In May of 2008, Kohlberg Kravis Roberts (‘KKR’) announced the launch of its KKR Green Portfolio program, a partnership with Environmental Defense focused on reducing the environmental footprint of the private equity fund’s portfolio companies in ways which would boost the bottom line. In commenting on the launch, Marc Gunther of Fortune Magazine noted that “The news is, all at once, significant, surprising, and predictable.”[1] Gunther chose these terms because of i) KKR’s sheer scale with equity investments of over $86 billion at the time, ii) the fund’s unexpected partnership with an environmental nonprofit in the interest, and iii) the seemingly obvious drivers which would lead a fund to emulate the savings generated by sustainability leaders such as Wal-Mart while also protecting their own images.
Roughly four years and one global financial crisis later, KKR’s has increased the number of portfolio companies in its green portfolio from 3 to nearly 20, hired a full time environmental expert, and generated over $160 million in savings. Commenting on the program, KKR’s environmental program manager Elizabeth Seeger recently remarked to MSP that, “In this increasingly complex investing environment, we recognize that considering environmental, social, and governance factors in our investment processes can be an important part of creating value in our private equity investments. Many of our investors and other stakeholders agree, which is why we developed our first ESG report to describe our processes for and commitments to being thoughtful about these issues.”
Other funds have followed suite in launching environmental efforts aimed at boosting performance:The Carlyle Group launched its EcoValueScreen in 2010, Doughty Hanson & Co has partnered with WWF (World Wildlife Fund) to publish guidelines on sustainable private equity management, and Apax Partners has implemented a ‘Value Programme‘ which measures the financial benefits of non-financial metrics including environmental sustainability. More broadly, more than 110 private equity groups have now become signatories of the United Nations Principles for Responsible Investment (the majority of which have signed after the beginning of the financial crisis).
In short, leading private equity groups around the world see environmental sustainability as an important issue – one which can help them to better manage risk, improve reputation, and drive returns. In doing so, these investors are harnessing the power of Environmental Strategy™,which is an approach to business which leverages environmental values to improve the bottom line and accomplish organizational mission while preserving the planet. Much as smart CEOs of companies across sectors and smart bankers are doing, fund managers see sustainability as opportunity.
Why Go Green? Why focus on environmental sustainability in private equity? At first glance it may seem like going green should be a very low priority for fund managers – private equity groups have small direct impacts and they operate under the radar of many environmental watchdog. Indeed the expressed visions and missions of leading funds are focused more on value creation than a broader social purpose.
Indeed, fund managers might cite the following as reasons not to focus on sustainability:
Funds are focused on raising capital and maximizing returns. Every activity which fund managers take must either help to raise capital or increase returns;
Private equity funds are seldom in the public limelight and generally deal with very sophisticated stakeholders. The concerns which fund managers must address differ from the public relations concerns of consumer oriented organizations.
Private equity portfolios often include holdings in many different sectors. Understanding and effectively supporting sustainability initiatives across a portfolio can be a highly complex undertaking.
The truth is that these reasons are exactly the reasons why funds should focus on environmental sustainability.
Environmental initiatives are a proven means for private equity funds to reduce the operating costs of their portfolio companies and thereby boost returns. Not surprisingly, a record of higher returns through sustainability initiatives is also useful tool in the fundraising process.
While private equity funds have fewer stakeholders than say, Wal-Mart, the seasoned investment professionals and managers which private equity funds must impress are highly sophisticated. Endowments and pension funds, in particular, often have a broader social purpose and respond well to sustainability initiatives.
Finally, while funds often hold companies with different types of products or operations, there are standardized environmentally-oriented performance enhancement processes such as logistics optimization which work across sectors to boost returns while helping the planet.
Environmental sustainability is complimentary to the overarching objectives of private equity funds.
[1] Private equity goes green: Kohlberg Kravis Roberts strikes partnership with the Environmental Defense Fund. May 1, 2008.