Private Equity Gets A Little Less Private

By Lee Coker, Project Manager, Corporate Partnerships Program, EDF

Last week The Carlyle Group (Carlyle) released its 2011 Corporate Citizenship Report.  At first glance this may not seem like a big deal.  Many leading companies are now reporting on their environmental, social and governance (ESG) activities.  What's significant about this report is that it's a leading indicator of broader changes taking place in the private equity (PE) industry.

Just a few years ago it was hard to find a PE firm that reported publicly on much of anything.  Today Carlyle, KKR and others are publishing reports and highlighting their ESG initiatives on the front page of their websites.  Last year, Carlyle became the first global alternative asset management firm to publish a report dedicated to corporate citizenship (see our blog post about last year's report).  Leading PE firms now recognize that they are well positioned to create significant value for their investors by measuring and managing ESG risks and opportunities.  A look at this year's Carlyle report highlights some of the ESG trends and best practices that are emerging across the industry:

  • Responsible investment principles are the starting point:  The growing number of signatories to the United Nations Principles for Responsible Investment (UNPRI) and the Private Equity Growth Capital Council (PEGCC) Guidelines for Responsible Investment indicate that more and more investors see responsible investment principals as the place to start for building their ESG programs.  Carlyle helped create the PEGCC Guidelines, and this week's report details how the firm has integrated them into their investment decision-making — including investment committee memos and investment risk analysis — and is actively reviewing the guidelines with its portfolio companies.
  • Integrating ESG strategies throughout the investment lifecycle:  PE firms are well positioned to improve environmental management across the investment lifecycle from due diligence to company ownership.  This is reinforced in Carlyle's report with examples highlighting how ESG issues are influencing investment decisions in the firm's sub-Saharan Africa fund, improving environmental practices at China Fishery, lowering cost structures at several portfolio companies, and improving product design at Talaris.
  • Setting quantifiable goals:   PE firms are masters at developing goals and metrics for financial performance and this is now becoming a best practice for ESG management as well.  In Carlyle’s report, you’ll find not only what firm has achieved in 2011, but also clear goals and expected results for 2012, including continuing to improve the firm's ESG metrics, expanding sustainability considerations to its U.S. real estate investments, and expanding efforts to focus on social impacts.
  • Better metrics improve management, reporting, and results:  Savvy PE firms are moving beyond ESG policies and developing ESG metrics.  The 2011 Carlyle report reflects this trend and includes significantly more metrics and data on the firm's environmental initiatives.  This enhances its ability to track progress and measure results.  The case study on NBTY, a global manufacturer and marketer of vitamins and nutritional supplements, featured in the report is a good example.  With Carlyle's support, the company is now actively measuring its environmental footprint and using this data to inform project planning, improve performance and assess progress.   As a result, the company expects to reduce costs by approximately $1.8 million per year and eliminate about 5,000 metric tons of greenhouse gas emissions and 440,000 pounds of waste annually.
  • Engaging experts:  PE firms are realizing that they can't do it all alone and are engaging internal and external resources to help them get the job done.  Carlyle's report highlights a range of collaborations in this area, including ESG best practice sharing with APG and PGGM, engaging with a wide array of environmental consultants — Arup, ERM, PWC, and TRC Solutions — to help support ESG initiatives at portfolio companies, and encouraging portfolio companies to improve energy efficiency by participating in EDF Climate Corps.

Carlyle's report points to several promising signs for the firm and the PE industry, but the journey is just beginning.   A growing number of leading PE firms now understand that systematic ESG management can create value for companies and investors.  In an increasingly competitive marketplace, we're eager to see which firms are able to use this strategy to their competitive advantage to create long term value for investors and the environment.