By Ted O'Callahan
Suspicion and animosity used to be hallmarks of the relationship between private business entities and environmental groups, so it was noteworthy when two top private equity firms sought the blessing of conservation organizations on the largest leveraged buyout in history. The détente came in 2007 when Kohlberg, Kravis, Roberts & Co. and Texas Pacific Group consulted with the Environmental Defense Fund and Natural Resources Defense Council in the process of the $45 billion acquisition of Texas Utilities. When TXU gave up plans to build eight new coal-fired power plants and pledged to cut overall greenhouse gas emissions, EDF and NRDC gave their blessing to the plan.
EDF and KKR went on working together, launching the Green Portfolio program in 2008, which helps KKR's portfolio companies measure and improve environmental and business performance in five areas: greenhouse gases, water, waste, forest products, and chemicals. "The Green Portfolio program isn't about creating a complete sustainability program," says Elizabeth Seeger, who helped start the program while working at EDF before moving over to KKR in 2009. "Our intention is to bring resources to bear on the highest priority issues for the companies."
Audrey Davenport '09, a project manager at EDF, says, "A systematic environmental assessment of a company's value chain can uncover a range of opportunities to improve performance — including cost reductions in the near term and growth, brand enhancement, and employee recruitment and retention in the longer term." She adds that "effective environmental initiatives don't require significant new staff time and resources, just a strong focus on performance metrics and results" — an important consideration in the current economic climate.
The three companies that took part in Green Portfolio's pilot year generated savings of $16.4 million. The biggest returns were at U.S. Foodservice, which saved $8.2 million and reduced greenhouse gas emissions by 22,000 metric tons, or 8%, through steps including reducing idling, installing speed governors on vehicles, and using routing software for its fleet. "The results for the pilot phase made it easy to engage other companies," Seeger says. At this point 20% of KKR's portfolio companies are involved. KKR is able to help with information sharing across the portfolio, providing experiences, expertise, and data that wouldn't be available without the firm's involvement.
"One of the main goals of the program is to identify best practices and make sure everyone in the portfolio has access to them," Seeger says.
In 2008, discount retailer Dollar General began a number of green projects, including a program that returned almost all cardboard from retail stores to distribution centers for recycling. Dollar General's participation in KKR's Green Portfolio program, starting in 2009, gave momentum to those efforts, according to Enrique Morales, senior director of supply chain engineering for Dollar General. The various function areas that were working independently have begun to meet regularly. Morales says, "There are now a lot of conversations like 'I already spoke to that vendor and here's what he said.' Or 'We did an ROI on this lighting technology and here's what we found.' That piece is a clear result of the involvement with KKR and EDF."
Dollar General decided to focus on reducing greenhouse gas emissions and waste production, so the company began to measure all programs in either tons of carbon emissions or cubic yards of waste. "That let us look across the company and say, 'Where is the big footprint coming from? Is it our transportation fleet? Is it the electricity our stores use?'" Morales explains. "With 8,900 stores, that is by far our biggest lever, so that is where we are focusing the majority of our efforts."
Since 2007, Dollar General has reduced cubic yards of waste generated by retail stores by 65%. In 2009, the company recycled more than 135,000 tons of cardboard. Next steps that are being investigated or implemented include emerging technologies such as LED lighting systems and energy management systems that automatically control lighting and climate in stores.
SunGard, another KKR portfolio company, quickly pinpointed its data centers as the key opportunity for improvement. The software and IT services company has more than 20,000 employees in more than 300 locations around the world. The firm manages nine million square feet of space, and five million of that is dedicated to data centers. "If we had done this on our own, we would have spent a lot more time figuring out what to do, how to do it, and who could help us," says SunGard principal Max Dufour. Working with KKR and EDF, they were able to move directly to hiring a well-vetted vendor specializing in data gathering and improvements for these sorts of operations.
The power usage efficiency (PUE) of a data center is a measure of the power going to the facility relative to the power going to the hardware itself. Ideally it approaches 1, but 2.5 is typical across the industry. SunGard has a center in Sweden with a ratio of 1.3. The number is so low because it is able to circulate cool outside air at little cost during most of the year. In warmer climates that sort of PUE would be much more challenging to achieve, but SunGard is establishing baselines for each center to be able to track year-to-year improvements.
The company is also working on a range of best practices, including virtualizing servers, which has the potential to decrease the number of servers used by 95%, according to Dufour. These and other efforts, such as consolidating and greening office space, are discussed in virtual groups on an internal social network hosted by Yammer. The changes won’t come from a one-time review but will be part of an ongoing assessment as technologies and practices shift.
"Sustainability can't be bolted on to a company. Companies that want to do this well will have it worked into every aspect of the culture," says Ryan Whisnant, SunGard's director of sustainability. "In the ideal scenario, I don't know that sustainability would be visible. It would be one of the questions reflexively asked: Is this good for the business? What is the sustainability impact?"
From EDF's perspective, this is an opportunity to share expertise in market-based environmentalism. "Private equity firms control, via the companies they own, about 10% of U.S. GDP and employ millions of people," says Davenport. "At EDF we can't possibly work with or partner with every one of those portfolio companies, but we can work with KKR and other PE firms to help drive change across the industry and to help make environmental management a best practice at KKR and the companies they own." EDF isn't paid for its time or expertise; instead the organization gets to learn. "We essentially get an opportunity to pilot a new set of tools and analytics and then have a powerful set of case studies to share with the industry." Based on its work with KKR, EDF has put together a green workbook that is available to any company looking for low-cost but proven ways to assess environmental impact strategically.
The private equity industry appears to be paying attention. The Carlyle Group recently announced a partnership with EDF as well. Its focus will be adding the environmental lens at the acquisition phase.