Kohlberg Kravis Roberts & Co has a well known program for its portfolio companies. The firm says on its website that it signed on in 2009 to the globally recognized voluntary framework of the United Nations-backed Principles for Responsible Investment, and it helped lead the development of the Private Equity Growth Capital Council’s “Guidelines on Responsible Investment.”
TPG Capital also has a strong program, although less publicized, Malk said, while The Carlyle Group LP and The Blackstone Group LP also have staked out positions as early adopters, along with Doughty Hanson in London and Actis in emerging markets.
“The signal that they’re sending to the market is that we’re onto something here, we believe in it, and we’re proliferating it across our portfolio,” Malk said.
Investors are increasingly putting fund managers on notice that they will hold them responsible for ESG, which stands for environmental, social and governance issues, Malk said. Three-quarters of limited partners participating in a survey by the firm this summer said they inquire about ESG during fund manager selection, and a few have gone further. The California State Teachers’ Retirement System notably has published a list of 21 risk factors that it weighs to systematize ESG consideration.
While reputational issues rank high with LPs, who may have reasons beyond economics to avoid apparel factories in Bangladesh that may collapse or firearms makers whose weapons may be used in horrific crimes, fund managers have looked primarily at ESG as a way to save money, by reducing factory waste or making office buildings more energy efficient, Malk said. And that is a perfectly good place to start.
“In the U.S., GPs have focused first on cost savings,” Malk said. “EBITDA enhancement is an easy thing for the managing directors of these firms to support.”
But to the extent that fund managers adopt ESG principles, they may have greater opportunities than other business owners to leverage their significant scale of ownership, Malk said, because they have the ability to roll out ESG across an entire portfolio of 10 companies or more. And that also dovetails with managers’ growing emphasis on active management with a toolbox of techniques to improve the operations of portfolio companies, he said. “This is an extension of that same operational management.”