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The​ ​Environment​ ​and​ ​Private​ ​Equity:​ ​We​ ​​Can ​Do​ ​Better

By Charlene Pedrolie

In​ ​today’s​ ​economy,​ ​consumers​ ​are​ ​increasingly​ ​aware​ ​of​ ​how​ ​their​ ​investments​ ​-​ ​large​ ​and small​ ​-​ ​will​ ​impact​ ​the​ ​lives​ ​of​ ​their​ ​children​ ​and​ ​grandchildren.​ ​The​ ​environmental,​ ​social​ ​and governmental​ ​(ESG)​ ​returns​ ​on​ ​our​ ​investments​ ​are​ ​becoming​ ​as​ ​important​ ​as​ ​financial​ ​returns. Mirroring​ ​individual​ ​investment​ ​at​ ​a​ ​much​ ​grander​ ​scale,​ ​private​ ​equity​ ​(PE)​ ​investors​ ​are grappling​ ​with​ ​a​ ​similar​ ​sense​ ​of​ ​increased​ ​urgency​ ​to​ ​include​ ​ESG​ ​considerations​ ​as​ ​part​ ​of their​ ​portfolio​ ​building​ ​efforts.​ ​Gone​ ​are​ ​the​ ​days​ ​of​ ​making​ ​top​ ​and​ ​bottom​ ​line​ ​deals.​ ​PE​ ​is trending​ ​away​ ​from​ ​its​ ​dark​ ​days​ ​of​ ​quick​ ​turnaround​ ​investments;​ ​those​ ​with​ ​little​ ​to​ ​no research​ ​on​ ​ESG​ ​impacts;​ ​with​ ​demand​ ​for​ ​responsible​ ​investing​ ​at​ ​an​ ​all​ ​time​ ​high.​ ​The​ ​fact remains,​ ​however,​ ​that​ ​is​ ​PE​ ​could​ ​be​ ​doing​ ​more​ ​to​ ​ensure​ ​it​ ​is​ ​protecting​ ​the​ ​environment​ ​and tracking​ ​progress​ ​made.

A​ ​2012​ ​​PwC​ ​survey​​ ​of​ ​the​ ​PE​ ​industry​ ​found​ ​that​ ​94​ ​percent​ ​of​ ​respondents​ ​believed​ ​that​ ​ESG activities​ ​could​ ​create​ ​value.​ ​However,​ ​that​ ​same​ ​survey​ ​found​ ​that​ ​47​ ​percent​ ​of​ ​PE​ ​houses​ ​did not​ ​publicly​ ​report​ ​on​ ​their​ ​ESG​ ​programs​ ​or​ ​their​ ​responsible​ ​investing​ ​strategies,​ ​and​ ​50 percent​ ​did​ ​not​ ​have​ ​policies​ ​guiding​ ​ESG​ ​and​ ​responsible​ ​investing.​ ​So​ ​where​ ​does​ ​that​ ​leave us​ ​as​ ​PE​ ​investors​ ​committed​ ​to​ ​environmental​ ​protection?​ ​PE​ ​must​ ​go​ ​back​ ​to​ ​basics​ ​and consider​ ​the​ ​following​ ​in​ ​the​ ​coming​ ​year:

Charlene Pedrolie Pondering Financial Statements in The Open Fields

Creating​ ​Partnerships​ ​With​ ​Environmental​ ​Experts​.

As​ ​PE​ ​investors,​ ​our​ ​experience rests​ ​more​ ​in​ ​understanding​ ​the​ ​financial​ ​risks​ ​of​ ​investing,​ ​and​ ​less​ ​in​ ​the​ ​full​ ​picture​ ​of long-term​ ​environment​ ​impact.​ ​The​ ​tendency​ ​for​ ​PE​ ​houses​ ​to​ ​be​ ​lean​ ​in​ ​their​ ​staffing means​ ​we​ ​must​ ​find​ ​experts​ ​-​ ​academics,​ ​advocates​ ​and​ ​researchers​ ​-​ ​that​ ​can​ ​help guide​ ​our​ ​investment​ ​strategies.​ ​A​ ​gold​ ​star​ ​star​ ​example​ ​of​ ​this​ ​kind​ ​can​ ​be​ ​found​ ​in​ ​the Carlyle​ ​Group’s​ ​partnership​ ​with​ ​the​ ​Environment​ ​Defense​ ​Fund.​ ​The​ ​two​ ​agencies, along​ ​with​ ​a​ ​third​ ​party​ ​consulting​ ​firm,​ ​created​ ​the​ ​​EcoValuScreen​,​ ​a​ ​framework​ ​which helps​ ​PE​ ​professionals​ ​understand​ ​where​ ​environmental​ ​liabilities​ ​and​ ​opportunities​ ​can be​ ​found​ ​within​ ​potential​ ​investments.

Designing​ ​Specific,​ ​Guiding​ ​Investment​ ​Practices​ That​ ​are​ ​Focused​ ​on Environmental​ ​Responsibility

​Adopting​ ​a​ ​systematic​ ​approach​ ​to​ ​environmentally sound​ ​investing​ ​can​ ​prevent​ ​the​ ​tendency​ ​to​ ​fall​ ​back​ ​on​ ​old-school,​ ​bottom​ ​dollar practices​ ​when​ ​making​ ​investments.​ ​When​ ​talking​ ​about​ ​motivations​ ​for​ ​social​ ​and environmental​ ​impact,​ ​David​ ​Hutchinson,​ ​the​ ​former​ ​head​ ​of​ ​UK​ ​investment​ ​banking​ ​at Dresdner​ ​Kleinwort,​ ​who​ ​now​ ​runs​ ​Social​ ​Finance,​ ​a​ ​non-profit​ ​“set​ ​up​ ​to​ ​improve​ ​third sector​ ​access​ ​to​ ​private​ ​financing,”​ ​told​ ​​The​ ​Guardian​​ ​that,​ ​“what​ ​you​ ​need​ ​to​ ​find​ ​is capital​ ​that​ ​values​ ​the​ ​social​ ​impact​ ​being​ ​delivered​ ​and​ ​doesn’t​ ​just​ ​tolerate​ ​it.​ ​[This]​ ​is more​ ​than​ ​an​ ​extension​ ​of​ ​philanthropy.”​ ​To​ ​be​ ​clear,​ ​a​ ​first​ ​strong​ ​showing​ ​of commitment​ ​to​ ​ESG​ ​investing​ ​could​ ​begin​ ​with​ ​PE​ ​firms​ ​signing​ ​the​ ​​United​ ​Nations’ Principles​ ​for​ ​Responsible​ ​Investing​​ ​(PRI).​ ​Launched​ ​in​ ​April​ ​2006,​ ​the​ ​PRI​ ​is​ ​an independent​ ​set​ ​of​ ​guidelines​ ​that​ ​encourages​ ​investors​ ​to​ ​invest​ ​responsibly​ ​to enhance​ ​and​ ​manage​ ​its​ ​ESG​ ​risks.​ ​There​ ​are​ ​currently​ ​about​ ​1,800​ ​signatories​ ​to​ ​the PRI.

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Bar Graph of Charlene Pedrolie

Assign​ ​Financial​ ​Value​ ​To​ ​Environmental​ Outcomes

Charlene Pedrolie believes it’s​ ​important​ ​to​ ​note​ ​that​ ​given the​ ​four​ ​to​ ​six​ ​year​ ​shelf​ ​lives​ ​of​ ​PE​ ​investments,​ ​it​ ​can​ ​be​ ​difficult​ ​to​ ​assign​ ​value​ ​to, track​ ​and​ ​share​ ​longer-term​ ​impacts​ ​on​ ​the​ ​environment.​​ ​​PwC​ ​found​ ​that​ ​with​ ​enough data,​ ​it​ ​is​ ​possible​ ​to​ ​establish​ ​“a​ ​link​ ​between​ ​ESG​ ​activities​ ​and​ ​intangible​ ​value.”​ ​To offer​ ​support​ ​in​ ​both​ ​assigning​ ​financial​ ​value​ ​to​ ​ESG​ ​factors​ ​and​ ​to​ ​share​ ​examples​ ​of PE​ ​ESG​ ​efforts,​ ​the​ ​INSEAD​ ​Global​ ​Private​ ​Equity​ ​Initiative​ ​​released​ ​a​ ​report​​ ​in​ ​2014​ ​for PE​ ​professionals​ ​interested​ ​in​ ​developing​ ​their​ ​own​ ​ESG​ ​policy​ ​frameworks.​ ​The​ ​report also​ ​case​ ​study-like​ ​overviews​ ​of​ ​PE​ ​firms​ ​and​ ​their​ ​portfolio​ ​companies​ ​who​ ​are​ ​sharing the​ ​responsibility​ ​of​ ​managing​ ​ESG​ ​considerations.

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