June 8, 2011
Stakeholder expectations, labor unions, conflict minerals, energy reduction, water scarcity. These terms are all commonplace in most of the sustainability or CSR events that I attend, but they are not the concepts usually discussed at a meeting for private equity firms–an industry which has historically been criticized for being ruthless, breaking up companies, and saddling others with debt. Yet last week, I had the opportunity to moderate a panel at the Responsible Investment Forum in New York hosted by the United Nations Principles for Responsible Investment and Private Equity International. There were more than 300 delegates in attendance, most of whom were either general partners (GPs) or limited partners (LPs) in major global private equity firms. More remarkable: most are actively engaged in ESG issues.
The speakers highlighted increasing expectations from investors, employees, consumers, and business partners as driving the integration of ESG issues into both due diligence and the management of portfolio companies by leading private equity players. A poll of the audience revealed that 67 percent of LPs care about how returns are made. And of the 33 percent who only look at returns, many argued that management of ESG issues still contributes to improved returns.
Open keynote speaker George Roberts, one of the founders of the private equity giant KKR, described how KKR views ESG as a critical component of their approach to long-term value creation. He talked about the more than US$900 billion currently invested in private equity and emphasized that in many ways the industry can actually make more impactful changes on environmental or social issues than many public companies or other investors. Because they control whom they invest in, they have the leverage to make change happen.
This falls in line with what BSR has seen in our work with private equity: When a firm focuses on specific ESG issues, it can have an immediate impact on the business practices of a large number of privately held firms across its portfolio. For example, we partnered with KKR on their Responsible Sourcing Initiative, which is a great opportunity to help shape sustainable sourcing practices across the diversity of their portfolio. In our experience, it is often easier for the individual companies to focus on making sustainable business decisions when they have an owner who is focused on longer-term value creation, rather than short-term quarterly returns.
I believe that investors, regardless of asset class, will continue to be a critical influence on corporate sustainability in the next few years. But I look forward to seeing whether and how the broader private equity sector embraces these issues as they can have an incredibly powerful impact.
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