Unlocking environmental capital: the new key to private equity investment

This is a guest post by Efrain Torres, CEO of The Payne Firm

In private equity deals, it’s often been the case that higher risks have meant higher returns.

Private equity investors often increase returns by making the tough decisions that prior owners did not want to make. These tough decisions can bring about major operational changes that improve performance and become the basis for investments.

Thankfully, there is a new approach in which taking risks isn’t the only way to yield higher returns.

Environmental performance has seldom been considered a significant lever to improve returns.  In fact, most due diligence activities in the private equity world have been focused on protecting from downside risks by looking for environmental liabilities.  These assessments often examined past operating practices, identified gaps in ongoing operations, and determined if latent problems affected the economic viability of a business.

The new EcoValuScreen, co-developed by The Carlyle Group (Carlyle), Environmental Defense Fund’s (EDF) Green Returns project, and The Payne Firm could be a major step in changing how private equity investors think about environmental performance. By considering the upside of green operational improvements early in the investment process, deal teams will be able to better understand the real value in a transaction.

There’s a compelling indirect benefit as well. Incorporating a “green lens” or an environmental perspective in the due diligence process could accelerate the rate of implementation of these opportunities. When a company realizes that it can save money by incorporating changes that reduce energy use or provide other environmental benefits, it is only a matter of time before it uncovers value in other places.

This process could accelerate the private equity industry’s efforts to unlock latent environmental capital; it’s always been there for the taking if you just knew where to look.

Maybe one day soon improving environmental performance will become a popular way to yield a higher return and be a core component of the investment thesis.

After all, making tough decisions and bringing about change is in the very fabric of private equity investing.

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