Even though credible sustainability initiatives serve as an engine of value creation, there are still critics who claim such efforts are more about public relations. Yet several prominent private equity firms -- known for their rigorous focus on producing returns for investors -- are emerging as sustainability leaders, particularly when it comes to integrating sustainability into investment decisions and management.
So how do leading private equity firms apply sustainability to generate and protect value and what can other companies learn from that?
Through BSR’s work with private equity firms, we have identified five practices that highlight the potential for lagging firms to catch up, for leading firms to take bolder steps, and for companies in all sectors to realize the value of sustainability.
These practices are especially important in light of questions that have been raised recently during the U.S. presidential race about the role and responsibility of private equity firms in the economy. It is timely to identify how private equity can integrate sustainability and stakeholder considerations to enhance value, as well as how the industry can engage with other sectors to create a more sustainable global economy.
1. Think holistically about value. Leading private equity firms think beyond immediate dollar returns to consider how managing environmental, social, and governance (ESG) issues can protect and build value. Kohlberg, Kravis, and Roberts (KKR) cofounder George Roberts has noted that his firm’s sustainability initiatives help the company recruit and retain talented employees. KKR also looks outward to build sustainable companies and brands. The firm’s Responsible Sourcing Initiative -- which BSR collaborates on -- reviews and enhances sourcing practices across the firm’s portfolio to help companies manage risk and strengthen supplier relationships.
2. Go beyond the short term. The average amount of time investment funds typically hold a stock has plummeted in recent decades, with some estimates measuring the time in seconds. Many companies chiefly measure their own progress in quarters. In contrast, private equity firms might hold investments and influence companies for several years. This helps the companies in a private equity firm’s portfolio make longer-term investments in programs like supply chain responsibility or energy retrofits that might not pay off for two or three years.
But there are clear financial and sustainability benefits for companies willing to commit to programs for the medium and long term: Since 2008, KKR’s Green Portfolio program has saved $365 million and has avoided 810,000 metric tons of greenhouse gas emissions, 2.2 million tons of waste and 300 million liters of water.
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