Senior leader buy-in proves key to successful ESG programs in Private Equity

Lee Coker, Project Manager, Environmental Defense Fund's Corporate Partnerships Program

In our past few blog posts about our Green Returns project in the private equity industry, we’ve highlighted several environmental, social and governance (ESG) best practices that are emerging across the sector. One critical element of a successful ESG strategy that we have not yet discussed is the importance of senior level commitment and leadership. This sets the tone throughout the firm that the ESG program is a strategic priority that will be complemented with the necessary capital and resources to achieve meaningful financial and environmental results. It also empowers employees, both at the firm and portfolio companies, to spend some of their time capitalizing on ESG opportunities.

To build a robust ESG program that drives measurable results, a range of stakeholders must buy in to the value creation potential of ESG, including the employees at the firm, the management teams of the portfolio companies and the firm’s limited partners. Who better to close this sale than the firm's senior leaders by speaking publically about their firm’s ESG commitment to create a sense of urgency and signal the program is of long term strategic value?

In watching this recent Wall Street Journal interview with David Rubenstein, co-founder of The Carlyle Group, it’s clear that he understands how to navigate this sales process and is actively promoting the idea that “sustainability equals more cash flow.”  By integrating EcoValuScreen into its existing operational mindset, Carlyle has seen exactly these results at numerous portfolio companies.  In addition, Carlyle is working to improve its ESG metrics, incorporating sustainability considerations into its U.S. real estate investments and expanding efforts to focus on social impacts.  While Rubenstein indicates that limited partner pressure has helped, his commitment is also integral to the continued growth and success of this program.

Another prime example of senior leader buy-in is George Roberts’, co-founder of KKR, 2011 speech at Private Equity International's Responsible Investing Forum.  In addition to the quantitative results from the Green Portfolio program, Roberts highlights three additional reasons to incorporate environmental management into private equity; stronger business relationships, increasing limited partner demand and growing interest among top recruits of the firm in their ESG activity.

Carlyle’s recent Citizenship Report and KKR’s third year of results both highlight how adopting ESG best practices can lead to strong financial and environmental returns.

KKR and Carlyle are clearly the two U.S. leaders when it comes to integrating ESG into private equity and it’s no coincidence that founders of both firms are champions for their programs both internally and publically.  While dedicated top level buy-in is not always necessary to getting an ESG program started, we believe it is absolutely essential to ensuring the program is successful and long lasting.