From the inside-out: Warburg Pincus and EDF Climate Corps’ recipe for replication

Since 2008, EDF has worked with private equity firms to integrate environmental, social and governance (ESG) management into their practices. Leveraging our EDF Climate Corps program is a key strategy for replicating our work and we have now placed 44 EDF Climate Corps fellows among private equity firms and portfolio companies, to date. To learn more about how a particular firm has benefitted, I recently spoke with representatives at Warburg Pincus to hear how the EDF Climate Corps program has enhanced their continued efforts to share ESG-related best practices with Warburg Pincus' portfolio companies.

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This summer, Warburg Pincus hosted an EDF Climate Corps fellow for the second year in a row, and again chose to place the fellow at the firm level, rather than with a single portfolio company. “Running this process from the center allowed us to identify different opportunities, across our portfolio and coordinate work on each of them,” Warburg Pincus Vice President Michael Frain told me.

From speaking further with Frain and Daphne Patterson, Warburg Pincus’ first EDF Climate Corps fellow and newly minted associate, four key themes emerged:

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Sustainability and Finance – Momentum Building, But a Long Way to Go

Guest post by Chris Pinney, President, High Meadows Institute

While it may seem that increasing progress is being made on integrating sustainability in the financial sector, the recent UN Principles for Responsible Investment (PRI) conference in Montreal was a sobering reminder of the challenges that still need to be addressed.

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On the one hand, we have seen a rapid growth of financial firms subscribing to the UNPRI, with firms now representing $45 trillion in assets under management.  At the same time, as UNPRI’s Managing Director Fiona Reynolds reported in Montreal, only 6% of asset owners committed to the UNPRI report that their performance management and compensation systems for senior executives include metrics that recognize and reward sustainability performance. As she noted, “What gets measured gets managed. If responsible investment is to become truly mainstream, it must start at the very top of every organization, with the right incentives.”

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Private Equity Interest in EDF Climate Corps at All-Time High

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CC 2012 fellow Sarah Stern presents her work to CD&R's Daniel Jacobs, left, and Thomas Franco, right

Summer at EDF is always an exciting time as EDF Climate Corps fellows fan out and begin their placements at organizations across the country. This year we're thrilled to see a dozen fellows working with private equity firms and their portfolio companies, the highest number of such placements in a single summer. In total, EDF has now placed 44 EDF Climate Corps fellows in the private equity sector to date.

Managing investment dollars equivalent to roughly 8 percent of U.S. GDP, the private equity sector is critical to sharing, replicating and advancing corporate environmental best practices, so it's gratifying to see the level of activity continue to build. New hosts this year include portfolio companies Associated Materials, Avaya, Floor & Décor, Philadelphia Energy Solutions and Taylor Morrison. Private equity firms KKR and Warburg Pincus are also hosting fellows this year, as they have previously.

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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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Raising the Bar for Private Equity ESG Reporting

As the old management adage goes, “what gets measured gets managed.” Private equity firm Apax Partners took an important step toward embodying that concept this spring by releasing a sustainability report rich with key metrics from its portfolio companies' progress in environmental, social and governance (ESG) management.

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As last year’s Pitchbook survey showed, ESG management is increasingly a mainstream issue for private equity firms. The detailed data that Apax portfolio companies are gathering — and reporting as a group — form the foundation for companies to manage ESG issues, as well as benchmark and then measure any advances.

This is all part of an important, ongoing shift in the private equity industry: from questioning if firms can create value through ESG management, to how can firms capture the value.

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PitchBook Survey Highlights Growing Importance of ESG

A recent report by PitchBook is telling on several levels when it comes to the changing state of environmental, social and governance (ESG) management in private equity (PE).

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First, the survey highlights the growth in the number of PE firms, limited partners (LPs) and general partners (GPs) who are engaged on ESG issues. A whopping 84 percent of LPs told PitchBook that ESG is at least somewhat important when deciding whether to invest, and 24 percent said a strong ESG program could outweigh slightly lower historical performance. A majority of GP survey takers (60 percent) have an ESG program at their firm, up from 49 percent last year. Another 26 percent either are developing an ESG program or plan to do so in the near future. This year’s survey included 54 GP and 54 LP respondents, up from last year’s 48 GP and 4 LP respondents.

Then, there's the fact that a prominent industry publication like PitchBook is now regularly reporting on ESG. This is a pretty clear signal that ESG management is now a mainstream issue for private equity.

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Oak Hill Capital Partner’s first ESG report blazes a trail for the middle-market

This week, Oak Hill Capital Partners (Oak Hill) became the first U.S. middle-market private equity firm to publically report on its environmental, social, and governance (ESG) performance.  Another first for Oak Hill and an extension of the ESG trend kicked off by industry leaders – including Carlyle and KKR – over the past few years.

Just last year, Oak Hill and EDF teamed up to demonstrate that opportunities to improve environmental performance were not limited to the mega buyout firms.  We worked together to create a methodology that mapped environmental management opportunities across Oak Hill’s portfolio based on potential environmental impacts, financial results, and management’s readiness to act.

Oak Hill’s new report discusses the firm’s work to expand its ESG efforts and shares its progress to date.  Last December, EDF released a new ESG management tool for the private equity sector.  The Tool is informed by our work in the private equity sector over the past five years and defines the practices needed to build a successful ESG management program.  Many of these best practices have been embedded in Oak Hill’s approach to ESG management and are evident in the firm’s first public report including:

1) Commitment from the top:  Successful ESG initiatives require strong commitment from the top. Oak Hill’s Responsible Investment Policy, ESG related trainings for the firm and its portfolio companies, and the commitment to publically report annually underscore the support for the firm’s leadership and commitment to make ESG management a core part of the way Oak Hill does business.

2) Integrating ESG into due diligence:  Collaborating with BSR to understand the key ESG risks and opportunities of potential investments is admirable, but it’s also smart business.  Just as we’ve seen in our partnerships with other leading private equity firms, integrating ESG into the due diligence process results in opportunities to reduce risks, increase efficiency, and improve performance.

3) Engaging with the right stakeholders leads to results: Private equity firms are increasingly building relationships with key stakeholder groups to gain new insights and improve operations.  Competing private equity firms take notice; three of Oak Hill’s portfolio companies have hosted EDF Climate Corps fellows.  EDF Climate Corps trains graduate students to quickly understand and improve the way organizations use energy by identifying lasting solutions with long-term financial and environmental benefits.  To date, over 30 private equity firms and portfolio companies have tapped in to this program to reduce energy use, cut greenhouse gas pollution, and save money.

In the past few years the private equity sector’s approach to ESG has evolved rapidly and we’ve been hearing from more and more players in the sector, including both asset managers and owners, about how to improve ESG performance.

Oak Hill is continuing to lead the charge in the middle-market.  The secret to Oak Hill’s successful ESG strategy is that there is no secret.

Any private equity firm can do this if they dedicate time and resources to the effort.  Luckily, the next firm to stand up to the challenge will have Oak Hill’s report as a blueprint.

A Hacker, a Hipster, and a Hustler Walk Into A Bar…

O.K. not a bar, but into the Manhattan Center’s Hammerstein Ballroom for the TechCrunch Disrupt Hackathon. Never heard of a Hackathon?  Well, until recently, I hadn’t either. It’s an event where teams of coders compete over a very short period of time to develop an app. As I learned, the “Hacking Dream Team” is to have a Hacker to do the guts of the app, the Hipster to focus on the look and feel of the app, and the Hustler to hold the project and team together. According to the event organizers, this was the best attended Hackathon TechCrunch has sponsored yet. Over 160 teams of coders competed to develop apps in less than 24 hours.

Attending the Hackathon was like getting a glimpse into the future and included demonstrations of 3-D printing and drones. Hundreds of coders hunched over their keyboards to crank out apps that ranged from the whimsical—such as the music app Game of Tones to the practical—like an app to help you with your job search called Career Hound—to those that combined the whimsical/practical such as RoboKeg.

KKR's Green Portfolio Program Reaps More than $900 Million

This week, KKR announced impressive results from the firm's five-year Green Portfolio Program: more than 1.8 million metric tons of reduced greenhouse gas emissions and $917 million in combined cost savings and new revenue for portfolio companies since 2008.

The Green Portfolio Program 's powerful trajectory stands as an example of the great things that can come out of a long-term partnership between a nonprofit like the Environmental Defense Fund and an innovative investment firm like KKR. We applaud KKR's continued commitment to increasingly make environmental, social and governance (ESG) management a central part of the firm's investment practices, strategy and methodologies. Read more

McDonald’s new paper coffee cups brewed from 23 years of hard work and NGO partnership

Environmental Defense Fund (EDF) is delighted to hear the good news from McDonald’s that it will transition away from polystyrene foam cups and opt for more sustainable fiber-based paper cups to serve hot coffee drinks in at its 14,000 U.S. restaurants. This is a significant step forward for the company — one that builds on decades of hard work.

Twenty-three years ago, EDF embarked on a partnership with McDonald’s to prove the business case for recycled paper packaging over polystyrene foam. In an era when environmental and business interests were typically not aligned, this was the first of its kind partnership between an environmental group and a Fortune 500 company.

The groundbreaking project ultimately phased out the old fashioned foam clamshell food containers at McDonald’s restaurants; eliminating more than 300 million pounds of packaging, recycling 1 million tons of corrugated boxes and reducing waste by 30 percent over a decade. Today, the majority of quick-service restaurants serve food in paper packaging.

Phasing out foam beverage cups is an important next step for McDonald’s and the industry as a whole, especially given the coffee culture that is our current way of life.

Just as EDF worked with McDonald’s to transform food packaging in the nineties, we then worked with Starbucks to transform coffee cup practices… and how far coffee cup practices have come.

When we first started looking at Starbucks, it was serving its hot brews in double stacked paper cups for the sake of its customer’s fingertips. This doubled the amount of solid waste the company created from hot beverage cups. EDF identified better solutions for keeping its customers’ hands cool. The result? In 1997 Starbucks introduced a corrugated paper coffee sleeve made from 60 percent postconsumer recycled fiber that was 45 percent lighter than the second cup it replaced.

Coffee sleeves seem anything but innovative nowadays, but the industry is continuing with its momentum on packaging. Tim Hortons, Canada’s leading quick-service restaurant, announced just last week that it has closed the loop on its coffee cups through its cup-to-tray project. The company collects coffee cups, lids, napkins and trays in recycling bins, sorts and compresses them, and ultimately turns old material into new trays.

So what have we learned over the past 23 years? Paper cups are far better than foam cups. One paper cup with a sustainable sleeve is better than two paper cups. And paper cups that can be recycled and turned into trays (or even better new cups) are really cool.

The industry is still far from perfect in regard to its beverage vessels though. EDF would like to see more of our leading coffee culture suppliers serving up a zero waste culture along with our venti-double-caff-mocha-cappuccinos.