Corporate America and major green groups are starting to build ties as companies see the benefit of getting ahead of a trend toward environmental responsibility. While partnerships have been emerging case-by-case, environmentalists are starting to ramp up their efforts to target money mangers and investors in an attempt to change how corporations do businesses.
Corporate America and major green groups are starting to build ties as companies see the benefit of getting ahead of a trend toward environmental responsibility.
While partnerships have been emerging case-by-case, environmentalists are starting to ramp up their efforts to target money mangers and investors in an attempt to change how corporations do businesses.
The latest entrant: private equity firms that control billions in company assets.
Kohlberg Kravis Roberts & Co. (KKR), a private equity firm that controls 46 companies, announced a major agreement last week with the Environmental Defense Fund (EDF). Through the deal, EDF will effectively operate as an unpaid consultant, advising KKR on energy consumption, waste output and the carbon emissions of its companies.
"It's not as if we are trying to resolve an issue," said Fred Goltz, co-director of KKR's energy practice. "We're trying to get ahead of an issue, and potentially set an example in terms of how best to manage, monitor and improve environmental footprints across the portfolio."
Well before the deal, EDF had already scored what may be its greatest coup in a prior arrangement with KKR. In cooperation with the group, KKR killed plans by TXU -- the Dallas electric company the firm was acquiring -- to build eight of 11 coal-fired power plants.
The KKR-EDF partnership, proponents say, is an excellent example of the growing influence of the environmental movement over private equity firms and other well-placed investors to influence boardrooms, leading to a broader cultural change by dint of their large stakes in or outright ownership of a multitude of key companies.
"We had a very constructive working relationship with EDF in the context of the TXU transaction," Goltz said in an interview. "The opportunity to potentially extend the relationship to our broader U.S. portfolio and marry what we consider to be one of our primary skill sets -- which is to systemically measure performance financially and within companies -- to take that expertise and marry it with EDF's practical and real environmental expertise. We see that as a real opportunity for our portfolio companies."
'We're still at the beginning'
Launched in 1976 and still operated by its founders, Kohlberg Kravis Roberts & Co. held equity investments valued at about $86 billion as of the end of last year. Along with TXU, the firm owns a corporate potpourri that includes big retailers like Toys"R"Us and Sealy, the credit card company First Data and the media research giant Nielsen.
KKR enjoys annual revenues of about $185 billion, and the companies in its portfolio employ roughly 825,000 people worldwide. That footprint makes the agreement with EDF so important, people behind the deal say.
"We want to see [the partner companies] become best practice in the industry sectors where we are working," said Gwen Ruta, EDF's vice president of corporate partnerships. "The tools and systems and metrics that we develop with KKR, they will become public and they will be able to be adopted by others in the same industry. So we're looking for sort of broader change."
The KKR deal marks the first time EDF has partnered closely with a major investment house that directly controls dozens of companies. Previously, the model was one of working directly with individual brand-name companies, such as Wal-Mart Stores Inc., an EDF partner.
There is enough promise in the new model that EDF plans to start approaching more private equity firms soon.
"We're still at the beginning of the learning curve," Ruta said, "but we definitely will be."
To be sure, the effort has a long way to go before it is an industry norm. Most private equity firms are still firmly focused on the bottom line, but as new environmental legislation emerges and corporate social responsibility becomes more mainstream, many see a bull market for companies wanting to adopt green practices.
"Perhaps a public company that's managing from quarter to quarter may have a difficult time justifying [a green] mindset," KKR's Goltz said. "For someone like us that's managing over a much longer term, we just feel like we'd rather be ahead of the curve than behind it."
Climate measures provide motivation
That KKR approached EDF first is a sign that the environmentalists' evolving strategy of pursuing cooperative ventures with investors and influencing shareholders is paying off in ways that many had not anticipated. And its impact is growing as Congress moves toward regulating heat-trapping greenhouse gases and taking other steps to address climate change.
"Both sides on that equation are beginning to realize that each has something to offer that the other doesn't necessarily have," said Ed Barker, director of corporate partnerships at the Earthwatch Institute.
"Nonprofit organizations are recognizing that they need the scale and influence that the private sector has, and the private sector is recognizing that the environmental organizations have expertise, credibility and in some cases also access that they don't necessarily have," he said. "So you're seeing a real convergence of those two."
Although waves of green euphoria have infected the corporate world before, the growing government concern over energy scarcity and climate change makes this time fundamentally different and permanent, many experts say.
Consider that some of the largest corporations whose very business model depends on environmental damage are moving away from their core business practices to emphasize sustainability and resource protections, experts say. For example, Rio Tinto, one of the largest mining concerns in the world, has formed a "consortium" with a handful of environmental nonprofits, including Conservation International, to advise the industrial behemoth as it struggles to keep to its pledge of no net loss of biodiversity in its operations.
"Done right, it is a healthy relationship that is both challenging and collaborative," Barker said. "These partnerships are at their best when they are co-equal partners in which one organization can say to the other, 'That's not going to fly, and here's why.'"
A rough division of labor seems to be emerging among environmental groups as corporate partnerships evolve.
The Natural Resources Defense Council (NRDC), for example, says it works closely with companies primarily for drafting legislation, an effort to guarantee that bills moving through Congress and state legislatures won't meet stiff corporate resistance later. NRDC is using this approach now toward climate legislation in Congress.
"That's where we think we get the most critical leverage is in that dialogue, especially in this season where we're in the middle of shaping the biggest environmental legislation that's ever moved through the Hill," said Rick Duke, director of NRDC's Center for Market Innovation.
Others, like EDF, focus on changing corporate culture and internal business practices, without necessarily pushing regulations on companies. And some focus on the development of environmentally friendly products, as in the Sierra Club's arrangement with Clorox.
The atmosphere is also getting noticeably less litigious, people involved say.
"I think it's fair to say that the focus of action, on global warming in particular, has shifted from the courtroom to the boardroom," NRDC's Duke said. "That said, the litigation aspect of this challenge remains important, and in selective cases, it's still very relevant."
But the days when the first conversations between corporate executives and environmental activists would be over lawsuits are fast receding into the past.
"Many organizations have recognized that you catch more bees with honey than vinegar," Earthwatch's Barker said. "They haven't given up on those [legal] tools, but I think they like to avoid using them if they can."