Why a Major Private Equity Firm is Investing in Sustainability

By Graham Russell

The University of Colorado at Denver Business School recently hosted an event in which Elizabeth Seeger, a principal at Kohlberg Kravis Roberts & Co (KKR), who manages its responsible investment efforts and Green Portfolio Program, outlined the reasons why KKR has embraced sustainability as a key strategic driver for enhancing shareholder value in its investment portfolio. About 100 local business people, students and faculty attended the event, which also featured Ellen Sandberg, Vice President at First Data Corporation, a KKR-backed company.

KKR?s global private equity investments number nearly 80 companies with more than $200 billion in revenues and 900,000 employees. Seeger explained that the acquisition of TXU, the largest Texas utility company, in 2007, highlighted how KKR could proactively manage sustainability and engage with stakeholders. It was the first time that non-investors were provided a seat at the table before a deal happened. This ultimately led to the firm forming a long-term institutional partnership with the Environmental Defense Fund (EDF),?in 2008, to assist in the process of identifying ways in which sustainability-based thinking could enhance the firm?s role as a creator of increased shareholder value.

In 2009, KKR furthered its commitment by becoming one of the first U.S.-based private equity firms to sign on to the United Nations? Principles for Responsible Investment. This coincided with the launch of the?Green Portfolio Program (GPP) in which they worked with EDF and three of KKR?s private equity portfolio companies in a pilot program designed to achieve cost savings through initiatives aimed at cutting energy and water consumption, and reducing waste. Subsequently, KKR has steadily expanded the GPP and, as of the end of 2011, has announced a financial impact of $365 million from these initiatives across 13 of the companies involved in the program. Through the GPP, KKR estimates that it has avoided 2.2 million tons of waste and 810,000 tons of GHG emissions, and reduced water usage by 300 million liters.

Seeger emphasized that the GPP is a rigorous and disciplined effort to identify, implement and track the results of environmental initiatives, but that it is the responsibility of each portfolio company to implement the most appropriate actions for its particular type of business. KKR concentrates on creating shared value through the formation of partnerships between its various portfolio companies and through workshops and seminars designed to highlight sustainability success stories. Its portfolio also includes a number of investments in companies offering solutions to some of society?s sustainability challenges such as renewable energy and water treatment products or services.

KKR is expanding the GPP to other companies in its investment portfolio, but, in answer to a question from the audience, Seeger emphasized that KKR does not directly purchase for its portfolio companies technologies and services required to achieve sustainability goals in a company, though it will from time to time help in identifying appropriate service providers. She explained that the best way to think of it is that KKR offers a set of best practices and encourages the use of those practices and vendors where appropriate.

In response to another audience question, Seeger stated that the 5-7 year timeframe KKR maintains a private equity investment (on average) before exiting is generally long enough for considerable progress to be made on sustainability initiatives. Simple operational and/or behavioral changes can often deliver a payback in 2-3 years, although large sustainability projects with heavy upfront investment sometimes appear challenging in terms of their ability to achieve an acceptable ROI ? they may need a longer time horizon. She also pointed out that investors in many parts of the world expect this type of approach. For example, many large European investors such as pension funds are long-term investors that actively seek to invest in companies with vigorous sustainability strategies.

One audience member also suggested that many of the cost savings supposedly achieved through sustainability thinking would occur regardless as part of a private equity firm?s normal focus on operational improvement. Seeger disagreed, stating that looking at operations ?through a sustainability lens? frequently throws up opportunities for improvements that would not be identified through normal operational review processes.

KKR has also been promoting non-environmentally related sustainability initiatives, although Seeger acknowledged that measuring the impact of socially oriented initiatives can be more difficult than those focused on things like energy efficiency or waste reduction programs. For example, it is working with the American Heart Association to encourage employee wellness programs in some of its companies.

Seeger acknowledged that it?s difficult to know whether Wall Street analysts are taking into account a company?s sustainability initiatives, even though the big accounting and consulting firms are certainly paying much greater attention to this area. One reason for this is that there is no standard approach to reporting sustainability programs and their results, neither is there (in the U.S.) any requirement to do so. Seeger is collaborating with the new Sustainability Accounting Standards Board to work toward standard methods of reporting Environmental, Social and Governance (ESG ? approximately equivalent to sustainability) data to permit analysts to make better comparisons on these aspects of companies? operations.

Seeger made a compelling argument that KKR clearly understands that the leading companies of the future will be those that grasp the resource challenges the world faces and that have adopted sustainability strategies to enhance their competitive position and create increased shareholder value. Hopefully, we can take KKR?s strong commitment to sustainability as an encouraging sign that the investment community in general is beginning to allocate resources and capital to those organizations that understand that environmentally and socially responsible behavior is simply good business.

Part 2 will summarize Ellen Sandberg?s presentation on how First Data Corporation has approached participation in KKR?s GPP.

Graham Russell is Founder & Principal at Trupoint Advisors, which helps companies achieve strategic success through sustainable business initiatives. www.trupointadvisors.com. Russell writes and speaks on the subject of sustainable business and teaches sustainability in the University of Colorado Denver MBA program.

image: 401K 2012 via Flickr cc (some rights reserved)

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