Before acquiring any new corporate asset, private equity firms conduct a “due diligence” process – which typically considers only environmental risks and liability (e.g., contaminated groundwater cleanup) – to assess a company’s value.  Using this new approach, Carlyle will now identify opportunities to improve operations, reduce costs, and strengthen the market position of target companies through steps like improving energy efficiency, reducing material inputs and waste generation, and developing environmental products and services before an investment decision is made.  Most importantly, the highest impact opportunities will be incorporated into the management plans for Carlyle’s portfolio companies.

This early-stage approach sets a new standard for the industry and expands the mindset on environmental due diligence from downside risks to upside opportunities.

Moving forward, EDF will work with Carlyle to implement the screen in its U.S. and Europe buyout funds (which represent about $30 billion in assets under management), make refinements as necessary, and share lessons learned with other leading firms at edf.org/duediligence.

As mentioned in the Wall Street Journal, today’s announcement builds on our pioneering work with KKR to develop the firm’s Green Portfolio Program that is currently helping to measure and manage environmental performance at 20% of KKR’s global portfolio companies.  We view these two collaborations as complementary initiatives that combine to help improve business and environmental performance at different stages of the private equity value chain. We look forward to both becoming standard practices for value creation across the industry.

During my time at EDF, I have worked in-depth on two projects.  For the first two months, I scoped the landscape of corporate environmental sustainability benchmarking tools and initiatives.  Most recently, I collected sustainability best practice content around key topics such as data center energy efficiency, paper use, and commercial lighting.

After working on these projects and supporting the Green Returns team on other tasks, I realize the importance and benefit of including environmental considerations in both long-term strategy and daily operations.  The knowledge I acquired at EDF around environmental management is a new addition to my toolkit that I will use to help companies improve.  I feel that I am now better able to holistically assess a company’s risk and opportunity by incorporating their impact on the environment into my strategic analysis.  And from an operational perspective, I will be able to communicate to companies how addressing areas such as energy efficiency and waste reduction result in quick wins that save money and lessen environmental impact.  Put quite simply, when I am faced with a company needing to reduce costs, my first question will now be – do they turn off the lights and computers at the end of the day?

Our message at the conference and for the private equity sector in the future is straightforward:

Environmental management and innovation should be one of private equity’s key strategies now and for the future.

A changing world and challenging economy is forcing companies in all industries – including private equity – to transform to remain competitive.  As a result, private equity firms are looking for new ways to lead and create value.  Taken to scale across portfolios, a creative approach to environmental issues can create value by improving due diligence, boosting portfolio company performance, presenting new growth and investment opportunities and building stronger relationships with LPs and other stakeholders.

Today’s announcement [PDF] by private equity leader Kohlberg Kravis Roberts & Co. (KKR) is proof that environmental management can help drive value creation at scale.  In fact, the release includes a quote from KKR Co-founder Henry Kravis stating that “The business case for environmental management has never been stronger.”

That’s why KKR has expanded the Green Portfolio program that we co-developed and tested at three companies in 2008 (U.S. Foodservice, PRIMEDIA and Sealy) to include twenty percent of its global private equity portfolio today.

In 2008, EDF and KKR worked with U.S. Foodservice, PRIMEDIA and Sealy to measure and improve business and environmental performance.  These pilots helped EDF to develop our Green Returns approach and the three companies to capture over $16M in annual cost savings and reduce 25,000 tons of CO2 pollution.  Based on these results KKR expanded the Green Portfolio Program in 2009 to include Accellent Inc., Biomet Inc., Dollar General Corp., SunGard Data Systems Inc. and HCA Inc. Today’s announcement adds four additional companies:  First Data, Lehigh Phoenix (a division of Visant), Oriental Brewery and Tarkett.

EDF believes that this is just the beginning.  Environmental management can play a much larger role in value creation across the broader private equity industry.   That’s why we recently released our Green Returns approach, resources and case studies to help industry leaders take advantage of this opportunity.

Green Returns is a tested and flexible approach for private equity firms to measure and improve business and environmental performance across their portfolios.  It is tailored to the strengths of the private equity sector and has quickly proven to yield significant business and environmental results, including millions of dollars in annual cost savings and thousands of tons of pollution.

Visit http://edf.org/GreenReturns to learn more and get started today.

Within EDF's Corporate Partnerships Program, we believe that this type of transparency is critical in our efforts to improve corporate environmental performance. Increased transparency around climate opportunities and risks will help firms make more informed investment decisions, and thus, reward companies that have positioned themselves to be cleaner and more competitive in the years to come.

"Investors have a right to know which companies are planning to be part of the clean energy future and which are lagging behind, " said Environmental Defense Fund President Fred Krupp.

It is vital that investors have this information as they make decisions about how to allocate capital, to ensure that funds are getting to the most efficient and innovative companies.

In his opening remarks, Tom said that he’s seeing a universal acceptance that financial engineering alone isn’t enough anymore and that going forward, multiple tools will be needed to create value, including a growing focus on operational improvement. In fact, an article in last week’s FT online called the growing demand for operations professionals one of the most significant shifts in the PE sector last year. Co-panelist Chuck Brizius, managing director at THL Partners, said his firm had also recognized the trend and would continue to focus on operational management in 2010.

“The reason we’re here today is looking for new ways to create value. That’s where we think the environment comes in. A focus on environmental performance can create a strategic competitive advantage.”

We know the opportunity is real, because we’ve done it – with impressive results – with Kohlberg Kravis Roberts & Co. L.P. (KKR), which is now taking it to scale across US and international portfolio.

Our work with KKR is just the beginning; Environmental management can play a vital role in value creation across the industry. As a result of our work with KKR, we have developed a flexible approach for capturing environmental and financial benefits called Green Returns and hope that 2010 is the year that other PE firms adapt the Green Returns approach to their portfolios.

Taken to scale across portfolios, a creative approach to environmental issues can create value by improving due diligence, boosting portfolio company performance, presenting new growth and investment opportunities and building stronger relationships with LPs and other stakeholders.

“The opportunities are already there. What Green Returns provides is a new way to look at performance and provide metrics to help them capture environmental improvements.”

"During the credit boom, private equity tended to hire financial wizards. Now, operational experts are in demand as private equity houses fix up companies they own rather than wonder about dividend recaps."

We've observed a similar trend in the private equity sector, and it's good news for both the environment and business in a tough economy.

Increasingly, private equity firms are looking for ways to run leaner and more efficient businesses through a focus on company operations. From improving energy efficiency to cutting material and packaging waste to reducing water use, we believe that environmental management offers significant opportunities to do just that.

In our partnership with private equity leader Kohlberg, Kravis and Roberts and Co., we are proving that a focus on operations can yield real business and environmental results. In 2008 alone, we helped identified over $16M in operational savings and avoided 25,000 metric tons of GHGs at three portfolio companies.

KKR is expanding environmental management efforts across its portfolio.  Stay tuned for 2009 results, coming soon.

The event will include perspectives from elite institutional investors, fund managers and advisors about the major PE investing trends for 2010, including a focus on environmental performance.

Environmental Defense Fund will be the first and only NGO to attend the conference, and Tom Murray will speak on a panel about where investors should focus in 2010.  He’ll introduce attendees to our Green Returns program, an innovative and flexible approach designed to create business and environmental value for the private equity sector that was developed as part of EDF’s partnership with KKR.

Tom's panel will also include speakers from top PE funds 3i, THL and Huntsman Gay, all of which take a hands-on approach to investing in their portfolio companies.

I look forward to hearing what role the top representatives of the private equity sector sees for environmental innovation in 2010 and beyond.  Share your ideas and best practices with us here.

This year, we’ve had 140 posts on a variety of topics, including what our

Climate Corps MBA fellows have learned about energy efficiency, highlights from our work in the Private Equity and fleet vehicle industries, exploring what innovation means and showcasing innovative practices at a variety of companies.

Some of this year’s top posts foreshadowed trends on which we’ll be building in 2010:

• You Set the Agenda: Green Innovation for Business Unconferences introduced the series of events affectionately known as GIBUs through which we brought together some 450 business, government and non-profit professionals to discuss what they are doing and thinking about to improve and accelerate sustainability in business.  In 2010, we’ll be expanding the program and changing the name to better reflect the results that the events are intended to produce: solutions.  This year’s Solutions Labs will support a well-informed, well-connected, rapidly-learning, network of innovators making business more sustainable in at least 10 cities around the country.  We have also launched the EDFix conference call series on the second and fourth Mondays of every month to explore topics in more depth.
• In I’ve Seen the Future… and it’s Transparent, Andrew Hutson wrote about the work we are doing with Walmart in China to assess technologies that are creating the greatest environmental impacts by identifying cleaner alternatives.  We’ll be writing more about our work in China in 2010.
• Sustainability managers can look forward to more posts in 2010 like Social Media: Is it the Sustainability Manager’s Job? and Sustainability Managers – Research Shows You’re Not Alone that address timely issues each of you face as you design and implement sustainability strategies in your companies.
• We’ll focus more on energy efficiency in 2010 and continue to highlight what our Climate Corps fellows are learning on the job – and the challenges they are overcoming – as they spend their summers running technical and financial analyses to identify energy efficiency improvements that can cut costs and reduce emissions at their host companies.

As always, we’d love to hear your thoughts on what you like, what you don’t and what other content you’d like to see, so please, let us know.

Wishing you a prosperous 2010 from all of us here at EDF!

One of my projects for CPP is to capture environmental best practices and case studies around key topics for companies, such as data center emissions, fleet efficiency, waste, and water use.  Given the breadth and depth of information on corporate sustainability initiatives (from blog posts to green business news reporting to corporate sustainability reports), it is virtually impossible for one person to do an exhaustive survey of all the content around these topics.  So, I need your help.

• Are you a business manager who has implemented environmental strategies to cut costs and reduce your company’s environmental footprint?
• Are you a thought leader in a particular area of corporate sustainability?
• Or are you just interested in trying to solve some of the biggest challenges facing companies today?

If you said yes to any of the above, please take a moment to answer the following questions…

1. What best practices related to environmental sustainability have you implemented or seen implemented with success in companies?  (Examples – packaging redesign, lighting retrofits, power management software, recycling programs, etc.)
2. What challenges have you faced in enacting corporate environmental improvements?  What information or help do you need to achieve results?
3. Finally, do you have any suggested resources for me to review while gathering best practice content?  Have you come across a helpful website, report, book, or talked to a subject-matter expert who’s offered valuable advice?

Please share your thoughts with me in any of the following ways:

• Post a response to this blog
• Email lmacintyre@edf.org with the answers to the above questions
• Fill out a brief survey by clicking on the following link: http://www.surveymonkey.com/s/MXRGWP7

Let’s work together to spread best practices and make them accessible to anyone who wants to enact environmental change.

Our article titled “Environmental innovation:  The investment that keeps on paying” is featured as the “CEO Topic” in General Atlantic’s December newsletter (copied below).

Fortunately for the economy and the planet, forward thinking firms have broadened their perspectives on environmental programs in recent years.  Even in a challenging and changing economy many Fortune 500 companies, ranging from Wal-Mart (2) and GE (5) to Owens Corning (422) and SunGard (435), are continuing to move forward with significant environmental initiatives.  They have discovered that regardless of size, sector, or economic conditions, environmental innovation is an investment with a broad range of returns: cost savings, growth, and brand enhancement.

Cost savings

In the current economic crisis, it’s understandable that some executives are asking “Can we afford to go green?”  But the more appropriate question is “Can we afford to leave money on the table?”  Many recent examples confirm that improved environmental management is a powerful strategy to significantly reduce operating costs by maximizing efficiency and resource use.

In its first year, Environmental Defense Fund’s (EDF) “Green Portfolio” project helped three private equity portfolio companies – US Foodservice, PRIMEDIA, and Sealy – capture over $16 million in annual cost savings and 25,000 tons of greenhouse gas reductions. Specific steps included reducing truck fuel usage at US Foodservice, cutting paper consumption at PRIMEDIA, and improving material use at Sealy.  Additionally, this past summer EDF’s Climate Corps fellowship program helped 23 companies – including Accenture, Cisco, Dell, Genzyme, Intuit, Raytheon, and salesforce.com – uncover efficiencies in lighting, computer equipment, and heating and cooling systems that could save $54 million in net operational costs over the project lifetimes. The bottom line is that smart businesses are making environmental management a key part of their strategy to improve efficiency, cut costs, and increase profitability.

Growth

In addition to reducing risks and operating costs, environmental strategy can fuel corporate innovation and top line growth.  More and more companies, ranging from GE to smaller technology firms, are using environmental goals and metrics to unleash creativity and spur the development of new products and services.  For these companies, environmental strategy has evolved from focusing on compliance in the ‘70’s and ‘80’s, to efficiency and footprint reduction in the '90s, to innovation and growth today.

GE’s “Ecomagination” is a business initiative designed to increase operational efficiency, meet the growing demand for cleaner and more energy-efficient products, and drive profitable growth for GE.  The program combines measurable goals for both efficiency and sales growth.  The results to date have been impressive, including reducing costs by over $100 million and growing annual revenues of Ecomagination offerings by 21 percent to $17 billion in 2008.[1]

These growth opportunities are not limited to corporate giants like GE.  Many innovative technology companies, including hybrid-electric power train manufacturer Azure Dynamics, LED lighting leader Cree, Inc., lithium-ion battery systems developer EnerDel, and super-insulating window manufacturer Serious Materials are capitalizing on the growing demand for “green” technologies to drive growth and increase market share.[2]

Brand enhancement

Establishing a company as an environmental leader in the eyes of key stakeholders – including employees, customers, and investors – can significantly enhance corporate reputation and brand value.  Timely information, since a November 2009 survey by McKinsey & Company found that a majority of executives think the economic crisis has increased expectations regarding business’ role in society and that the environment remains the issue that will most likely impact shareholder value in the long-term.

Companies become market leaders by capitalizing on challenges and opportunities better and more consistently than their competitors.  Increasingly, market leadership will require environmental leadership.  Executives that take advantage of the opportunity to integrate the environment into their business strategy will generate a wide range of returns – including cost savings, growth, and brand enhancement – and position their firms to be the market leaders of the future.

We’re excited that thought private equity thought leaders, such as General Atlantic, see these opportunities as well and are helping us spread the word about the role environmental innovation can play in value creation.  We’re eager to continue and expand this conversation.  Next month, I’ll be discussing this topic on a panel at the Dow Jones Private Equity Analyst Outlook 2010 conference in New York.  Hope to see you there.