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Global PE firms introduce responsible investing

Social issues being seen as areas of risk, opportunity by investors who’ve felt the effect on results in developed markets
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First Published: Wed, Feb 13 2013. 11 45 PM IST
Blackstone India senior managing director and chairman Akhil Gupta. Photo: Living Media India Ltd
Blackstone India senior managing director and chairman Akhil Gupta. Photo: Living Media India Ltd
Mumbai: Global private-equity (PE) firms are introducing the idea of responsible investing in the country.
Environment, social and governance (ESG) issues are increasingly being seen as areas of risk and opportunity by these investors that have already felt the positive impact of such initiatives on the net incomes of their portfolio firms in developed markets.
Experts say managing ESG issues is being seen as a means of value creation by investors, which are adopting various measures for unlocking the potential worth of the portfolio companies.
While most PE firms are cautious about ESG compliance in pre-investment due diligence, they are now beginning to believe that companies successful in avoiding risks while taking advantage of opportunities in the space will do well in the longer term.
For example, KKR & Co. LP (KKR) has two of its India portfolio firms—Dalmia Bharat Cement and Bharti Infratel Ltd—under its Green Portfolio Program (GPP), run by KKR Capstone). Under the scheme, it works on the environmental strategies for business benefit.
In Asia, there are a total of four firms under this programme, including Oriental Breweries and BIS Industries. The savings of the four Asia GPP companies is over $10 million. In environmental terms, the four participants have reduced 115,000 tonnes of CO2 emission since joining the programme.
“KKR Capstone’s involvement, via the Green Portfolio Program, helps make an environmental impact along with positive impact to the bottom line. These are not CSR (corporate social responsibility) initiatives. We undertake measures that include reduction of waste, water, chemicals and greenhouse gases to help companies save cost,” said Karthik Narayanaswamy, principal, KKR Capstone, operational improvement team, KKR.
With Dalmia Bharat Cement, the team broadly undertook three initiatives—ensuring that minimum energy was consumed per unit of clinker produced, increasing efficiency of the captive power plant and reusing lime sludge, a waste product of the dyeing industry.
“We want to make an impact on the environment in a meaningful way, which adds to the bottom line. When there is a meaningful economic impact, promoters see the benefits of the programme,” said Narayanaswamy.
Being a part of KKR’s programme is voluntary for its portfolio firms. Besides a strong focus on best practices through partners, KKR also brings constant monitoring and benchmarking of the progress through realistic milestones for these initiatives.
Steve Okun, director of Asia-Pacific Public Affairs, KKR, said pre-investment due diligence ensures that KKR and the promoters are on the same page. “It’s based on the principle that what we do will create value,” Okun said.
The Blackstone Group has environmental sustainability programmes globally.
It conducts environmental due diligence on environment, health and safety practices on all investments in the manufacturing sector, said Akhil Gupta, senior managing director and chairman of Blackstone India.
“If a potential investee company is not compliant, we either do not invest, or invest only after corrective action has been taken,” he said.
PE firm Zephyr Peacock, on the other hand, sees ESG risks and opportunities at the most basic level. It starts from something as simple as ensuring that all workers wear helmets and are given liability insurance, said Mukul Gulati, managing director, Zephyr Peacock India. While this may increase operational costs by 2-3% initially, it reduces chances of accidents and compensation claims and the cost of insurance goes down.
“In the long term, it’s for the economic good of the company. In situations where global strategic investors are looking at buying a firm, it helps to have everything in place,” Gulati said. He further added that while it has never faced resistance from promoters on ESG issues, it helps to talk about them before the deal.
Investor concern, founded on the view that ESG issues have the potential to materially affect the valuation of investments over the longer term, is another key driver of responsible investment in the PE industry, according to a 2012 report by PwC called Responsible Investment: Creating Value from Environmental, Social and Governance Issues.
Experts say ESG compliance is a way of being in line with global standards. Every organization needs to get globally accepted, and minimum requirements have to be met, said Vikram Hosangady, head of PE, KPMG India, a consultancy.
It does not mean they can charge more or they get more investments, he said. “In a hospital business, for example, Joint Commission International (JCI) certification is an accreditation on quality. Investors will look for it,” he said.
Meanwhile, PE firms will work selectively with their portfolio companies on ESG issues as in some businesses, the opportunities of increasing efficiency or reducing waste are less while in some there are more.
For example, cement, coal and power have the biggest chunks of raw material costs and it directly affects the profit and loss in a balance sheet. If a PE firm can help in making any kind of optimization of coal and power usage, it will make an impact on bottom line. In other spaces, such as financial services, there isn’t much waste. A domestic fund manager, on the other hand, feels working hand in hand with portfolio companies on ESG issues requires a change in mindset and may not happen overnight.
“We are still a developing nation. We can’t just copy other nations that are developed and have processes in place. The shift from zero to step one can’t be overnight. This has to be a step-by-step development,” said the fund manager, who did not want to be identified.
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First Published: Wed, Feb 13 2013. 11 45 PM IST
More Topics: ESG | KKR | Blackstone | Zephyr |