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In late March, I had the opportunity to speak about impactinvesting at the Information Management Network s 2012 Spring Investment Series , an event attended by managers of pension funds, endowments,foundations, and a wide array of financial advisers. While thecontent of the event covered a wide array of industry topics, fromcapitalizing on rapidly expanding secondary markets to globaleconomic forecasts intended to guide fixed income asset allocation,the importance of environmental, social, and governance managementwas raised during several panel discussions. The emerging commitment of this community to responsible investinghas a direct impact on private equity general partners (GPs) asthese institutions invest in private equity as limited partners(LPs). As LP expectations continue to rise, GPs will need toincrease their management of environmental, social, and governance(ESG) issues in order to raise the capital necessary to acquirecompanies. To be fair, many attendees still view responsible investing as anascent rather than established concept. However, institutions arebeginning to take action. For example, Linsey Schoemehl of theIllinois State Board of Investment shared her organization sexperiences as a signatory of the United Nation Principles for Responsible Investment (UN PRI). These principles provide benchmark standards andpractices for investors to integrate ESG considerations into theiractivities. Although less than a decade old, over 1,000 institutionsrepresenting approximately $30 trillion of assets under managementhave signed the principles that s roughly double the annualgross domestic product of the United States committed toresponsible investing! Participating organizations includeinstitutional investors such as the New York State Local RetirementSystem and UAW Retiree Medical Benefits Trust, investment managerssuch as Goldman Sachs and PIMCO, and private equity generalpartners such as KKR and Darby Private Equity, among others. Signatories of the principles make a number of commitments whichaffect the assets in which they invest. These include, amongothers: Incorporating ESG issues into investment analysis anddecision-making; Being active owners which incorporate ESG issues into ownershippolicies; and Seeking ESG disclosure from the entities in which they invest. The rapid adoption of the UN PRI is indicative of a rapidlyevolving focus on ESG management by investors in private equity. Aspart of an ongoing study which the Malk Sustainability Partnersteam is conducting on this subject, we recently had the opportunityto speak with a number of LPs on their views of ESG issues andtheir relationship to investment performance. We view environmental, social, and governance risks in a privateequity general partner s portfolio as material to our owninvestment decisions, said David Russell of the UK sUniversities Superannuation Scheme (USS). We look for evidence ofmanagement processes for these risks, as well as appropriateprotocols to communicate about any issues which may arise. USSinvests with general partners which include Oak Tree CapitalManagement and Silver Lake Partners. Tim van der Weide of Dutch pension administrator PGGM shared asimilar outlook. As long term investors, he noted, managementof environmental, social, and governance issues is important toPGGM for both financial and social reasons. Our clients and theirbeneficiaries ask us about these issues and we want to be at theleading edge of responsible investing. As more LPs in the US and abroad increase their focus onresponsible investing and adopt protocols such as the UN PRI, GPswill need to pay closer attention to ESG management to satisfythese evolving demands. We suggest that private equity fundmanagers consider the following actions toward this end: Engage your limited partners to discuss their interest in ESG andresponsible investing. In speaking with GPs, we consistently hear that LP interest is thesingle biggest driver of ESG management, and that fund managersexpect this interest to increase in the coming years. Rather thanwaiting for LPs to make requests, it is productive for yourinvestor relations team to proactively engage your LPs on ESGissues. Exceed the transparency expectations of your limited partnersthrough ESG communication . We are still in the early innings of efforts within the financecommunity to enhance ESG management. While they will becomestandard expectations in the coming years, case studies on ESGmanagement, citizenship reports, and integration of ESG managementcontent into private placement memorandums can be a valuabledifferentiator in communicating with LPs. Beyond the expectations of limited partners, we also encourageprivate equity GPs to consider other stakeholders who may have aninterest in ESG performance. For example, acquisition targets maylook at such performance as a value-add which your fund provides a value-add which may persuade executives to do business with yourfund rather than a competitor. Similarly, regulators and the publicmay in some cases be stakeholders; for instance, the private equitysector may receive more attention during this year s electioncycle and GPs which can point to strong ESG and citizenshipprograms may benefit from a better public image. Limited partners, particularly in the United States, are not yetdemanding exceptional ESG performance from private equity GPs.However, they are already asking about these issues while over1,000 financial services providers are committing to do even more.In short, ESG management platforms are currently a differentiatorfor GPs but are fast becoming the new baseline in fund managementas LP expectations increase. Zach Goldman is a Partner with Malk Sustainability Partners (MSP) , a specialty management consultancy, which guides businesses indeveloping profitable corporate environmental sustainability programs. MSP has particular expertise in engaging privateequity funds to unlock value through shifts in thinking aboutsustainability. This article was written with MSP ManagingPartner Andrew Malk. If you have enjoyed this series so far, weinvite you to also download Malk Sustainability Partners tearsheet outlining how private equity funds can unlock value throughsustainability online here . 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