General Partners Going Green – Sustainability in Private Equity

In May 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 so that the end result is increased. Commenting on the launch, Marc Gunther of Fortune Magazine said, “The news is important, surprising and predictable all at once.”[1] Gunther chose these terms because of i) the sheer size of KKR, with equity investments in excess of $86 billion at the time, ii) the fund’s unexpected partnership with an environmental non-profit of interest, and iii) the seemingly obvious drivers that would drive a fund to do so emulate the savings made by sustainability leaders like Wal-Mart while protecting their own image.

Approximately four years and a global financial crisis later, KKR has increased the number of portfolio companies in its green portfolio from 3 to nearly 20, hired a full-time environmental professional, and achieved over $160 million in savings. Commenting on the program recently, Elizabeth Seeger, KKR’s environmental program manager, told MSP: “In this increasingly complex investment landscape, we recognize that integrating environmental, social and governance factors into our investment processes is an important part of creating value in our business can private equity investments. Many of our investors and other stakeholders agree, which is why we developed our first ESG report to describe our processes and our commitments to reflect on these issues.”

Other funds have followed suit and launched environmental efforts to improve performance: The Carlyle Group launched its EcoValueScreen in 2010, Doughty Hanson & Co partnered with the WWF (World Wildlife Fund) to publish guidelines for sustainable private equity management, and Apax Partners has implemented a “value program” that measures the financial benefits of non-financial metrics including environmental sustainability. More broadly, more than 110 private equity groups have now signed the United Nations Principles for Responsible Investment (most of which signed after the start of the financial crisis).

In short, leading private equity groups around the world recognize environmental sustainability as an important issue – one that can help them better manage risk, improve reputation and increase returns. In doing so, these investors harness the power of Environmental Strategy™, a business approach that uses environmental values ​​to improve the bottom line and fulfill the company’s mission while preserving the planet. Just like smart CEOs of cross-industry companies and smart bankers do, fund managers see sustainability as an opportunity.

Why go green? Why focus on environmental sustainability in private equity? At first glance, it might appear that the green shift should be a very low priority for fund managers – private equity groups have little direct impact and operate under the radar of many environmental watchdogs. In fact, the visions and missions expressed by leading funds are more focused on value creation than a broader social purpose.

In fact, fund managers could cite the following reasons for not focusing on sustainability:

  1. The funds focus on raising capital and maximizing returns. Every activity of the fund manager must contribute to either raising capital or increasing income;
  2. Private equity funds are rarely in the public eye and usually deal with very sophisticated stakeholders. The concerns that fund managers need to address are different from the public relations concerns of consumer-facing organizations.
  3. Private equity portfolios often include investments in many different sectors. Understanding and effectively supporting sustainability initiatives in a portfolio can be a very complex endeavor.

The truth is, these reasons are exactly why funds should focus on environmental sustainability.

Environmental initiatives are a proven way for private equity funds to reduce the operating costs of their portfolio companies and thereby increase returns. Not surprisingly, tracking higher returns from sustainability initiatives is also a useful tool in the fundraising process.

While private equity funds have fewer stakeholders than, say, Wal-Mart, the seasoned investment professionals and managers who must impress private equity funds are highly experienced. Foundations 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 environmental performance improvement processes such as logistics optimization that work across industries to increase returns while helping the planet.

Environmental sustainability complements the overarching goals of private equity funds.