders, including on environmental, public health, social and governance issues; (iv) seek to use governance structures that provide appropriate levels of oversight in the areas of audit, risk management and potential conflicts of interest and to implement compensation and other policies that align the interests of owners and management; (v) remain committed to compliance with applicable national, state and local labor laws in the countries in which they invest; support the payment of competitive wages and benefits to employees; provide a safe and healthy workplace in conformance with national and local law; and respect the rights of employees to decide whether or not to join a union and engage in collective bargaining; (vi) maintain strict policies that prohibit bribery and other improper payments to public officials consistent with the U.S. Foreign Corrupt Practices Act, similar laws in other countries and the OECD Anti-Bribery Convention; (vii) respect the human rights of those affected by their investment activities and seek to confirm that their investments do not flow to companies that utilize child or forced labor or maintain discriminatory policies; (viii) provide timely information to their limited partners on the matters addressed in the guidelines and work to foster transparency about their activities; and (ix) encourage their portfolio companies to advance these same principles.

In July 2009, the PRI initiative published a guide entitled Responsible Investment in Private Equity: A Guide for Limited Partners3 to help signatories apply the PRI principles to their investments in private equity. The guide outlines actions that an investor can take to incorporate ESG considerations into their due diligence processes and in their ongoing engagement with managers. A fund manager should be careful to ensure that any representations to investors in offering memoranda, fund documents or due diligence questionnaires about the manager's commitment to ESG principles accurately reflect the manager's investment policies and practices.

As investors in private investment funds pay increased attention to ESG considerations and use their relative negotiating power in the current market to put additional pressure on private fund managers to consider ESG considerations in their investment activities, it has become increasingly important for fund managers to understand the nature of ESG concerns and to be prepared to discuss with potential and existing investors their firms' ESG philosophy and commitment to dealing with such concerns.