Private equity funds are increasingly aligning their portfolios with environmental, social and governance (ESG) considerations. They are recognising the material value brought by sustainable businesses and social enterprises. Consequently, we have seen in the market the launch of Impact funds, along with ESG considerations being imbedded in investment decisions.
KKR is a leading global investment firm that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate and credit, with strategic partners that manage hedge funds. Here, Elizabeth Seeger, Director of Sustainable Investing at KKR, discusses what the increased focus on ESG means for the firm at a practical level and what it is doing to help address some of the greatest challenges of our time.
How long has KKR been focused on sustainable/responsible investing for?
It’s been over a decade since we formally began our responsible investment journey and developed a team and started building resources. We announced a partnership with the Environmental Defense Fund (EDF) – a US-based non-profit organisation focused on finding solutions to environmental problems – in 2008 and we have been building on our lessons learned ever since.
The ’Green Portfolio’ partnership with EDF—now called the Green Solutions Platform—was set up to measure and improve the environmental performance of companies across our portfolio. As part of that, we committed to developing a set of analytic tools for companies to use to assess and track cost-effective improvements on a series of environmental metrics. In 2008, the partnership was the first of its kind between a private equity firm and an environmental organisation; we wanted to bring the rigorous approach of private equity management to the area of environmental performance.
What does that practically mean? How do you integrate ESG throughout your portfolio?
Honestly, it’s always a bit of a moving target and we’re always seeking to evolve and to do more. As it relates to our private equity strategies, in the past decade we have engaged with hundreds of companies across various geographies and asset classes on issues ranging from environmental impact and responsible sourcing to worker safety and employee wellness, among many others. We have expanded our diligence practices and reporting processes, responded to countless investors and helped shape a smarter way forward for our firm and, hopefully, our industry. In general, we are committed to the thoughtful consideration of relevant ESG issues throughout the investment process in a way that is integrated and materiality-driven.
In 2018, you launched an Impact strategy? What drove this decision?
As I’ve mentioned, KKR has put in place strategies for thoughtfully managing ESG and stakeholder issues as a way to reduce risk and create sustainable value. We have also invested in companies where the core business model, product or service provides a solution to an ESG-related challenge and produces strong financial outcomes alongside positive impact. We have made more than 30 such investments totaling over USD 5.5 billion in KKR Fund equity since 2010.
After seeing many investment opportunities around these themes in the lower middle private equity market – a corner of the market that we believe has been underserved – in 2018 we launched KKR Global Impact, which is an impact investing business focused on tackling problems across the globe where KKR operates. By creating a dedicated strategy, we are better positioned to identify great opportunities, particularly in the lower middle private equity market, and to help these sustainable businesses grow.
What measurement does KKR use to measure the impact on its investments?
We’re committed to measuring and reporting the impact of KKR Global Impact in a manner that is transparent and leverages established frameworks. For this strategy, we evaluate, measure and track each portfolio company’s contributions to one or more of the United Nations Sustainable Development Goals using indicators defined by third-party reporting frameworks wherever possible. We work with the management teams of portfolio companies to design and implement the appropriate processes to gather the necessary data. In addition, as part of our effort to align with credible third parties, in 2019 we became founding signatories of the Operating Principles for Impact Management, developed by the International Finance Corporation, part of the World Bank Group. We intend to measure and communicate our progress toward aligning with these principles.
What do you see as the main barriers to further integrate ESG?
Our work is always evolving to keep up with emerging trends and expectations. Even today, there’s a lack of information for investors to make decisions, at least partly driven by companies and investors not knowing what is most important and where to get and interpret that data. This is one reason we have worked to integrate the market-driven standards of the Sustainability Accounting Standards Board in our processes. There’s more work to do to get to the point where we have all of the information we all need.
You can play an important role in helping to reduce carbon emissions. What are you doing in this area?
We measured our own emissions in 2019 and are working on strategies for how to manage that going forward. We have also worked for many years to support our portfolio companies’ efforts to manage and reduce emissions and are currently working on evaluating additional strategies aligned to the Task Force on Climate-related Financial Disclosure. One of the things we’ve done to date is launch the KKR Eco-Innovation Award to encourage and reward KKR portfolio companies for innovative, environmentally-beneficial projects or initiatives that create business value.
Have you seen any trends from your LPs you would like to highlight in regard to this agenda?
We have learned a lot in partnership with our investors over the past 10 years and appreciate their ongoing engagement and ideas, such as the ones we get through our partnership with BNP Paribas. I think that LPs have a unique perspective and ability to educate their investment managers on what practices they have seen that are effective. We are always open to learning about proven practices and partnering with others.
For more on KKR’s ESG strategy, visit kkresg.com