Adding Green, Adding Value

David Snow, Privcap: Today, we’re going to be talking about adding green, adding value. We’re going to be taking a deep dive into the ways that private equity firms are hoping to make money also to control the risk and to be better citizens of the world through environmentally sustainable strategies.

Luckily, we have an all-star cast of experts today to talk about this topic and I’d like to introduce all of them to you. Elizabeth Seeger is from Kohlberg Kravis Roberts. Audrey Davenport is from the Environmental Defense Fund. Adam Black, from Doughty Hanson & Company, and Scott MacLeod, from Global Environment Fund.

Welcome to all of you – thank you for joining Privcap today.

So today, we’re talking about adding green, adding value. I guess we could start out by making the point that, if you were walking down the street and you grabbed a random person and you said, “Okay, when I say private equity to you, what do you think of?” they probably don’t think of environmental investing first, right? They probably think of a number of other things. But maybe we could start by just talking about how is it that we got to the point that private equity firms became interested in environmental strategies and trying to help their portfolio companies make it a bit further down the road as far as being sustainable.

And so, you know, Elizabeth at KKR, maybe you could talk about a bit about the background of how KKR got to the point where they were even interested in this topic.

Elizabeth Seeger, KKR: Absolutely. I think a lot of people don’t realize that private equity firms are long-term investors, right? And our interests are aligned with the interests of our portfolio companies and their long-term performance. So, if you think about globalization, natural resource scarcity, growing access to information, changing stakeholder expectations, it’s really not a surprise that we are starting to think very seriously about environmental issues and other issues when we make our investments. So it really made sense, in 2008, when we launched our partnership with the Environmental Defense Fund – the green portfolio program – that we focused on these issues and started to highlight the linkages between good environmental performance and good business performance and by doing so, we’ve actually been able to enhance the performance of the companies in which we invest, and also to convince others to start taking this issue pretty seriously.

Snow: And just really briefly you mentioned the green portfolio program. What is that?

Seeger: Well, the green portfolio program started as a partnership with Environmental Defense Fund in 2008 and it started, actually, even before then in the acquisition of TXU, where KKR collaborated with EDF and others to create environmental goals for the TXU management at the time as part of the acquisition. That company is now known as EFH, Energy Future Holdings. That partnership created a model for us, where we partner very carefully with our stakeholders and subject-matter experts and our portfolio companies to find opportunities to create shared value. And so we’ve been doing that across the portfolio now.

Snow: So we’re very lucky. We also have someone from the Environmental Defense Fund, Audrey Davenport. So we know that private equity firms are finding the environmental issue for a variety of reasons. But can you talk about what was it that the EDF found to be interesting about private equity, in particular?

Davenport: Sure. We are a leading environmental non-profit organization and we have a long history of working with innovative companies to help them identify ways to both improve financial and business performance and capture environmental results and improve their environmental performance. And we’ve done that with partners like Wal-Mart and Citigroup and FedEx, but we certainly hadn’t thought about working with the private equity industry until we engaged with KKR in 2007 over the acquisition of TXU. And that created this opportunity to actually have a conversation about how we think about engaging with private equity firms, specifically KKR, more systematically.

And that started a conversation where we started to explore what that might look like, how we might work systematically together. And the outgrowth of that was the green portfolio project. But more importantly for us, the more we learned about private equity, the more excited we got, that this was actually a great industry and KKR was a great partner, by which to pursue our goals. We’re looking at an industry that has a relatively long hold time for their companies, five to seven years. At the time in 2008, there was a growing focus on operations, slightly shifting market conditions, increasing interest from LPs and others that private equity firms be transparent, and so for us that was this convergence of powerful influences that made environmental strategy something that could really, really step in and play a role there to decrease costs and improve efficiency and increase returns to investors.

So we developed this theory that that was important and we’re working with KKR and others – The Carlyle Group – to sort of prove out that theory that there’s a role for the environment.

5:08

Snow: And of course, private equity firms own lots of different companies and they exert an influence over those companies. And so, is that part of the attraction, that if they do something right with one company, they can apply those tricks to the other ones?

Davenport: Yes, thank you. I mean absolutely, when we think about our work with leading companies, we’re looking for leverage and scale in every relationship. And. . . working with a private equity firm, that delivers exactly what we’re looking for – the leverage and scale, a way to reach a significant number of companies that as a relatively small non-profit, we could never reach on our own. And so, it’s a great opportunity for us to reach a huge number of companies in diverse industries and to help the private equity firms spread best practices more quickly through the companies they hold.

The Sustainable GP

05:49

Snow: And Adam, you’re over from London. Thank you for making it to New York for this episode. But you’re not a private equity guy by background or training. You came into your firm, Doughty Hanson, in a different way. Can you talk about how it was that you had the opportunity to join a private equity firm and how they evaluated you and how you evaluated Doughty Hanson?

Adam Black, Doughty Hanson: Sure. Well, most of my career has been spent in industry or in consultancy. My background is in environmental science, environmental law and safety. Some fifteen years ago, I started working with a number of private equity firms, including Doughty Hanson, on environmental issues. But back then, the focus was very much on liabilities and risk management and due diligence. So it was all about risk rather than business opportunities.

Over that time, that interests, essentially, for the reasons which have already been expressed – growing interests from investors, the community at large – that interest did shift towards well what do you do with your companies once you own them. How can you improve your businesses and create value? That conversation led to me being invited to interview three and bit years ago. I think the culture at Doughty Hanson was very much, we are active owners; we would like to have someone look at these issues from a practioner’s perspective and engage with the companies, very much at a site level and go visit the factories that the companies operate and work with them very closely on a whole host of sustainability related issues.

Snow: Scott, as a long-time investor in companies that provide environmental solutions and environmental services, are you surprised to see mainstream private equity firms take such an interest in this topic or do you see this as sort of a natural evolution? What’s your viewpoint?

Scott MacLeod, GEF: Certainly, I am not surprised. The Global Environment Fund, where I work, has been investing for over 20 years in companies that offer solutions to the environmental challenges of the day. We invest in companies, really, of two types. One, companies that help other companies to improve their efficient use of raw materials and water and to reduce their carbon footprint and to address various environmental objectives that they set as part of their branding proposition.

Even more so, we invest in companies that help society to address the environmental objectives it has set for itself. This would be particularly related to environmental services, water, wastewater, solid-waste management, cleaner energy, alternative energy solutions, and sustainably managed natural resources. These are sectors that have historically, depending on the country and the period of economic growth in each country, have grown two to three times that of the underlying GDP of the countries in question, and therefore offer up great opportunities for relatively fast growth for the companies that are related to those.

So in sum, I am not at all surprised. There are great opportunities for investing in companies, both helping other companies to improve their environmental footprint as well as to help society at large, to address its broader environmental objectives.

Snow: And I would imagine that there is a growing awareness that if you are running a standard type of company, a company that was not born with an environmental mandate, that you can find new technology and services that actually can make a difference?

MacLeod: Absolutely, I think that awareness is increasing and I think you have heard it from all four of us here today. It is an awareness which is, I think, driven by the stakeholders of those companies but very quickly, at the operating level, becomes an opportunity to drive better bottom-line results through increased efficiencies, though better use of energy and water, and therefore by reducing the cost structure of companies that are in various industries or manufacturing.

Show Me The Money

10:14

Snow: Well, I’m glad that you mentioned bottom-line because what we want to talk about now is can you make any money in this. Someone who does not have a sustainable program or has not hired someone like Adam, they are probably wondering, all right, this is great, but show me the money. So I would like to hear from all of you about how you can actually makes changes to portfolio companies in a way that would actually increase their profitability, and therefore their value, and therefore the returns you deliver to your investors? Audrey, you’re someone who works with private equity firms, maybe you can walk us through some examples of this actually working and making people richer in addition to being happier?

Davenport: Sure, and I think its logical that there would be some skepticism around that. But more and more we are seeing a growing trend that is helping to alleviate a lot this skepticism that this is an uneasy marriage between environmental progress and increased profitability.

And we find that with the private equity firms that we work with, the conversation has really shifted in the last two to three years from convince us that this matters, convince us that there is an opportunity here to, okay, how do we implement, how do we capture some of these opportunities? And so for us, that is a big proof point, there are a tremendous number of opportunities around environmental strategy.

That said, there are a number of different opportunities and it depends on the firm and the nature of their portfolio and the type of opportunities they are looking for. For the most part, portfolio companies are finding benefits through increased efficiency, which can cut costs.

Snow: What kinds of efficiencies?

Audrey: Sure, you know we have worked with a number of portfolio companies at KKR that have found efficiency in their commercial lighting systems, in improving energy efficiency in their manufacturing operations, rerouting fleets more efficiently to cut fuel use, looking differently at waste steams and where we can cut waste and seeing where we can find revenue steams for reusable material. So it really runs the gamut, it is very operationally driven, the type of work we are doing.

Snow: Well, if possible, can we have an example? So Elizabeth, if KKR buys a company, and then what? Can you guide us through an example where you having delivered bottom-line results to one of the companies that KKR has either owned or co-owned with another private equity firm?

Seeger: We are lucky to have a number of examples under our belt in terms of how to improve both environmental performance and business performance. Some of our favorites, as Audrey was discussing, are the ones where we can actually have both a revenue and cost-savings impact.

One of the examples that we like to talk about a lot is the one of Dollar General, which is a retail organization with 9,000 stores across the United States, a number of distribution centers, a huge truck fleet. As you can imagine, a lot of their products are shipped in boxes. A couple of years ago, they realized that most of the waste that was going out the back of the store was good, clean cardboard. So they worked to create a recycling program where they collected the cardboard, kept it clean, shipped it back to their distribution center, bailed it, and sold it to the cardboard market. By doing that, they were able to reduce their waste management fees by about 50 percent, and then they were able to sell the cardboard to the market as I mentioned, and also make a revenue.

Now, that they have systematically applied that to their stores across the United States, they are actually using that revenue to pay for other recycling programs. So we see it growing over time. One of the other great things, about working from the private equity perspective, is that we are looking at the portfolio now and seeing where else we can take this lesson, this proven practice, and apply it other organizations that have a similar situation.

(14:10)

Snow: Ok, so how about truck fleets? So let’s say you got Dollar General which is delivering things and you got some other companies with truck fleets, how would you save money by working with those fleets in a systematic fashion?

Seeger: Sure, so as you have mentioned we have a number of companies with truck fleets. Sealy Corporation has a large truck fleet, US Foodservice, another organization in our green portfolio program, has a truck fleet. We find that there are a lot of shared opportunities. We have opportunities to improve routing through new technology, we have the ability to pack the trucks better so there are actually putting more product on each truck that goes in and out of the distribution center. All of these, in the green portfolio program, are able to shave off fuel use or miles driven. In both of those cases, we are able to track exactly how that affects the company in a financial perspective and we report that publically.

Snow: And of course, some case studies for these investments that you have made are going to be available to viewers of Privcap. In general, what kind of numbers are we talking about from, maybe, a percentage basis? Say, General Dollar, of the green initiatives, how much money was saved and maybe how much revenue was made?

Seeger: At Dollar General?

Snow: Yes, sorry I mean at Dollar General, if you have those figures handy.

Seeger: I dream about these numbers. So, yes I do have those handy. We have a whole website created around this program. Part of the reason we have done this is to inspire others to understand that there is this direct link between environmental performance and business performance. We have all of our numbers up there; all of our case studies are available up there. In 2008 and 2009, the first eight companies to report into the green portfolio program avoided $160 million in cost which we are associated with, 345,000 metric tons of CO2 emissions, 8000 tons of paper, and 1.2 million tons of waste, so a cost that the companies were able to see. Dollar General was a big part of that, certainly because their organization is so large. We saw a lot of impact coming from that organization.

Snow: So, I am interested to hear from you, Adam. You joined Doughty Hanson, you are now working with their portfolio companies. Are you helping Doughty Hanson’s investors make more money as a result of the work that you have done with their portfolio companies?

Black: Yeah, in a similar vein to Elizabeth. There are certainly some themes here. We have been working with companies to make them more efficient from an environmental perspective. Picking up on your conversation, whether that is related to power consumption, waste or water use. We have also been looking at how additional revenue streams might be generated either through new products or services, which may be more environmentally benign or ethical. We have also been looking at how improvements to the way companies are structured or managed from an environmental and safety perspective might also result in savings from reduced insurance cost, for example.

So over the last three years or so that I have been in the role, cost savings have largely been associated with being more efficient and adding revenue to businesses have amounted to some €50 million which I think is about $70 million*. We are also looking at some intangibles as well, how we can improve value and de-risk a portfolio by looking at possible reputational issues associated with what that business does, where it might operate, what issues might exist within the supply chain.

Snow: Can you give an example of when you went to a company, and you noticed that they were not practicing x-y-z best practice, and therefore you made a change. The change might have been something as mundane as turn your truck off or don’t idle for too long, something like that.

18:20

Black: There is a theme about trucks, so we will stick with that for a bit. One of our companies is a bus and coach operator in Spain. They have saved around about €1.2 million euros by being more efficient through their fuel use and fuel management program which has largely been achieved by drivers being trained to drive more defensively. A knock on an effect of that has been growing interest in what the company is doing by its customers. Its customer, are effectively, the regional, local government bodies. One of the requirements they have in order to provide our company with additional work streams and guarantee new routes to them in the future is that they are seen to be actively managing environmental and safety issues.

So it certainly has been a contributing factor to help secure additional business for that firm. But there are a number of examples where initiatives that companies in the portfolio have put into place have received praise and have been recognized by customers that they do business with which has only helped grow the businesses concerned.

Snow: And Scott, we are going to talk about the importance of brand and reputation next. But sticking to the bottom line theme, you must be, obviously, aware of corporations in general, understanding that they can save money and boost the value of their companies by adopting the very same products and services that your portfolio companies probably provide, right?

MacLeod: Right, so our perspective is a little different from what you have heard here today. We are investing in companies that offer products and services that help the traditional companies, such as Dollar General, to address the broader objectives of environmental sustainability. We do that both investing in companies that help companies as well as companies that help society at large. But focusing on companies that help other companies, an example would be, which is consistent some with what you just heard is a company called Cantaloupe in which we are a major shareholder, based in California. It has technology that helps the vending industry, and basically it enables vending companies to know at any given moment how many products they have in the vending machine. Surprising as it might be, traditionally, vending companies have no idea how many products they have in the vending machine.

Snow: They just send a guy to count potato chips?

MacLeod: Exactly, or they run out and lose a revenue-generating opportunity. They have standard truck routes with standards trucks that carry standards products that might or might not be what is needed for the set of vending machines on their route.

By use of this technology, the vending company can know exactly what is in which machine, what size of trucks needs to be therefore servicing a particular route, what products need to be transported to refill those vending machines.

So there are many companies in which we are invested or looking to invest that do offer up solutions to companies to help them do their job more cost effectively, and as a result create a smaller carbon footprint.

Snow: Well I’ve just decided that I am going to do a LBO of a vending machine company and then I’m going to call Scott. So that’s good to know, thank you, I didn’t know that you could save that much money.

Risk and Reputation

22:25

Snow: So we have talked about the bottom line, saving money, but there is a slightly less tangible – or, we are going to learn how tangible it is – issue that has to do with risk and reputation. There are bad things that happen to a company when it is found to be dirty, and then there is also the perception among the customers and even the investor base of private equity firms, that a firm that is adopting very good practices with regard to the environment is one that one would want to be affiliated with and one customer of. So can we talk about that a little bit?

On the subject of reputation and risk, Elizabeth, you need to be concerned with both that of KKR and also that of KKR’s portfolio companies. Can you walk us through how you think about both of those issues, and how you help protect reputation, and to also guard against risk?

Seeger: It’s a really important question as you have said for both us and the portfolio companies. Regarding the portfolio companies, we have really built the consideration of both environmental and human rights issues into our investment processes. So whenever we are considering making an investment, we will think about the risks and opportunities associated with the company, where it is located, the products it is creating, its customer base, that sort of thing.

As we hold that company over our investment life cycle, we continue to revisit these issues, and make sure that we understand what is going, the stakeholder expectations for that company, and that we partner with them very carefully to manage those issues where appropriate.

One of the areas where we are focusing in 2011 is really encouraging and helping the portfolio companies to communicate their own performance on these issues so that their stakeholders can understand what they are doing. At the KKR level, we are doing the same thing where we are engaging with our investors, with our stakeholders, with other people who are interested in the way that we do this work, the results that we are announcing. We try to be fairly transparent with the work that we are doing.

On the green portfolio program, we have more information than anyone would want to read, it turns out, available. We just released our first sustainability report, something that we are really focused on.

Snow: Well, what is the cost of just not communicating about this topic? If someone comes up to your firm and says, how green are you? And you said, I don’t know, that’s not my business. What is the downside to that?

Seeger: That is a really interesting question because I think a lot of people still don’t answer that question. For us, we hear that question all the time, what are you doing, what are your companies doing. We think it is important to have that conversation, and we are open to engaging with all people who want to have a constructive dialogue about these issues, and we have been doing that quite a bit. Our sustainability report is just one piece of that conversation. I expect that we and our portfolio companies and all of our peers will continue to receive those questions, and at some point, people will have to start answering so we are just starting now.

Snow: Adam, let’s talk about risk for a little bit. Your job is not only to look for ways to save on fuel and things like that but also to make sure that a portfolio company does not run afoul of the public’s perception of it. So can you talk about how you would guard against that happening?

Black: Sure, let’s talk about potential new investments to start off with it. In that context, it really begins every Monday morning after I have grabbed a coffee or tea, being English. We sit down as a company and we talk about businesses that we are looking to invest in. I am sitting there, thinking what does that company do, what are the likely risks, what might the opportunities be, so due diligence kind of kicks in then. I am constantly thinking about what my colleagues are looking at, what companies they are interested in acquiring.

If a decision is taken to, you know, seriously look at a particular business, then as I am sure other firms do, we will commission outside, independent experts to undertake due diligence. During that process, issues that might pose a risk or a possible threat to a business are identified. It is at that stage where I can think about what is management doing about those issues, and how might we support them post-transaction.

(27:14)

Snow: Is there ever a situation where you want to acquire a company, but you make them cleaning up their act, or them making a change to their operations, conditional upon that offer?

Black: Yes, one example, one of our companies is Tumi, the luggage business. A lot of their work was outsourced to the Far East, China, Thailand, Vietnam. So as part of our interest in that business, we sent a team out to look at the companies, the factories, that Tumi used to manufacture the product. Some of those companies didn’t stack up, and didn’t form part of the deal moving forward.

Snow: And when you say “didn’t stack up,” you found their practices to be. . .

Black: We were not comfortable with them on a number of levels. Some of my colleagues were not comfortable with their quality assurance practices. I was not comfortable from a safety perspective, a wider work, a welfare perspective. Conditional on that particular deal was that the company had to join the Fair Labor Association, the FLA.

Subsequent to that, I have become much more involved with that particular business, building upon that processes that exist, arising out of the FLA work, to look at wider reputational risks relating to sustainability in the supply chain. So for example, better understanding where some of the raw materials come from, like the leather that goes into the products, where is it ultimately sourced from, does it come from the Amazon or not, and it doesn’t. So you know working with companies on those kinds of issues which they may not have not have given consideration to before has massive benefits from a reputational and brand-enhancement perspective. Sometimes more difficult to put a number on, but our customers are very pleased that we are looking at those issues and actively working on them

MacLeod: David, maybe just to answer your question in terms of our practices. We, of course have as part of our due diligence process, a review of the environmental, social and governance issues associated with the company that we are considering in which to invest. There will usually be issues that will surface about which we are uncomfortable and about which we would like to see better practices put in place.

We have what we call an environmental action plan that we agree with the majority shareholders or prior owners of a company to put in place; it is incorporated into the legal documentation as part of the obligations of the company and of the other shareholders of the company to implement over time. It becomes, therefore, an agreed action plan for the environment, and the same way you have a business plan in which the operations of the business and the investment are to be founded.

We then have regular visits by appropriate specialists over the period our holding to monitor the successful implementation of the elements of that environmental action plan. It typically works pretty well.

Snow: Audrey, as someone that looks across the corporate world, and also the specifically the private equity world, have we turned a corner as far as the way that customers have perceived companies? Is it really the case, that there is value that is either created or lost as a result of the perception of the company’s environmental record?

Davenport: Without being able to point to any specific data, I would say yes, absolutely. I think, what I was thinking of earlier when you asked Elizabeth a question, is the fact that private equity firms have always been good at managing risk, right? But I think reputation, the ingredients that make up a company’s reputation and brand value now are broader because expectations have shifted from customers and other stakeholder. So it is not just the reputation and brand is made up of the ability to manage downside risk related to regulatory and legal compliance but also the ability to be proactive about trying to run businesses that create value for investors, for the employees of those businesses, and the communities in which those businesses operate. So I think reputation now is much more strongly linked to customers’ expectations o for proactive management and value creation as much as it is just to downside management.

LP Demand for Green

31:57

Snow: Let’s talk about a very important constituency of a private equity firm and that is its investors, arguably the most important customer that a private equity firm has. Adam, do investors care about this issue, are they coming to you and saying tell me about your green record or are you going to them and saying can I tell you about this great thing we are doing and can I take your time?

Black: A bit of both. They are coming to me, some more than others. Some are extremely involved to the extent where they are providing me with articles and information on new technologies that they may have seen. Others want to know, more broadly, what we are doing. Most are interested in specific case studies, some of those have invited me to speak to their colleagues about certain topics, about certain aspects about my work.

Snow: To other investors in the private equity space?

Black: Indeed. And it is growing. I haven’t gotten accurate figures, but my colleagues who work in our investor relations team tell me that a few years back there would be a handful of companies that were asking questions about this and submitting questionnaires for us to respond to, and that has quadrupled over the last few years from what I understand so we are seeing much more interest.

(33:18)

Snow: So Elizabeth, what kinds of inbound questions are you getting from your investors? Adam mentioned questionnaires. It looks like you have seen those questionnaires before.

Seeger: Yeah, we have spent some time on the questionnaires in the last year or so. You know, I have only been at KRR for less than two years now so I can’t say very much about the trend there, but we certainly spend a lot of time engaging with our investors on these issues. As Adam mentioned, some of them are more interested than others. Certainly, a lot of them have different angles in terms of what specifically they are interested in. Some of our investors have very specific mandates that they are seeking to achieve by investing in us or in others.

Snow: And by mandate, you mean an environmental mandate?

Seeger: Absolutely. One investor, for example, cares a lot about water scarcity issues so they are very interested in making sure that the companies in which they invest are appropriately managing those issues.

Snow: What kinds of questions are in the questionnaire? These are questions from the investors to KKR saying do you do x-y-z?

Seeger: Yeah, that is right. I have seen a number of different types of questionnaires, many of them are based on the United Nation’s Principles for Responsible Investment, of which we are signatory as is Adam. A lot of those questions are about how are we progressing against those principles. Some of those questions are who is in charge of it at KKR? Give me an example of when you identified an issue and what you did about it? So they are really trying to make sure that we have the processes, procedures, policies and people in place to deal with these things

Snow: Audrey, what happens when a private equity firm gets a questionnaire and they answer no? Do they lose their investors or do they get a slap in the wrist? What are the consequences of not having the right answers?

Davenport: That is a good question. I think we are seeing a real increase in the sophistication of the type of questions asked by limited partners to their general partners. I think that it is a great thing and I think going forward we are going to see less of the superficial questions of what do you have in place and more questions around show me an example of how managing ESG issues created value for you, tell me how you are implementing this across the firm.

I think, especially in the States, in a place where that awareness is on the rise and the sophistication is still needed the types of questions that LPs are asking GPs to help direct them towards the type of management that they want to see. At EDF, we are watching this very closely because for us when we talk about leverage those investors are sort of the key point of leverage for us

Snow: Very quick follow-up question, Elizabeth – do you get the sense that some investors would decline to continue to invest with KKR if the answers were completely wrong or if you had no program at all?

Seeger: I would say that some investors would decline, I would not call that a majority by any stretch.

Snow: Scott, as someone who has been engaged in this topic, obviously, for a very long time, have you seen a shift in the way that investors perceive environmental responsibility as they are vetting managers with whom they might place capital?

MacLeod: I think it becomes a more important issue. A question that we are often asked by third parties is, are investors investing in the GEF because of the returns or because of the broader environmental objectives that we attempt to serve. I think the answer to that is absolutely first and foremost is the returns that they are looking for. These are returns that are possible because we are investing into what are rapidly growing industrial sectors in the counties in which we are making those investments. Again, as I mentioned, two to three times growth rates of what the underlying GDP is.

This has given the opportunity to achieve, since 1998, the 30 percent annualized returns. There are though, categories of LPs that do have a concern for which, as Elizabeth just mentioned, the certain aspects of the environment are as important as are the annual returns on investment. We see this, particularly among some of the pension funds, which will have a policy mandate they want to see served related to the environment. We also see it among a number of family offices whose principles have an abiding interest in the environment, and who want to both do good and to do well. If you do it right, you can achieve both objectives.

Seeger: I think one of the underestimated audiences for the work that we’re doing is the portfolio companies themselves. Many times when I go in and speak to one of the companies in which we are invested, they will say thank you for asking these questions and also thank you for providing resources and caring about these things.

Managing Skepticism

38:39

Snow: Let’s talk about something else that today often companies environmental issues, and that’s skepticism. So as you are doing your jobs and attempting to reach out to private equity firms involved in your various activities, you are running into people who, maybe, don’t think that you are adding the kind of value that they would hope that you would add to the portfolio company level, or maybe your own portfolio companies are saying, Gee, why are you having us do this fire drill with cardboard boxes. Things were just great before you guys showed up.

So can you talk a bit about the skepticism that you’ve encountered, maybe with Audrey? As the EDF started to engage with private equity firms, was there push back about why are you here and why are we talking about this?

Davenport: Sure. Definitely. It’s sort of an unlikely partnership. People wouldn’t have put a progressive environmental group and a large private equity firm together. But, I think we managed that skepticism in a couple ways. First of all, we don’t take any money from our corporate partners. So on an organizational level, that helps us to talk about the fact that we are really looking for opportunities to drive environmental change and this isn’t part of our own revenue model for how we’re looking to fund our work.

So that helps us, but in terms of the project itself and our work with private equity firms, we really seek to create a lot of transparency around results. And so, we’ve made all of the results with KKR’s portfolio companies public. We’ve talked about what’s hard and the fact that this is hard work. I think we seek to really seed the change with inspirational, but realistic, case studies that can help other private equity firms and portfolio companies see those and realize, that’s a company just like me or a firm just like me and I can do that too.

We’ve tried to be really transparent and provide as much information and resources as we can to the market place about the power that this type of thinking has to offer.

Snow: Adam, when you joined Doughty Hanson, if you got any skepticism or push back, where was it coming from, without necessarily naming names?

Black: There was not necessarily skepticism; perhaps unease that there was someone from the owners coming to look at these issues, and that hadn’t happened before.

Snow: So this is at the portfolio company?

Black: Yes, some of the portfolio companies. A large part of what we all do is to build credibility and reassurance.

I spend a lot of time working with portfolio company managers and fellow practitioners, and you need to prove to them that firstly, you know what you’re talking about, that you have something valuable to add. There have been examples where there’ve been some barriers in terms of opening up and building that trust. But things change once you start to work with colleagues in portfolio companies.

As regards senior management, there have been one or two examples where there’s been real push back. Why do I need to see this guy; we don’t make anything? To which I respond, You have a thousand officers worldwide and there’s a lot of travel that goes on in your business. You have a large IT function. Let’s talk about energy costs. Let’s talk about your image. What do your employees think?

There’s always an element of education, sometimes, that needs to happen. There’s often also a difference between our operations based in Europe and those elsewhere in the world – perhaps we’ll touch on that a bit later. There are cultural differences we need to take into account. And increasingly, I spend most of my time in the Far East.

(42:31)

Snow: Well let’s talk about cultural differences very briefly. That’s something that can fill a whole day but as briefly as you can, is it the case that Europeans tend to be more onto the environmental topic than over here?

Black: I’ll generalize. I think in Europe, there’s a tendency to embrace broader sustainability principles. What I mean by that is, not to focus on the traditional legal issues around environmental or health and safety, but to think about access to resources, product supply chain, ethical risk, ethical issues.

Having said that, some of my contacts in the US, there was some pushback in that sense to start with, but having worked with them now for some time, they’ve really embraced that concept. And I think it’s changing. But in general, I think it would be fair to say that in Europe there’s a slightly more open attitude to some of these issues.

MacLeod: I’m surprised actually, as a firm that invests primarily in emerging markets, how quickly the convergence is occurring of environmental standards across the world and across countries of different levels of development. I think there are a couple of drivers. One is what some people call the Wal-Mart effect, that we are in an increasingly inter-dependent world of globalized products and services. Companies such as Wal-Mart are establishing standards of their supply chain that have to be met whether the company is manufacturing a product in Indonesia or in Georgia, here in the US. The second is that as many of these countries see a larger portion of their population achieve middle-income socioeconomic status, there is a demand for a higher standard of environmental excellence and a higher quality of life. As such, and China is the most dramatic example of that, you see the government instituting policies to improve environmental standards for all parts of their industrial and economic life there.

Snow: Elizabeth, what kind of push back have you gotten? Has there been anyone who has said, Oh, these environmental programs are window dressing. It masks what’s really going on at those private equity firms.

Seeger: You know, it’s a fine line when we walk on these issues. When we first started, there was skepticism that you could improve environmental performance and business performance at the same time. So, we proved that concept, starting with some pilot project companies and then expanding the program. And now there’s skepticism that, you know, why is KKR really focusing on this at all? And, as Scott mentioned, we are doing this because it builds better businesses and it makes us better investors, period. We think that by highlighting the great work that our companies are doing, we are encouraging greater performance and encouraging more companies to participate. With EDF, encouraging the rest of the industry to really take a second look at what we’re trying to do. So as Audrey mentioned, we do focus a lot of transparency and making sure we’re very clear with the results. We spend a lot of time explaining exactly how we calculate the numbers and exactly how that translates into better business performance. We’re pretty happy with the fact that we’ve been able to prove that over and over again.

Snow: I have a final question for just about anyone and that is, who tends to be the more ferocious skeptic: Is it the people on the environmental side or on the capitalistic side?

Black: I’ve come across both. Yeah, I’ve definitely come across both. I’ve had some people that are ardent environmentalists, really questioning why I’m working for a firm like that. That’s basically because they don’t understand private equity, which is the industry’s fault. I don’t think it’s necessarily being clear about what it does and how it does it. But, increasingly, I think, in the environmental community, there’s a realization that they have to engage and they can effect change by working with business. And private equity has been a missed opportunity for a long time now and it’s an area to really tap into so that’s starting to change. Still come across some died in the wool capitalists…

Snow: So do I.

Black: It is always good fun. But, to be honest, the conversations I’ve had with colleagues who initially were skeptical, once you can demonstrate real improvement through case studies and better communicating what I do on a daily basis, they’ve bought into it. Totally.

Seeger: I think it’s a really interesting question. I think it’s a perceived conflict more than an actual conflict, right? Capitalism, when you really think about it and expand, at least, the time line that you’re thinking about, needs to think about these issues. These are bottom line issues. Until we all throw out the expectations of what the other side is trying to do, we’re not going to succeed in this.

Snow: Well, I think it’s agreed that it’s possible to be both a rabid environmentalist and a rabid capitalist. And so, this is a very big topic. I think we should pause there and pick it up next time. But once again, thank you to all of you for coming and sharing your views of adding green and adding value. And I’m certain that Privcap will be returning to this topic again.

Thank you for watching and goodbye.