Private equity funds are finding that incorporating ESG goals into their game plan boosts company value.
By Andrew Malk, Managing Partner, Malk Sustainability Partners
Private equity as an investor category is fairly new, growing rapidly from the leveraged buyout firms formed in the 1980s. Today these investment organizations, which amass capital to buy large interests in corporations, own the companies that employ roughly one in 10 Americans.
Private equity fund managers, referred to as general partners or ‘GPs,’ have at times been surrounded by controversy with a reputation for being highly pragmatic in buying companies and realizing big returns through financial engineering or operational restructuring.
Private Equity Firms Taking Account of ESG
It is easy to assume that management of triple bottom line issues, often described in finance as environmental, social, and governance (ESG) matters would be of little interest to such financiers. However, GPs around the world are beginning to adopt ESG in a context they are familiar with: value creation.
Active value creation is now fundamental to providers of private capital. A recent survey by tax and assurance consultancy McGladrey, for example, found that 70 percent of firms now implement a “100 day plan” to realize operational cost savings and other strategic benefits shortly after acquiring a company. Once the domain of only the most active funds, 100 day plans and other approaches to operational improvement are now commonplace.
ESG Management Creates Value and Profit
An increasing number of funds now see ESG management, and environmental management in particular, as a means of creating value. In a recent study which our group, Malk Sustainability Partners, conducted in collaboration with the Environmental Defense Fund (EDF), 69 percent of responding GPs noted that environmental issues are material to investments from a cost savings perspective and 77 percent cited materiality from a risk management perspective.
In short, funds are increasingly confirming the perception that they can profit by focusing on sustainability.
How can funds profit from ESG management? GPs are doing so in several ways.
Leveraging Eco-Efficiency Efforts As A Method Of Driving Operational ‘Cost-Outs’
Funds are engaging management of their portfolio companies to focus on savings which can be realized by increasing the energy efficiency of operating areas such as facilities, manufacturing processes and logistics while identifying other cost saving opportunities in areas such as packaging or waste management.
For instance, private equity fund TPG collaborated with portfolio company Caesars Entertainment on energy and waste management initiatives, which have resulted in $17 million in annual run-rate savings across 110 projects and a 33 percent reduction in trash at two properties.
A Green Portfolio Program
Another interesting example of eco-efficiency is KKR’s Green Portfolio Program. This initiative, which began within a small subset of the fund’s portfolio as a collaborative effort with EDF, has expanded across 13 companies between 2008 and 2011 and resulted in $365 million of avoided costs.
At the same time, Green Portfolio initiatives have avoided over 800,000 metric tons of greenhouse gas emissions, two million tons of solid waste, and 300 million liters of water.
About Andrew Malk
Andrew Malk is Managing Partner of Malk Sustainability Partners, a specialty management consultancy, which guides funds and businesses in developing profitable corporate environmental programs. MSP has particular expertise in engaging private equity funds.