Are Private Equity Firms the Next Environmental Crusaders?

Are Private Equity Firms the Next Environmental Crusaders?

Image CC licensed by Flickr user Jeff Kubina

What do mattress maker Sealy Corp., discount retailer Dollar General and consumer guides publisher Primedia all have in common?

They're all private equity-owned and have adopted new, environmentally sound business practices that deliver millions of dollars in annual savings. 

Given the turbulent ride the financial services sector has endured over the past few years it seems counter-intuitive that anyone in the sector would be devoting special attention to environmental matters.

The private equity (PE) industry has been beset with multiple issues, including constrained access to capital, overleveraged portfolio companies, a paucity of public market exits, the tax treatment of carried interest under scrutiny and growing calls by LPs for greater transparency. So it would appear that the industry is a particularly unlikely candidate for embracing new thinking on environmental matters. {related_content} That is, however, precisely what has happened.

When we here at Capital C Partners first started working with Environmental Defense Fund (EDF) on its Green Returns program more than six months ago, we reached out to a cross-section of our contacts in the PE world to get a sanity check on just how receptive investment professionals might be to the concept that environmental measurement and management practices could deliver tangible bottom line value.

The feedback was consistently equal parts of interest, skepticism, a need to see supporting data and 'This just isn't a priority when I'm worrying about potential covenant breaches...' The final kicker from several of our PE friends was 'My institutional investors really don't care about this stuff, whatever they publicly say -- it's all about the returns.' 

Fast forward to today: Kohlberg Kravis Roberts & Co. (KKR) and The Carlyle Group (Carlyle), the world's two largest private equity firms by assets under management, now both have dedicated programs specifically designed to ensure that environmental best practices are hard-wired into their processes. KKR's Green Portfolio investment management program now extends across 20 percent of its global portfolio and Carlyle's EcoValuScreen due diligence tool will be applied to all new investments in its U.S. and European buyout funds.

EDF is now in conversation with many of the world's leading PE firms about Green Returns and the conversations have moved from "Why should I do this" to "How do I do this?"

This change has not happened overnight (EDF's first PE collaboration took place back in early 2007), and there's undoubtedly still much to be done. But private equity leaders such as KKR and Carlyle, through their collaborations with EDF, are providing the pathway and proof that many in the industry needed to see in order to take that first important step towards incorporating environmental management practices into their business processes and those of their portfolio companies.

This video from The Deal.com – featuring conversations with EDF, Carlyle, KKR and Sealy -- makes it clear that Green Returns now has all the hallmarks of an emerging industry trend -- one with the potential to live up to EDF's ambition that it become a new best practice for the entire private equity industry.

Ian Bailey is managing partner of Capital C Partners, a strategic communications firm. This article also appeared at EDF's Innovation Exchange.

Image CC licensed by Flickr user Jeff Kubina.