ESG taking the spotlight among alternatives heavyweights

Updated with correction

Alternative investment managers are getting serious about environmental, social and governance investing.

Executives at alternative investment manager KKR & Co LP have expanded their ESG program from cutting energy costs at portfolio companies — including changing types light bulbs — to investments in solar energy companies.

Since 2008, KKR's program to improve portfolio companies' eco-efficiency resulted in a total of $1.2 billion in cost savings, according to the firm's July ESG report, which covers 2015.

The combined result avoided 2.3 million metric tons of greenhouse gas emissions, 6.3 million tons of waste and 27 million cubic meters of water use, the report noted.

New York-based KKR is not the only firm to expand its ESG program.

Carlyle Group LP's 2016 ESG report, the latest of its annual reports and also covering 2015, noted carbon emissions was a notable theme last year in that customers of a number of its 200 portfolio companies asked for information on the companies' sustainability practices, including reporting to the Carbon Disclosure Project.

In 2015, 17 of Carlyle's portfolio companies reported data to the CDP, which gathers information on carbon and climate change risk.

Over the past year, all portfolio companies in which Carlyle has a controlling interest reviewed their operations in accordance with Carlyle's responsible investment guidelines, which the firm developed eight years ago.

Carlyle's last two reports have highlighted nearly 30 examples — representing 20% of the firm's corporate buyouts — of sustainability adding value to portfolio companies.

Alternative investment firms are taking ESG more seriously these days, noted David Rubenstein, a co-founder and co-CEO of Washington-based Carlyle Group while speaking at the Pension Bridge Private Equity Exclusive Conference in Chicago last month.

Investors will typically favor managers that are concerned with ESG, Mr. Rubenstein said, adding, “GPs that are not serious about ESG will suffer.”

At Carlyle, firm executives begin evaluating ESG issues early in the process to buy a company, and that evaluation continues through its ownership. Then environmentally related operational improvements — such as replacing boilers, which improves a company's carbon footprint — can make the portfolio company more valuable at exit.

At KKR, its Green Solutions Platform, one of its ESG programs, involves 28 portfolio companies with 30 different projects across four asset classes, noted Elizabeth Seeger, director of public affairs who oversees KKR's ESG program, the Green Solutions Platform. KKR has a total of 115 private equity portfolio companies.

Most recently, on Aug. 11, KKR executives created an Eco-Innovation Award for KKR's portfolio companies as part of its Green Solutions Platform, which “has expanded from eco-efficiency to eco-innovations and eco-solutions,” said Ms. Seeger.

The purpose of the award is to reward portfolio companies for projects or initiatives that are innovative, help the environment and create business value.

“We have expanded the types of companies we are including in the (ESG) program,” she added.

For example, KKR's infrastructure business has invested in renewable energy while its global private equity team is investing in companies that are tackling issues of food safety.

Examples of food safety investments include KKR's 2014 investment in Sun Drop Farms Holdings Ltd., a Sydney-based agribusiness that grows its crops in greenhouses using salt water and solar energy to help address water and food security issues in arid regions, she said.

“Every year I am impressed by the amount of momentum and growth in the program,” Ms. Seeger said. “I am pleasantly surprised by the amount of impact and growth that we have had.”

KKR launched its ESG efforts in 2008 with a green portfolio program in which firm executives helped portfolio companies drive cost savings through energy reduction, she explained.

“Part of KKR's culture is being innovative,” she said. “I've been here seven years and I believe that KKR is committed to this work and (the program) will continue to evolve in the future.”