In New Report, KKR Deepens Commitment to Tackling ESG Concerns

Too often, environmental performance gets labeled as the responsibility of one team within a company – whether that of a dedicated sustainability staff, external or public affairs, legal or compliance, etc. As a result, a company’s staff can often think of environmental and social governance (ESG) issues as what Douglas Adams once famously termed an SEP – Somebody Else’s Problem.

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With the release of its 2013 ESG and Citizenship Report, private equity firm Kravis Kohlberg & Roberts (KKR) shows it’s taking a different approach:  KKR has adopted a new global policy that makes identifying and addressing ESG risks in both the pre-investment and investment phases, for its staff, everyone’s problem.

Notably, KKR’s private equity investment professionals are being integrated into the ESG risk assessment process: first, in assessing risks during the diligence phase, and second, working with portfolio companies, consultants and subject matter experts to set performance goals and measure against them during the typical five to seven years a company remains part of its portfolio.

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The 2014 Skoll World Forum: Always Act

Skoll World Forum logoSe hace camino al andar – the road is made by walking,” said Yves Moury of Fundacion Capital, quoting Spanish poet Antonio Machado. He went on to explain that the poet was telling us to find new ways to think and to act. “Always act,” he exhorted, “the road is made by walking.”

I identified with this call to action as the unofficial theme of the 2014 Skoll World Forum. The presentations, the side conversations and even the general spirit of the Forum underlined this. Here is a sampling of some of the more provocative actions and articulations I heard:

  • In the opening plenary, Sir Richard Branson, founder of the Virgin Group, argued that the world needs more CEOs to stand up to their shareholders.
  • Also in the opening plenary, Arif Naqvi, founder of private equity firm The Abraaj Group, emphasized the importance of a broad definition of stakeholder engagement because as he put it, “you can’t have islands of excellence in an ocean of turbulence.”
  • Jason Saul of Mission Measurement presented a framework that promotes deriving a cost/outcome across what he deems is 132 outcomes in the world.
  • Jeff Bradach of Bridgespan Group raised not only organization-centric pathways to scale, but also field-centric ones that would argue for strengthening a constellation of organizations.
  • Feike Sijbesma, chairman and CEO of Royal DSM, emphasized that more than shareholders have to be a company’s priority in “future-proofing a business” as he traced the company’s transition from a coal mining company to a chemical company to its current framing as a life sciences company.
  • Mike Barry of Marks & Spencer shared in a side conversation that in 10 years their most important strategic partner might be a healthcare company as they think about a frame of wellness rather than products.
Malala Yousafzai

Malala Yousafzai

Finally, as a tour de force at the Forum were the words of Malala, the 16-year-old Pakistani girl who survived a Taliban assassination attempt as she advocated for education for girls. She spoke passionately and eloquently with a poise way beyond her years as she proclaimed, “Education is more powerful than any weapon.” Although she was specifically speaking about education for girls, her message is really universal whether speaking about individuals, investors or companies.

As I reflect back on the Forum, I’m inspired to continue challenging companies to always act, innovating to protect the planet.

The benefits of tying executive compensation to sustainability

Aligning incentives – this is why executive compensation is linked to financial performance. Corporate America wants to promote financial performance, so it compensates its executives directly for it. With the increasing risk that natural resource scarcity and climate change poses to businesses, what about aligning compensation to sustainability performance?

A  2012 Glass Lewis report states that 42 percent of publically traded companies interviewed across 11 major markets across the world disclosed a link between compensation and sustainability. Last year Ceres found that only about 10 percent of S&P 100 companies have reportedly incorporated sustainability into their bonus structures.

These statistics point not only to an emerging trend, but also to the varying degrees of transparency and rigor with which corporations are linking executive compensation to sustainability goals and results.

On one end of the spectrum, some companies mention a sustainability-compensation link in their CSR reports, yet do not provide further details.  On the other end, there are companies that clearly articulate the connection. Alcoa, for example, in 2010 started tying 5 percent of executives’ annual bonus to the company’s CO2 emissions reduction goals. Intel is another example—since 2008 it has tied 3 percent of all its employees’ annual bonuses to specific company-wide sustainability goals (in 2012 the focus being energy efficiency in the company’s operations and products).

On the exemplary side, Xcel Energy ties one-third of its’ CEO’s annual bonus to renewable energy, emission reduction, energy efficiency, and clean technology goals.

What is driving those companies that are aggressively linking executive compensation to sustainability?

A 2012 Conference Board report notes two factors:

  1. Financial benefits: Given the inchoate nature of the field, there is little data yet to show the correlation between this practice and better long-term financial profitability. But, EDF in its 20+ years of corporate partnerships has numerous case studies of how environmental innovation can save companies millions of dollars, and be a critical component of long term value creation. In our Green Returns work alone, we have seen a sustainability lens lead to $650 million in financial benefits while avoiding 1 million metric tons of GHG emissions, 3.4 million tons of waste, and 13.2 million cubic meters of water use across 38 portfolio companies.
  2. Reputation and culture benefits: Linking compensation to sustainability is a powerful marker of a company’s environmental leadership—the Conference Board found that such leading companies were more likely to link their compensation than others.  Additionally, this practice can serve as a powerful tool to increase accountability and promote action around environmental goals, a sentiment echoed in Intel’s 2012 CSR report, and articulated by Tom King, president of National Grid U.S.—who notes: “linking executive pay and climate change deliverables has increased accountability and positively impacted our culture. Employees across the company are increasingly incentivized to put sustainability at the heart of the way we do business.”

If you want to learn more about linking executive compensation to sustainability, the Conference Board report is a good place to start.  As everything from water scarcity to carbon constraints start impinging on your company’s growth, now is a good time to think about implementing such a powerful tool to position your company for success in this new environment (pun intended).

Data-Driven Water Savings

Affecting more than half the country, this summer’s drought has put water issues front of mind.  As the risk to supply chains and communities where they operate increase, not surprisingly, companies are paying more attention to their water impact.

Notably, this summer Facebook was the first company to ever release water usage effectiveness (WUE) data. WUE is a metric released in 2011 by GreenGrid, which builds upon the success of GreenGrid’s power usage efficiency (PUE) metric, now ubiquitously employed across data centers. As the term suggests, WUE gauges the efficiency of water use in data centers.

Water use?  Why does a data center use water?  Well, the transfer and storage of data generates a great deal of heat, which needs to be removed for the equipment to continue to function smoothly.  That heat removal usually occurs through the use of a water cooling tower, which uses significant amounts of water.  Building cooling, in general constitutes 60 percent of water use in buildings.  Because of the higher intensity of heat generated, data centers use an average of 20 percent more water for cooling than other types of buildings.

In August, Facebook reported that the WUE of its Prineville, Oregon data center was 0.22 L/kWh, which Facebook considered a “great result.” We commend Facebook for releasing the WUE data and nudging others to follow suit. But, it is premature to pass judgment about what is a good, bad, or mediocre WUE. Facebook, itself, acknowledged this – recognizing the importance of benchmarking this metric against other companies and over time.  The company will start disclosing its Prineville WUE data on a monthly basis, and in 2013 it will produce WUE data for a second data center in Prineville and one in Forest City, NC. We hope this will become a slippery slope toward the best practice of comprehensive water reporting and management, and that Facebook as well as other companies such as Google and Microsoft go beyond just showcasing best-practice sites to provide full context for their water usage.

Admittedly, water is more complex than other environmental issues.  Unlike greenhouse gas emissions, which affect our global climate equally no matter where on Earth they take place, water’s geographical use matters a great deal. A company’s water footprint can mean different things based on the regional context in which it’s set.  As a case in point, through our collaboration with AT&T we’ve learned that in water-stressed areas such as the South and Southwest, water consumed for commercial building cooling alone accounts for a hefty 10 percent of total regional water demand.

To get their hands around water impact, companies should embrace comprehensive water reporting. This starts with mapping out their water footprint to identify areas of opportunity. For example, AT&T’s water mapping revealed that 125 AT&T facilities account for approximately half of the business’ total water consumption.  We believe water efficiency efforts should begin there, and indeed they are. As mentioned in this recent blog about our collaboration with AT&T, we are in the midst of piloting practices to reduce water use in building cooling.  Our focus isn’t on a specific type of buildings; we’re looking to develop tools and insights that can generate water efficiency at a variety of facility types across diverse industries. We are exploring three approaches for this reduction:

1) Optimizing free air cooling;
2) Minimizing the amount of water blown down from a cooling tower while maintaining equipment integrity; and
3) Tapping into non-traditional technologies that further minimize water blow down.

We will release our findings in early 2013.

In the meantime, check out the following water disclosure and measurement tools that can help get your business up to speed on sustainable water management, easing pressure on the environment and saving you money:

•    CDP’s water survey
•    CERES’s Aqua Gauge
•    WRI’s Aqueduct
•    GreenGrid’s WUE and WUEsource
•    World Business Council for Sustainable Development’s Global Water Tool
•    Alliance for Water Stewardship’s upcoming water stewardship standard

This content was originally posted on facilitiesnet.

Show me the money: How Energy Efficiency Financing makes dollars and sense

Here’s a quick pop quiz to test your knowledge on financing energy efficiency. True or False: 

1. Energy efficiency financing provides risk-adjusted returns in the mid-to-high “teens.”

Answer: True

2. Energy efficiency is the hot, new asset class with massive amounts of investment capital catalyzing upgrades in building stocks and industrial facilities across the country to realize significant greenhouse gas reductions in the near-term.

Answer: False

As crazy as it may seem, this paradox exists today.  The Conference Board and McKinsey & Co. predict that energy efficiency is a $170 billion per year investment opportunity that can provide an average 17 percent rate of return. At Environmental Defense Fund (EDF) we’ve demonstrated the potential return through our work with leading business partners.  Our EDF Climate Corps program has identified investments to date that can create a whopping $439 million of savings in net operating costs. Another example – our work with Kohlberg Kravis Roberts & Co. (KKR) has yielded over $160 million in energy efficiency savings across seven of KKR’s portfolio companies since the Green Portfolio Program began in 2008. Despite all of the promising research and results, we are currently seeing only a fraction of investment capital needed to realize these benefits. 

Investing in energy efficiency is important to our goals at EDF to clean up the air we breathe and stabilize our climate, and we set out to better understand how we can catalyze this marketplace.  We reviewed the literature; spoke with investors from firms Sustainable Development Capital LLP, Hudson Clean Energy Partners and GE Capital; and captured lessons learned from our work with leading business partners like KKR and programs like EDF Climate Corps.  We’ve consolidated the results of our research into a new report, “Show Me the Money: Energy Efficiency Financing Opportunities and Barriers,” which explores how organizations can overcome the challenges to energy efficiency financing and maximize the opportunities that are available for business and our planet.  We hope you will utilize the research we’ve collected and join  us in stimulating this marketplace.  Heck, we would be happy even if you by-passed us altogether and went straight to taking advantage of this lucrative asset class.

Bank of America, TIAA-CREF, and CalPERS oh my!

These are just a few of the institutional investors that are proactively focusing on energy efficiency as the market has begun to recognize the lucrative returns in this asset class.  Last week, Bank of America announced a $55 million program that will work with community development finance institutions to promote retrofits of old buildings.

Bank of America’s commitment to consolidate and analyze the data from the retrofits is just as important as the funds that will get the company there.  More data, as we cited in our last energy efficiency financing blog, will bridge that knowledge gap between engineers and investors, reduce perceived risk and thereby promote more capital entering into the energy efficiency arena.

On the heels of the Bank of America announcement, Pensions & Investments magazine released a review of the real estate management industry.  Among others, it cites that TIAA-CREF Global Real Estate reduced energy consumption by 11.5% in its office portfolio and 10.8% in its multifamily portfolio, leading to $12.5 million in annual energy savings.  Not to be outdone, Jones Lang LaSalle cut energy costs by $128 million last year.

The article further emphasizes that an important driver in this activity is the demand from significant institutional investors such as California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTERS).  We believe that CalPERS and CalSTERS recognize what EDF Climate Corps and Green Return projects demonstrate: it makes cents (pun intended) to invest in energy efficiency.

EDF Climate Corps fellows have identified $91 million in investments to date that would yield a whopping $439 million of savings in net operating costs.  Our Green Return project with KKR has yielded $35 million in energy efficiency savings across 7 of KKR’s companies through no or low cost investments, an approach that KKR is now rolling out to its entire portfolio.

We are encouraged by this trend and expect that this is just the beginning as investors increasingly realize the low risk/high return combination provided by energy efficiency.  Don’t be left behind!

We're On the Same Page, Part 2: Energy Efficiency Finance

As Liam Pleven’s Wall Street Journal article “Buy Now, Pay Later” rightly points out, upfront costs– present a persistent stumbling block for the realization of energy efficiency retrofits.  He details several business models that are addressing this issue.  Given that capital flows toward new assets classes where it can turn a profit much like water searching for cracks and crevices to form a new tributary, why, then, aren’t the businesses cited in his article overwhelmed by investors?  The answer is that the perception of risk is still very high in this area.  Without a track record in this space, investors become Jerry Maguire caricatures, sitting on the sidelines demanding, “Show me the money!”

EDF’s response: here you go!  EDF Climate Corps fellows have identified $91 million in investments to date that would yield a whopping  $439 million of savings in net operating costs. Another example – our project with KKR has yielded $35 million in energy efficiency savings across 7 of KKR’s companies through no or low cost investments. In return, KKR is now rolling this approach out to its entire portfolio.

But investors are a skittish bunch, especially of late; they want more confidence in the returns.  As a result, EDF is working to address the knowledge gap between building engineers that prescribe the retrofits and the capital providers that fund them.  Although tools and standards exist today, the application can be somewhat discretionary, making it difficult for financial professionals to become comfortable with their track record.  EDF is facilitating the development and adoption of a consensus approach to the application of these tools and standards to help building engineers clearly communicate to finance professionals that projected savings and expected recurring savings are real.

Lastly, the high transaction costs of identifying pipeline have thwarted financial product developers in aggressively developing and offering energy efficiency investment products for institutional investors.  Essentially, EDF is operating as an aggregator in the short-term to identify pipeline through its myriad of relationships.  Once investors and consumers see the mutual benefit of retrofits, the marketplace will develop a system for the two to find each other and take us out of the equation.  In essence, it is a “crowding in” strategy.

Considering the $170 billion per year investment opportunity that the Conference Board and McKinsey predict can provide an average 17% internal rate of return, the energy efficiency asset class is poised to be a lucrative new asset class that will also have significant benefit on cleaning up the air we breathe and stabilizing our climate.  So investors, to borrow another line from Jerry Maguire – “Help me, help you!”

Shooting for the ST*RS : Building momentum in "The First 90 Days"

Congratulations!  You got the job!  You’ve just been promoted!  You won the project!  Now what?  Enter The First 90 Days: Critical Success Strategies for New Leaders at All Levels. This book contains a highly tactical approach for building early momentum that will put you on a trajectory for success, regardless of whether you are in a new position or starting a new initiative.

At the heart of the book is the STARS framework, referring to four broad types of business situations:

  • Start-up
  • Turnaround
  • Realignment
  • Sustaining success

There are clear steps on diagnosing which projects fall into which category and how to develop early wins, as well as avoid common trap

As I’ve been navigating this process in my new role as Director of Strategy for the Corporate Partnership Program here at EDF, one of the most useful suggestions I have found is to, in collaboration with my boss, identify who I should speak to/learn from early on within the team and across the organization.  The book emphasized keeping to the same “script” in each meeting, so that you can collect comparable responses.

The final important step to this process was making sure to feed it back to the group.  This process served for not only introducing me to the team, but also helped build a shared understanding of where the team is; what are the challenges we are confronting; and how we might address them. Read more

The Gulf Oil Spill : A Strong Case for Mainstreaming Environmental Data and More

While BP was benefiting from the revenue upside of drilling the world’s deepest wells, were any analysts, investors and its Board wondering about the risks associated with this strategy?  Could this questioning have avoided what is proving to be one of the largest environmental disasters of our time, not to mention the untold economic ripple effect throughout our still struggling economy?  Possibly — which begs the question as to why environmental, social, and governance (ESG) issues are not a common part of the analysis of companies.

These questions and others were discussed during panels at two recent global conferences – the 2010 Skoll World Forum panel  “Social Good with Market Returns?” and the 2010 Ceres Conference panel “Canaries in the Data Mine: The Information Boom in ESG Data.” Read more

Corporate Sustainability: “There is no plan B for saving the planet.”

This is why UK-based retailer Marks & Spencer (M&S) calls its sustainability plan — “plan A” — explained Mike Barry, Head of Sustainable Business for M&S in the panel, “Beyond the Single Bottom Line,” at the 2010 Skoll World Forum.  He went on to say that when M&S launched plan A, the company executives thought that in order to implement it, they were going to have to spend £200 million over 5 years.  In marked contrast, three years later, plan A initiatives are instead generating a profit of £50 million.

Framing these impressive results is a story about how the CEO embraced this approach as an important facet of the M&S brand with the strongly held belief that M&S could make money by operating in a way that is fundamentally better for the environment.

As I was listening to Mike’s remarks and impressive results, I found myself wondering why all companies don’t embrace this approach.  The history of Environmental Defense Fund’s work with companies – as well as the work of many other NGOs and their business partners (independent of EDF) – has proven time and again that there is a business case for sustainability initiatives.  Then why is making money by reducing environmental impacts not a standard practice for all businesses?

On one side, there is the issue of the need for a policy framework to send the right market signals and provide stable, long-term investment horizons for companies to see a return on their efforts.  However, the other side seems to be a question of leadership and the age-old challenges of organizational change.  One of our efforts focused on addressing this barrier is embodied in the EDF Climate Corps program; where we train MBA students and embed them in companies for a summer to help them identify energy efficiency opportunities.  Through this program we are training tomorrow’s business leaders to incorporate energy efficiency as a standard management practice. Read more