CSR and Asset Management Companies: Perhaps More than just Social Washing?

Everyone involved in the financial sector has accepted that society’s expectations have changed and there is no turning back. The increasing threat of climate change, the scramble to find new, clean energy sources and the intrinsic understanding that humans are having an adverse effect on our planet have all meant fundamental changes in the way firms invest today, and in the future. In the private equity sphere, many have accepted the role that economies have to play in a greener future by entering a new phase of a mature, reasonable approach to ESG criteria. Regulatory evolution has followed, notably in the framework of the European Union’s Green New Deal. This isn’t mere social washing, many have found that adhering to principles regarding sustainability and social cohesion can be real drivers of value for LPs.
 
Standing out from the pack in capital markets means embracing CSR
 
Nowadays, the way an investment firm deals with its ESG commitments says a lot about its approach to asset management, its ability to protect value and mitigate risk. This, coupled with increased accountability following regulatory changes, has meant that shying away from shareholder and stakeholder scrutiny of CSR practices is a thing of the past.
 
According to Doug Kerwin, who works in advisory at the accounting, consulting and technology services firm Crowe, “For many institutional investors, a strong ESG profile is really a prerequisite. Many organizations have committed themselves to one of several international initiatives such as the Principles for Responsible Investment  and the Net-Zero Asset Owner Alliance  and thus must buy or finance companies that will not break those commitments. The effect spills down to middle-market private equity and private credit organizations, inclusive of their current and prospective portfolio companies.”
 
This has led to a real evolution in private equity firms’ approach to investment over the last few years. In July 2022, for example, private equity firm KKR & Co Inc announced that it was going to launch its very first two ESG credit funds focused on investing in credit of oil and gas companies committed to reducing carbon emissions to zero by 2050 with credible decarbonisation strategies.
 
The first fund, KKR Credit ESG Climate Opportunity Fund, will focus on investing in firms that have a high score on KKR’s “proprietary ESG scorecard” when it comes to climate change and the energy transition. The second fund, KKR Credit ESG Accelerator Fund, will be a global sustainability-focused fund deploying a range of private debt investing strategies including direct lending, junior debt, asset-based finance and opportunistic credit, according to Reuters.
 
These new funds are an expansion of the firm’s Global Impact Fund, that was launched back in 2018 with the goal of investing in scalable, commercial solutions designed to tackle the critical global challenges of today. The $1.7 PE fund takes an active role in managing its portfolio companies’ ESG risks in order to build resilience and positive long-term performance. These initiatives form part of the firm’s ESG 2.0 framework, a bespoke strategy leveraging data from across its portfolio in order to "unearth trends, identify aggregate areas of ESG risk, disclose relevant metrics to investors, and potentially identify investments as relevant to future sustainability-focused investment strategies.” “Our investment teams are expected to implement the framework and incorporate ESG criteria on applicable transactions, proactively engaging with prospective portfolio companies and their owners,” said Ken Mehlman, Partner, Global Head of Public Affairs & Co-Head of Global Impact at KKR.
 
Reinvention of socially useful finance
 
ESG has really become the backbone of private equity, with rigorous ESG analysis on the different effects of a business’s practices on its stakeholders, the environment and society at large key driving value creation. It is no longer simply about good PR, or social washing. Employees want to work for companies with strong ESG credibility, who are levers of positive change in their communities. “When it comes to brand value, the qualities that make an organization appealing to employees and customers are often non-financial, and next-generation investors are raising the bar with expectations of transparency around this type of information. How does a company demonstrate self-awareness, foresight and long-term thinking? How does it best communicate its commitments to good corporate citizenship and environmental stewardship?” asks Daniel Arias from Crowe. “The exact answer will vary from organization to organization, but a solid ESG foundation can capture and frame the value no matter the context or investment thesis.”
 
This ESG foundation enables PE firms to rethink their fundamental investment strategies, something which has undoubtedly altered capital markets forever. Some firms have subsequently turned to data and analytics in order to leverage ESG criteria and deal with market risk. Ardian, the French investment house with circa. $120 bn in assets under management, has turned to digital tools to protect the returns of its renewable energy investments. Worldwide, the firm manages 6.15 gigawatts of installed capacity. Digital for sustainability is the modern way.
 
In reality, global investment houses are positioning themselves to be real drivers of social change, as underlined by Dominique Senequier, President of Ardian: “The act of investing in the real economy is essential for the growth and transfer of businesses. It is this type of finance, concrete and with a positive impact, at the service of companies, people and society, that we must now draw the lines for the future.”