Private Equity

Harvard Management Company: Private equity has opportunity to step up on methane

By: Kate Gaumond / Wed, Dec 19, 2018 4:13 PM

Earlier this year, we had the opportunity to sit down with Michael Cappucci, Senior Vice President of Compliance and Sustainable Investing at Harvard Management Company (HMC). In a recent blog post, Michael shared his outlook on the methane opportunity for oil and gas companies, along with his opinion on the pace of change within the industry.

Below is the second part of our conversation, where Michael offers new insights on investor ESG engagement and its correlation to portfolio performance. He also talks about private equity’s somewhat quiet stance on methane, and the sector’s potential to bring about change among mid-size operators who have yet to tackle methane emissions.

As Investors Benchmark Methane Management, Where Will Companies Stand?

By: Ben Ratner / Wed, Oct 26, 2016 5:06 PM

Global attention on oil and gas methane emissions is taking off. The International Energy Agency has recognized that “the potential for natural gas to play a credible role in the transition to a decarbonized energy system fundamentally depends on minimizing these [methane] emissions.” North American heads of state recently committed to reduce oil and gas methane emissions 45% by 2025. And the U.S. Environmental Protection Agency has issued standards for methane from new sources, while Canada and Mexico begin executing their commitment to develop regulations necessary to achieve waste-cutting emission reductions.

With a rising wave of public and policy maker scrutiny, it’s no surprise that methane has become a hot topic in investor circles. A group of 76 investors representing $3.6T assets under management publicly supported the North American methane announcement. And a much broader set of investors, from large institutional investors to private equity, and socially responsible investors to large banks, are turning their attention to reading up on the issue and engaging operator management in quiet but important conversations on managing this rising risk. As leading global asset management company Allianz Global noted to its clients, methane emissions are “the next frontier for the Oil & Gas industry” and there is an “urgent need to act.”

EDF has long recognized the power of stakeholders with an economic incentive to drive progress that helps people and nature prosper. That’s why we are devoting a growing effort to educate oil and gas investors on why methane risk matters and what they can do to address it through constructive engagement with operators across the world.

In a post-Paris, carbon constrained world where investors constantly demand more and better information on all manner of corporate responses to climate risk, it’s only a matter of time until investors have the data at their fingertips to use the quality of methane management as one additional input in decision making processes, even including which companies to buy or sell.

If that seems like a stretch, just consider: an operator managing methane aggressively is better poised for smooth regulatory compliance, while also reaping operational efficiencies through waste reduction, providing evidence they can be part of the transition to a lower carbon energy economy, showing neighbors they are helping to reduce air pollution, and even appealing to top talent in an environmentally conscious workforce.

In the meantime, EDF has released a new resource in partnership with the Principles for Responsible Investment: “An Investor’s Guide to Methane: Engaging with Oil and Gas Companies to Manage a Rising Risk”, which builds on our landmark report “Rising Risk: Improving Methane Disclosure in the Oil and Gas Industry.” While the primary audience is investors who represent growing demand for improved methane management (and indeed gave us the idea for creating a guide in the first place), the Guide is public for a reason – operators who want to get ahead of the curve can review it for themselves.

Our Guide is based on three simple ideas. 1) Methane poses a material risk, in the form of financial, reputational, and regulatory risk. 2) Managing the risk well requires directly measuring emissions, transparently reporting the plan of action and its results, and actively reducing emissions. 3) Continuous improvement is key: each company can advance along the spectrum from beginner, to intermediate, to advanced, on each dimension of measure, report, reduce.

As operators review the Guide, they can use it to benchmark where they are today, prepare for dialogue with investors, and develop an action plan for continuous improvement. Whether motivated by investor relations, operational enhancements, regulatory positioning, or simply doing the right thing, we hope operators will find the guide to be a useful tool. Competitive advantage is at stake, and there’s no time to waste.

Follow Ben Ratner on Twitter, @RatnerBen

Managing the Rising Risk of Methane, What Investors Can Do

By: Sean Wright / Thu, Oct 20, 2016 3:37 PM

In a recent blog post, I discussed three ways investors can have a positive impact on the environment. One of those levers is engagement, or using your influence with the companies you invest in to help ensure those companies are being managed both profitably and sustainably.

Principles for Responsible Investment (PRI) is a recognized global authority on how investors can engage with companies to manage environmental risks. Environmental Defense Fund (EDF) is partnering with PRI to release a new how-to guide for engaging with oil and gas companies globally on methane emissions.

As investor scrutiny ramps up on all forms of climate risk, investors globally are becoming more aware of and concerned about the material risks that methane poses to portfolios, detailed in EDF’s Rising Risk report. That report found methane poses a series of reputational, regulatory and financial risks to operators and their investors. Methane, 84 times more powerful than carbon dioxide, is a potent form of carbon risk, and left unmanaged it can literally leak away shareholder value.

[Tweet “Methane is a potent carbon risk, left unmanaged it can literally leak away shareholder value.”]

An Investor’s Guide to Methane responds to growing demand from investors globally for practical guidance on how to not only manage these risks through company engagement, but surface opportunities as well. Investors want to understand how companies should measure their emissions, what they should be reporting, and what kinds of best management practices they should adopt to keep more product in the pipeline. This guide provides details on what leading methane management looks like.

Just as investors use quarterly earnings to understand who the most profitable companies are, investors can use the performance benchmarking framework included in the guide to help differentiate relative methane performance. Because methane management is such a powerful proxy for operational excellence, understanding relative performance on the issue can be a helpful insight for investment decision-making. As such, early-engagers will have a first-mover advantage. This framework is also designed to help identify concrete next steps companies can take to improve management, such as using additional emissions reductions technologies or adopting methane reporting metrics.

summary-performance-assessment-tool The guide also provides detailed questions to help support constructive dialogue. For example, EDF’s Rising Risk report found that as of early 2016, zero of the leading 65 companies in the US had disclosed a methane reduction target. The guide includes questions such as “What form of a quantitative methane reduction target would work best for your company?” that can help an operator think through how to best set an ambitious but achievable target.

As part of their engagement, investors should expect all operators to measure, report and reduce their emissions:

Measure – We’ve all heard the phrase “what gets measured, gets managed.” Getting accurate information on a company’s methane emissions is the first step in understanding the extent of the problem, uncovering hidden risks, and identifying opportunities to bring more product to the bottom line. The more accurate the information, the better positioned companies will be to effectively reduce emissions. Expert level methane management requires companies to utilize robust direct measurement, or the process of getting out into the field to measure emissions, as this is more accurate than desk-top estimates.

Report – Investors require actionable methane information in order to understand the relative performance of operators, and leading companies will demonstrate how they are managing methane risk. Operators should set and disclose a methane reduction target, and report how they plan to meet that target. For example, expert level operators will report the frequency, scope and methodology for their leak detection and repair (LDAR) programs as one best practice to limit emissions.

Reduce – Minimizing methane emissions is highly cost effective, and can be done using proven, off the shelf technologies. Because methane is both pollutant and product, many of these technologies have a positive payback. Investors should feel confident in encouraging companies to reduce emissions knowing they can do so in a shareholder-friendly manner. Leading operators will show a declining trend in emissions, frequently inspect assets for leaks, join global voluntary initiatives like the Oil and Gas Methane Partnership, and support regulations to reduce emissions.

The key points from these three buckets, as well as related engagement discussion questions, are summarized in a 2-page cheat sheet summary investors can take to meetings with them.

managing methane risk Methane is the next frontier for investor engagement on climate and carbon risk. Unmanaged emissions of methane can directly undermine the natural gas’ ability to play a role in a lower-carbon energy economy, impair social license to operate and be a proxy for operational inefficiency. Conversely, active methane management can inspire investor and stakeholder confidence, keep product in the pipeline and prepare companies to operate in an increasingly carbon-constrained, regulated world.

Investors should utilize their influence, and this guide, to ensure companies are proactively managing methane risks and leveraging opportunities.

Download An Investor’s Guide to Methane

Follow Sean Wright on Twitter, @SeanWright23

Additional reading: Why energy investors need to manage methane as a Rising Risk

Three Ways Investors Can Drive Environmental Gains

By: Sean Wright / Wed, Oct 12, 2016 8:55 AM

Investors can be powerful change agents when it comes to the environment. Investors have capital which they can allocate in ways that either help or hurt the environment. They also have significant influence with the companies they invest in and with policymakers globally, both critical stakeholders when it comes to improving the environment.

While some investors are already working at the nexus of the environment and finance, given the earth’s pressing environmental challenges like climate change, overfishing and deforestation, there has never been a greater need for all investors to engage on sustainability issues. For example, private capital will be essential in order to mitigate the worst impacts of climate change – a recent UN study estimated that it will require roughly $90 trillion dollars, much more than philanthropic or public (i.e., government) investments can fund.

Of course, investors should consider environmental issues not just to do good, but also because the returns often meet if not exceed the performance of more traditional investments. And because investors are interested in risk-adjusted returns, managing environmental risks like carbon and water is critical to any comprehensive investment process.

Below are three levers investors can use to when considering environmental impacts:

Capital allocation – The first decision any investor must make is where to invest their money. Considering sustainability issues can help drive capital towards investments that provide both an environmental and financial dividend.

One way to allocate capital toward more sustainable investments is to integrate environmental criteria into the investment process. Organizations like Carbon Disclosure Project (CDP) and Sustainability Accounting Standards Board (SASB) improve disclosure on issues like carbon emissions and water, enabling investors to gain insight into how efficiently a company operates and manages environmental risk. In this respect, as Environmental, Social and Governance (ESG) disclosure improves, investors can move from screening out whole sectors to proactively allocating capital toward companies that better manage material environmental issues, an investment trend which is becoming more mainstream in the U.S. For example, while Environmental Defense Fund’s (EDF) Rising Risk report found methane disclosure in the oil and gas industry to be poor, as methane data improves, investors will be able to shift capital to those operators who are actively managing risk from this powerful pollutant and wasted product.

Investors can also place their money into investments with an explicit environmental component, like green bonds. These bonds are a debt instrument specifically tied to achieving a beneficial environmental outcome like energy efficiency, climate resiliency, or water infrastructure. The market for these double bottom line investments has grown from less than $3b just a few years ago to over $40b in 2015.

Investors are gaining new opportunities to invest in innovative products that help to reduce carbon emissions from deforestation and agriculture and improve sustainable fishing practices around the globe. Sustainable investing is also no longer just for sophisticated institutional investors. As financial tech startups are enabling individual retail investors to invest in an environmentally-friendly manner – giving all an opportunity to do well by doing good.

Company engagement – Once their money is allocated, investors can then use their influence as equity or debt-holders to hold corporations accountable for environmental performance, risk management and disclosure. Organizations like Principles for Responsible Investment (PRI) and Interfaith Center on Corporate Responsibility (ICCR) act to help investors be effective engagers by coordinating efforts on topics from deforestation and palm oil to water risks, and encourage collaboration where possible.

Engagement can include the ability of asset owners like private equity to work with portfolio companies to become more sustainable. EDF worked with leading private equity companies to design the Green Returns tool, which enables private equity to approach value creation through an environmental lens, and spot opportunities such as energy efficiency and waste reduction initiatives that generate cost-savings. Using this tool, Kohlberg Kravis Roberts (KKR) was able to add $1.2 billion to the value of their portfolio while avoiding significant greenhouse gases, water use, and excess waste.

Shareholders in public companies also have the ability to file shareholder resolutions to publically encourage better environmental management. In 2016, shareholders filed a record number of climate-related resolutions, which a recent Harvard Business School study has shown to be effective in improving both financial and environmental performance when focused on material ESG issues.

[Tweet “Investors need to engage on environmental issues now – 3 levers to balance portfolio and planet”]

Policy Support – Getting the rules right will be critical in both addressing environmental issues directly and in driving private capital towards environmentally-friendly assets. As Hank Paulson, the former Treasury Secretary and CEO of Goldman Sachs noted in a recent NY Times Op-Ed, we need policies that “include environmental regulations to stimulate clean, sustainable development; incentives and subsidies for clean energy investments; and the pricing of carbon emissions.”

Investors with expertise on business, markets, and finance have an important role to play in the policy process. The next generation of investor leadership on sustainability will require aligning external policy positions with internal sustainability practices and playing a proactive and public role to support legislation and regulations.

Organizations like CERES have been instrumental in activating investors on policy matters. Just this year, CERES played a leading role in getting 76 global investors with $3.6 trillion in assets under management (AUM) to support methane regulations in the U.S. and Canada while working with organizations like Institutional Investors Group on Climate Change (IIGCC) in Europe to recruit 130 investors with $13 trillion in AUM to support implementation of the Paris agreement. Such statements of support are meaningful in helping build the business case for environmental policy. And direct engagement with law and policy makers is a next frontier for investors looking to maximize their impact on supporting sound policy development.

The need for investors to engage on environmental issues has never been greater, and the opportunities to do so profitably have never been more widespread. Investors of all kinds should incorporate the levers of allocation, engagement and policy in their investment process – a move with the potential to benefit both the planet and their portfolios.

Follow Sean Wright on Twitter, @SeanWright23

Why energy investors need to manage methane as a Rising Risk

Why Investments in Agricultural Carbon Markets Make Good Business Sense

By: Sara Kroopf / Thu, Jun 23, 2016 9:31 AM

Over the past decade, private investment in conservation has more than doubled, with sustainable forestry and agriculture investments as the main drivers of growth. This unprecedented expansion in “impact investing” or “conservation finance” has occurred as investors seek ROI that can also benefit the environment. According to Credit Suisse, sustainable agriculture is particularly appealing to investors as it offers a wider array of risk mitigation approaches than sectors such as energy and transportation.

Yet despite this boom, there has been very little investment from private capital in emerging ecosystems markets, especially in the agricultural sector.

We’ve blogged before about the benefits growers – and the environment – realize from participating in agricultural carbon markets or habitat exchanges. But here’s why the private sector, food companies and retailers should invest in agricultural carbon markets. Read more

KKR Expands Its Green Portfolio by Shepherding Green Solutions

By: Tom Murray and Namrita Kapur / Thu, Dec 24, 2015 1:43 PM

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.

We’re proud to see the Green Portfolio Program, an initiative we helped kickstart in 2008 with private equity firm Kravis Kohlberg & Roberts (KKR), evolve to identify and implement more efficient practices in its portfolio companies that drive business value and reduce environmental impacts. Last week, KKR relaunched this initiative as the Green Solutions Platform (GSP), expanding its mission to include companies outside of its private equity portfolio, as well as a wider range of business and environmental benefits.

KKR announced a shift in its investment strategy in its latest ESG report, and the relaunch of the GSP gives us a first glimpse into what that means in practice. The GSP’s scope has expanded beyond finding energy, water and waste reductions – what KKR refers to as “eco-efficiency projects” – to include portfolio company projects that can drive both top-line and environmental gains (“eco-innovation”) and companies whose core business drives a positive environmental impact (“eco-solutions”).

Much like GE with its Ecomagination product line or social enterprises focused on delivering renewable energy or clean water, the GSP’s new direction has the potential to support business activity that, by its nature, curbs climate impacts and creates value for communities and companies alike.

In just eight short years, 27 KKR portfolio companies reported that they achieved nearly $1.2 billion in avoided costs and added revenue, and avoided more than 2.3 million metric tons of greenhouse gas emissions, 27 million cubic meters of water use, and 6.3 million tons of waste through eco-efficiency efforts. We’re heartened to see an already-forward looking firm push its boundaries further in the pursuit of greater environmental gains, and look forward to seeing what innovations emerge from the Green Solutions Platform.

In Its 5th Citizenship Report, KKR Reaches Beyond ESG

By: Tom Murray and Namrita Kapur / Wed, Jul 15, 2015 10:30 AM

Sustainability pioneer and inspiration to many of us at EDF, Ray Anderson frequently talked about his company’s efforts to scale the seven faces of Mount Sustainability and develop a more responsible company along the way. Summiting a mountain is a good analogy for a company’s journey to improve its environmental performance. To succeed you need a plan, commitment, resources, and the ability to change direction if there are obstacles in your path.

In the case of a private equity firm like KKR & Co. L.P. – with over 56 portfolio companies participating in value creation programs linked to its environment, social and governance (ESG) strategy since 2009– the journey is more akin to traversing an entire mountain range, whose contours keep evolving as companies enter and exit their portfolio.

That changing landscape is what’s driven KKR to continue to adapt how it manages ESG challenges and opportunities. KKR’s recently-released 5^th annual ESG & Citizenship Report details how these programs have continued to evolve since our initial partnership in 2008.

Our work together helped drive KKR’s Green Portfolio Program which, six years later, has added a cumulative $1.2 billion to its portfolio companies’ bottom lines while avoiding more than 2.3 million metric tons of greenhouse gases and reducing waste by 6.3 million metric tons and water use by 27 million cubic meters, according to results announced last fall.

kkr_logo_13932 KKR’s latest report documents the firm’s progress in advancing ongoing efforts, including measuring and improving ESG performance at key portfolio companies, rolling out a publicly available ESG policy across its global private equity staff, contributing its expertise to the Sustainable Accounting Standards Boards’ development of ESG disclosure guidelines, bringing together sustainability professionals and other experts at its first Sustainability Summit last year, and hiring a full-time energy expert and two EDF Climate Corps fellows to help its portfolio companies more systematically adopt solutions for better energy management.

In addition, something new caught our eye. KKR plans to refocus its investment efforts through one of three lenses – responsible investing, solutions investing and impact investing.

Responsible investing incorporates ESG metrics and analysis into investment decisions.
Solutions investing refers to investments made in companies that have an intentional focus on solving a societal challenge and deliver traditional returns to investors, such as providers of reusable bulk shipping containers, developers of environmentally-responsible office buildings in Korea and microfinance groups increasing access to capital for business owners in rural and semirural India.
Impact investing goes beyond the other two, focusing on investments in companies that put environmental and social impacts on par or even ahead of financial impacts. KKR began advising two impact businesses in 2013 by providing technical assistance, helping the companies scale their businesses and secure additional funding. Moving forward, KKR will consider investing in such businesses.

At EDF, we believe that private capital can and must be part of the solution to our biggest environmental challenges. We’re encouraged to see major investors like KKR expand their investment strategy as the next step in this journey and eager to see the environmental and financial results it delivers.

EDF Climate Corps Proves its ROI for Private Equity Firms

By: Scott Wood / Wed, Jul 1, 2015 4:30 PM

As summer officially gets underway, the 2015 EDF Climate Corps fellows are already off to the races seeking out energy and cost-saving opportunities for some of the world’s largest companies and organizations. Among those participating, we are pleased to place 13 fellows with private equity firms and their portfolio companies, the largest such cohort in a single summer, besting last year’s record of 12 fellows. This brings the grand total up to 57 EDF Climate Corps fellows who have worked in the private equity sector (including with portfolio companies) to date.

EDF Climate Corps fellows Yien Huang (left) and Jiamu Lu (right) collaborating at the fellow training

Since 2008, EDF has worked with the private equity sector to drive environmental results, beginning with a partnership with KKR & Co. L.P., and later with The Carlyle Group and Oak Hill Capital Partners. Resulting from this work was a suite of free tools designed to help firms identify and manage environment, social and governance (ESG) issues. EDF Climate Corps offers private equity firms a powerful resource that continues to deliver environmental benefits alongside real financial returns.

This year, as in past years, we continue to see a diverse range of participating companies and projects:

In 2015, we welcome new hosts Guitar Center, NBTY (vitamin/food supplement supplier), Ortho Clinical Diagnostics (medical equipment manufacturer), Pharmaceutical Product Development, and Gelson’s Markets (a grocery chain in southern California).
Among returning companies, we’re excited to welcome back Floor & Décor, Philadelphia Energy Solutions, Avaya, and Caesars Entertainment, the last of which was featured in episode 7 of the Showtime series Years of Living Dangerously (now available on Netflix, Hulu and Amazon Prime), which profiled the efforts of EDF Climate Corps.
HCA Healthcare will also be returning, marking the company’s sixth straight year of participation.
KKR & Co. L.P., Carlyle Group, and Hellman & Friedman will have fellows working at the firm level this year.

The work that these fellows will engage in this summer ranges from energy benchmarking and efficiency upgrades to demand response assessments and green revolving loan fund design. We’ve written previously about the myriad ways that fellows can add value both at private equity firms and portfolio companies and we’re excited to see new stories unfold this summer. Watch this space as well as our Climate Corps-specific blog, where fellows across a variety of sectors will share their experiences and accomplishments.

Carlyle Sheds Light on How Sustainability Creates Value in 2015

By: Namrita Kapur / Fri, May 1, 2015 8:15 AM

On the eve of The Carlyle Group releasing its 2015 Corporate Citizenship Report, I had the chance to catch up with Jackie Roberts, Chief Sustainability Officer at Carlyle and former EDF colleague who was one of the founders of EDF’s Corporate Partnership Program. Here are highlights from our conversation:

What attracted you to your current role at Carlyle?

Rather than being in an arm’s-length advisory role, I now get into more of the details of implementation. I work directly to support sustainability leads in a broad range of companies, helping them prioritize among business goals, crystallize sustainability strategies and, most importantly, execute on a lot of different ideas. Also, as Carlyle is an owner of companies in many countries and industries, I have the opportunity to understand how aspects of sustainability play out differently across the globe. In short, it is a tremendous platform for influencing corporate sustainability.

What are you and Carlyle particularly proud of in this year’s report?

This is the first year that we have designed the report to align with the types of value creation we typically see, such as customer satisfaction, brand equity, operational efficiency and workplace strength. This year’s report moves beyond operational efficiencies into these other key drivers for companies.

What does Carlyle see as the value of ESG management for its business? How do you quantify that value? What form is that taking, both for Carlyle and its portfolio companies?

We have examples across these four ways that ESG management connects to value creation (customer satisfaction, brand equity, operational efficiency and workplace strength). A great example related to both customer satisfaction and brand equity comes from a portfolio company that quantified its sales increase for greener products. Their primary customers, mainly hotels, were requesting green products, so the company invested in this area, which paid off in increased sales – a clear win-win. Read more

EDF Climate Corps Continues to Drive Results for Private Equity Firms

By: Michael Reading / Thu, Dec 11, 2014 9:30 AM

The results are in. As my colleague Victoria Mills wrote recently, this year’s cohort of EDF Climate Corps fellows found $130 million in potential energy savings across 102 organizations.

Among the engagements, 12 fellows worked with private equity firms and portfolio companies on a diverse set of projects. Each engagement offers its own story, but we’d like to showcase a few examples demonstrating the value the Climate Corps program can bring to firms of all sizes and at all stages of understanding of energy management.

Energy audits and retrofits for a major manufacturing company

ami Hellman & Friedman’s portfolio company Associated Materials, which specializes in exterior building products, hosted two fellows this past summer, its first year with the EDF Climate Corps program.

Fellow Karunakaren Muthumani Hariharan audited two of the firm’s 11 manufacturing locations to identify opportunities for energy efficiency, including lighting upgrades, process equipment upgrades and manufacturing process modifications. He suggested improvements with potential net present value savings greater than $1.4 million and reductions of greenhouse gas emissions by approximately 2,700 tons per year. Hariharan also proposed funding the energy efficiency projects through a new Green Energy and Sustainability Fund.

Krishna Chaitanya Vinnakota analyzed Associated Materials’ total expenditure on energy, over $15 million, and focused on energy saving opportunities in the company’s supply centers, including an approach that could result in energy expenditure savings of 20 to 50 percent in some supply centers. He also suggested strip doors as a simple but effective way of conserving energy during winter. It’s a project that could save the approximately half a million dollars per year if rolled out across the company’s 125 supply centers and 11 manufacturing plants. Read more