As Fund Investors Demand More, PE Tries To Become More Responsible
By Jonathan Shieber.
Private equity firms are trying to be more responsible with their business practices, thanks to pressure from their limited partners and a need for funds to differentiate themselves in a crowded market, according to investors and industry professionals.
Increasingly private equity firms are writing in environmental, social and governance clauses into their portfolios as a way to woo investors and win profits, as pension fund investors demand more for their money.
By working with more energy-efficient companies and practicing less wasteful corporate practices, firms can improve the bottom line in their portfolios, according to data from the Environmental Defense Fund, a non-profit working with firms like Kohlberg Kravis Roberts & Co. and Oak Hill Capital Partners.
In some cases, limited partners are demanding firms provide annual performance reviews as well as environmental social and governance standards, according to Andrew Malk, managing partner of Malk Partners said on a September conference call. If those standards are not met, limited partners can reserve the right to withhold capital as part of the investment agreement, Mr. Malk said.
According to a survey by Malk Partners and the Environmental Defense Fund published in late September, seven of the 13 general partners surveyed said their environmental, social, and governance programs went beyond basic environmental compliance to help create business value, and 12 out of 13 expect to have a greater focus on those issues going forward.
“Funds, even in their pursuit of their very-focused fiduciary responsibility, are taking into account the larger impact of their capital flows and their investment decisions,” Mr. Malk said. “The primary driver has been the growing interest and attention to this issue from limited partners.”
Many funds see there’s a lot of money to be wrung from increasing efficiency among portfolio companies. For instance, EDF began a relationship with Oak Hill less than a year ago, and are now running pilot tests of suggested retrofits that could eventually yield more than $700,000 in annual energy cost savings and reduce carbon dioxide output by 2,900 metric tons.
KKR has been working with EDF since 2008. There, the environmental non-profit helped the private equity giant develop a system for the 60 companies in the firm’s Green Portfolio Program. According to an interview with Tom Murray, managing director with EDF’s Corporate Partnerships Program, “[KKR’s] efforts have reduced $350 million in operating costs since 2008.”
According to Mr. Murray, the focus on environmental issues; and improving efficiencies around energy use, water use, and waste is no longer something that needs to be justified to private equity investors. Instead, these are now issues that private equity firms are bringing up themselves with their portfolio companies.
“This is a real lever for creating value,” said Murray. “And interest from LPs is growing.”
– View original posting on The Wall Street Journal