Private equity changes ripple across the pond

Over the past few years we have been working with The Carlyle Group (Carlyle), Kohlberg Kravis Roberts (KKR), and other industry leaders to develop new best practices that create environmental and business benefits for our partners, and ripple effects across their industry.  Our goal is to make measuring and managing environmental performance a standard practice for value creation across the private equity sector.

In October, I traveled across the pond to London for Capital Impact 2011, hosted by The Financial Times and the Emerging Markets Private Equity Association (EMPEA), and meetings with a number of private equity industry contacts.  I came home inspired by the progress we have made, the best practices that are emerging in the industry, and the competitive ripples flowing back and forth across the Atlantic.  Here are a few reflections from my trip:

Sign here

To date, over 900 organizations have inked the United Nations Principles for Responsible Investment (UNPRI) — up 70 percent since 2009.  That's impressive growth for any industry.  It indicates that more and more investors see responsible investment principals as the place to start and a solid foundation for building environmental, social and governance (ESG) programs.  It's a great first step, but the real test will be how firms convert the principles into action.

Help wanted

The secret is out.  Hiring in-house ESG professionals provides a great return on investment.  That's why ESG hiring is on the rise in private equity.  Nearly a dozen ESG experts are now working at major firms, including 3i, Actis, Blackstone, Doughty Hanson, KKR, Riverside and TPG.   These professionals are making an impact and all indications point towards more ESG hiring at private equity firms and portfolio companies.

Environmental management is about risks AND opportunities

Strategic private equity firms have figured out that best in class environmental management means both mitigating downside risks and capitalizing on upside opportunities throughout the investment process.  These firms are now beginning to identify and take advantage of upside opportunities to increase efficiency, reduce pollution and waste, and drive cost savings at their portfolio companies.   Carlyle's EcoValuScreen and Apax's Value Programme are both examples of innovative due diligence approaches designed identify and capitalize on these opportunities.  Both efforts were featured in Private Equity International's February 2011 Responsible Investment Compendium.

Metrics matter

Leading companies are moving beyond ESG policies to ESG metrics.   Over time, these firms are realizing that if they measure and manage ESG performance with the same rigor and metrics they use to manage financial performance they will unlock new opportunities to create value for their portfolio companies and investors.  The results reported on KKR's Green Portfolio Program website are a great example of industry leading environmental and financial performance metrics.

Hot off the presses!

Moreover, 2011 was a banner year for publications about responsible investing in private equity.  Mega buyout firms Carlyle and KKR released their first corporate citizenship reports.  BVCA, CDC, Doughty Hanson, World Wildlife Fund UK and others issued reports on ESG practices and responsible investment for private equity.   With institutional investor interest in ESG management and performance at an all time high, 2012 should bring even more reporting on responsible investing in the private equity industry.

Awareness that systematic ESG management drives increased value creation is on the rise in private equity.   As a result, private equity firms are no longer asking why they should focus on ESG, but how to do it.  The trends highlighted above point to some of the best practices that are emerging in both Europe and the U.S.  This is a promising start, but there's still a long way to go before these ripples turn into an industry wide wave.  In an increasingly competitive private equity industry, I'm looking forward to seeing which firms ride the ESG wave to the top.