PE firms start to get serious about ESG

IFR 2406 - 23 Oct 2021 - 29 Oct 2021
5 min read
Timothy Sifert

The biggest US private equity shops are adding ESG expertise in an effort to bring their portfolios up to increasingly strict standards as the overall economy starts to require emissions reductions and greater transparency.

Financial markets and regulators have lately focused on making sure the world’s biggest publicly traded companies are following environmental, social and governance best practices, with the US Securities and Exchange Commission expected to announce disclosure rules in a few months and banks recently pledging trillions of dollars to the ESG cause.

PE firms – some of which are publicly traded – have meanwhile been stepping up their own efforts to bring portfolio companies in line with emerging standards. That these firms tend to take sizeable or controlling stakes in companies gives them more influence to effect change than many other asset managers.

“Some of the companies that we invest in are in fairly early stages of their journeys,” said Elizabeth Seeger, managing director for sustainable investing at KKR. “We have a unique opportunity as PE investors to provide them with tools and resources to improve ESG-related performance.”

PE shops have been staffing up in their environmental and sustainability teams over the past 12 months to address this growing challenge. After adding six people over the past year, KKR is in the process of hiring several more.

“One thing that we’ve been focused on in 2021 is building out our team,” said Seeger.

Effect change

Blackstone has also significantly expanded its green investing expertise this year, after last year announcing a goal to reduce carbon emissions by 15% across new investments (in which it controls energy usage). It is also currently in the process of looking for a global head of ESG and earlier this month announced that Amisha Parekh had joined the firm as global head of ESG for private equity.

“We will be adding more professionals to work more closely with portfolio companies on ESG initiatives,” said Christine Anderson, global head of external relations and acting head of ESG at Blackstone. “I think our industry will ultimately make a real impact. As majority owners of assets, we can really effect change that makes our companies stronger.”

Any new hires for Blackstone will add to the several new senior positions announced in April. Among them, Elizabeth Lewis was named managing director of ESG and James Mandel joined as managing director of sustainability. In addition, the New York-based firm hired Nina James and Caroline Hill as heads of real estate ESG for Asia and Europe, respectively, and Rita Mangalick as global head of ESG for Blackstone Alternative Asset Management and Blackstone Credit.

Elsewhere, Apollo Global Management said earlier this month it had hired Dave Stangis as chief sustainability officer, a newly created role reporting to co-presidents Scott Kleinman and Jim Zelter.

Better data

Many new roles at PE shops will focus on perhaps the biggest problem for the broader ESG financing market: the paucity and unreliability of data.

“One of the main concerns right now is data,” Anderson said. “Only when you can track and measure your efforts can you prove you’re making progress. So the challenge for us is, how do you get accurate data out of hundreds of portfolio companies?”

The Carlyle Group and Blackstone are among the firms that created the ESG Data Convergence Project, with the aim of streamlining “the private equity industry’s historically fragmented approach to collecting and reporting ESG data,” according to a press release last month. General partners in the project will report metrics related to Scope 1 and 2 emissions, renewable energy, board diversity, work-related injuries, net new hires and “employee engagement”.

“We believe better businesses, with better ESG metrics – like smaller carbon footprints – are fundamentally worth more," said Megan Starr, global head of impact at Carlyle. "We need better data to figure that out and improve our portfolios.”

Firms need more expertise also because there’s more money than ever targeting green assets. KKR’s Global Impact Fund, which launched in 2018, had US$1.3bn in committed capital at its final close in February 2020 and has made 13 investments in eight countries, according to its 2020 impact report.

TPG announced the first close of an inaugural climate fund, TPG Rise Climate, in July at US$5.4bn. The same month, Canada’s Brookfield Asset Management announced an initial US$7bn closing on an inaugural global transition fund.