Is private equity (PE) going green?
Kohlberg Kravis Roberts and Co. (KKR), the giant buyout firm, was planning to announce on Thursday (Friday morning in India) a new partnership with advocacy group Environmental Defense Fund to help it improve the environmental performance of the dozens of businesses it owns.
The private equity firm’s decision to embrace environmental issues is likely to have far-reaching implications for business operations and might put pressure on its top rivals to follow suit.
KKR has more than $185 billion (Rs7.5 trillion) in annual revenues and some 825,000 employees worldwide through the firms it operates. Its decision to embrace environmental issues could have far-reaching implications for business operations and might put pressure on its top rivals to follow suit.
One of the original PE firms, KKR owns 46 companies, including the Texas utility TXU Corp., hospital giant HCA Inc., children’s retailer Toys “R” Us, discount retailer Dollar General Corp. and mattress manufacturer Sealy Inc.
KKR’s partnership with Environmental Defense is aimed at creating measurement tools of environmental performance across several areas, from energy efficiency and greenhouse-gas emissions to water consumption and containment of toxic substances across all of its businesses.
Fred Goltz, a partner in KKR, said the company was “trying to be ahead of the curve, trying to see around corners”. He added, “The area of environmental performance is becoming increasingly important and the cost of poor performance is going to become more tangible over time.”
Still, it remains unclear how far KKR will go in accepting environmental performance costs that affect its profits. Goltz said he could not predict what would happen if the new yardsticks suggested by Environmental Defense involved a course of action that could hurt profit of one of its companies.
“It’s obviously difficult to answer questions in the abstract,” he said. “The object is to create win-wins for our company and improve our environmental performance.”
The new partnership grew out of a watershed deal last year in which the Environmental Defense Fund and the Natural Resources Defense Council brokered an agreement with KKR and the Texas Pacific Group to back their acquisition of TXU. In exchange, the companies pledged to reduce carbon emissions and abandon plans to build coal-fired power plants that would produce millions of tonnes of emissions that are linked to climate change.
Many large companies already measure aspects of their environmental performance, either through internal yardsticks or by using guidelines such as those developed by the International Organization for Standardization.
Gwen Ruta, vice-president of Environmental Defense for corporate partnerships, said in an interview that her group would draw from existing methods of measuring environmental performance.
“We definitely want to draw from the system and the metrics already out there,” she said, adding, “We want to come up with a streamlined set that makes sense for the way KKR does its business, combining our expertise about environmental issues and various metrics” with KKR’s expertise on gauging their companies’ performance.
The Environmental Defense Fund’s embrace of corporate partners has won it some credibility in a business world that is often sceptical of environmental activism. At the same time, other environmental partners were dubious of—or downright hostile to — the idea that the businesses they blame for pollution could be real allies.
Under the terms of the partnership, KKR will not pay any money to Environmental Defense. Whatever business tools are created as a result of the pact will be shared with other companies, including their rivals. KKR plans to pursue test programmes over the next six months with several of its portfolio companies and make the results public.
Recently, however, some other groups have developed partnerships of their own. The Sierra Club, for example, is now lending its corporate symbol to Clorox Co.’s Greenworks line of all-natural cleaning products.
KKR has been planning an initial public offering (IPO), following rival firms such as Blackstone Group Lp. and Apollo Management Lp. The IPO has been delayed amid the credit crisis, but KKR has continued to make preparations.
The firm has also sought to become more transparent and take a more active role in public policy issues and Washington. Last week, KKR hired Ken Mehlman, the former chairman of the Republican National Committee, as its head of global public affairs, a new position.
©2008/THE NEW YORK TIMES