Creating Value through Sustainability

We get a lot of questions from clients about our approach to sustainability. It’s a big topic that boils down to something simple: Taking the right approach to sustainability can help businesses create value.

Recently, I joined Anne Arlinghaus, Co-Head of KKR Capstone in the Americas; Florian Christ, Head of KKR Capstone Global Infrastructure; and Annie Young-Scrivner, CEO of Wella Company, a global beauty company in the KKR portfolio, at a meeting with some of our investors in the Americas to discuss building value through sustainability.

Here are four of the important points we covered in our conversation:

Focusing on Material Issues Is Key to Value Creation

Environmental, social, and governance issues can pose additional risk to companies or, handled exceptionally well, create a potential advantage. Some of these issues are universal. Every company can benefit from thoughtful governance, building a workforce of engaged employees who think and act as owners and encouraging hiring from diverse backgrounds to promote diverse thinking, optimizing the use of energy and other resources, and taking cybersecurity seriously.

However, some issues are company-specific. Social and governance issues, like safety and tightly managing the supply chain, are material to companies that make clothing and footwear. Those issues aren’t as important to banks as data security. Identifying and focusing on material issues can be an important lever for creating or preserving long-term value for companies.

Employee Engagement: You Manage What You Measure

We’ve learned over the last four decades that companies tend to perform better when employees are engaged and empowered at work. However, as Anne Arlinghaus noted, not everybody “can snap their fingers and create an engaged and inclusive culture.”

We are developing tool kits to better engage, empower, and mobilize our workforce and employees at our portfolio companies. Many of the lessons we have learned have come from our broad-based employee ownership programs, an effort led by our colleague, Co-Head of Global Private Equity Pete Stavros, and our group of operational partners at KKR Capstone.

Collecting quantitative data, including through annual surveys, is an important way to measure engagement and create a baseline for improvement. Anne recounted how a CEO at one of our portfolio companies managed a disappointing survey “in the same way as if she had a problem with scrap or another manufacturing issue.” She visited the firm’s locations to find the root causes of low engagement, and then experimented with solutions, including rewards and recognition programs and training for managers. We think this kind of hands-on leadership and accountability, as well as strong and transparent communication, is a critical component in building ownership cultures.

Energy Efficiency Is Good for Business and the Environment

The sharp rise in energy prices in 2022 underscored that energy efficiency is a business issue for many companies, some of our panelists recalled. Annie Young-Scrivner said that Wella Company saved 25% on energy last year by implementing its workers’ conservation ideas, including re-engineering delivery schedules to make fewer trips, retooling production schedules, and even keeping lights off in daylight hours.

Florian Christ noted that investments in energy efficiency not only stand to save companies money, but to reduce their exposure to carbon pricing mechanisms, which already exist in much of the world, and help maintain their “license to operate,” especially when they are suppliers to major corporations that have committed to drastically reducing their greenhouse gas emissions.

When Sustainability Breeds Innovation

Solutions to sustainability issues can also offer unique investment opportunities. KKR’S Global Impact Fund recently invested in CoolIT, a company that makes liquid cooling solutions for data centers that are designed to reduce energy use and water consumption, which in turn stands to reduce a company’s costs and carbon emissions. Data storage is energy-intensive: By some academic1 estimates, data centers may consume 8% of the world’s energy by 2030. We think solutions that can offset some of this energy usage will not only help address climate change but help companies save money and reduce regulatory risks.

Annie told the group about how a sustainability mindset has led to innovative new products at Wella Company, including a Ghd-branded tool called the Duet Styler that allows users to style and dry their wet hair at the same time. The process uses 45% less energy, but is also more convenient for users.

Conclusion

Our operational experts and business leaders have seen that addressing material, business-relevant sustainability issues is just as important as any other operational issue. We think sustainability is an important part of creating long-term value for the people we work for, our clients, and the hundreds of thousands of people who work at KKR and at our portfolio companies.

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