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March 27, 2012
Private Equity Increases Sustainability Focus
    by Robert Kropp

Programs encouraging the uptake of environmental, social, and corporate governance considerations by private equity firms include the Environmental Defense Fund's Green Returns initiative.

The uptake of sustainable investment strategies by alternative investment funds such as private equity has increased in recent years, as a report published in October by US SIF: The Forum for Sustainable and Responsible Investment found.

By 2011, according to the report, 233 private equity and venture capital funds with $33.9 billion in assets were incorporating environmental, social, and corporate governance (ESG) criteria into investment strategies. A number of factors contributed to the uptake of ESG considerations by private equity funds; according to Enviro nmental Defense Fund (EDF), a nongovernmental organization (NGO) that seeks market solutions to environmental problems,"Just a few years ago it was hard to find a PE firm that reported publicly on much of anything."

In early 2009, the US-based Private Equity Council (PEC), adopted investment guidelines that address ESG issues in accordance with the United Nations Principles for Responsible Investment (PRI). A few months later, PRI's Steering Committee on Private Equity developed Responsible Investment in Private Equity: A Guide for Limited Partners.

EDF launched its Green Returns initiative in 2008, when it joined with Kohlberg Kravis Roberts (KKR) to develop the private equity firm's Green Portfolio Program. To date, 13 of KKR's portfolio companies have achieved savings of $365 million in operating costs through reductions totaling 810,000 metric tons of greenhouse gases, 2.2 million tons of waste, and 300 million liters of water.

One year ago, EDF collaborated with the Carlyle Group, another private equity firm, in the creation of EcoValuScreen, a "business review process that unlocks opportunities for operational improvement and value creation through enhanced environmental management at potential investments."

"EcoValuScreen expands environmental due diligence beyond its traditional focus on downside risk to identify upside opportunities for operational enhancements that will lead to better environmental and financial performance," EDF stated. The framework has been applied to several of the Carlyle Group's US investments thus far, and has identified a number of net present value (NPV) positive opportunities to improve environmental performance.

Interviewed this week in the Wall Street Journal, David Rubenstein of the Carlyle Group described how the incorporation of ESG factors in its due-diligence process not only reduced investment risk, but provided opportunities for outperformance as well.

"In recent years I've noticed that investors aren't interested only in rates of return," Rubenstein said. "We understand that investors are interested in things that are more socially responsible."

"In the old days when we would buy a company we would say, 'What are the risks we're going to take in the environment? What are the risks we're going to take in the energy area?'" he continued. "Now we say, 'How can we improve these areas and how can we actually make money doing this?'"

The number of PRI signatories "with exclusive or significant activities in the private equity asset class" now totals over 100. Twelve of the signatories, including KKR, are based in the US; PRI's most recent list of signatories does not include the Carlyle Group. However, the firm's 2010 Citizenship Report states that its Guidelines for Responsible Investment, developed in 2008, draw on "a variety of existing internationally recognized norms," including PRI.


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