Mega-ESG: Carlyle, TPG Talk Culture and Responsibility

David Snow, Privcap: Today we are joined by Bryan Corbett of the Carlyle Group, Ed Norton of TPG Capital, and Beth Lowery of TPG Capital. So we're talking today all about a very important topic and a topic of increasing importance in private equity. It is ESG, Environmental Social Governance. All of you play a role in your own private equity firms in building and striving for excellence within that function. So I'm fascinated to hear about the trends that you see with regard to ESG in private equity.

Why don't we start by recognizing the fact that your firms and all firms in private equity didn't used to have ESG functions and have added these as the industry has matured and as your firms have sort of upped their game. I'm interested in understanding how it was. Let's start with TPG. TPG decided to create an ESG function and what it looks like now. Who's in it? What do they do? Maybe starting with Ed.

Edward Norton, TPG Capital: I've been at TPG for 4 and 1/2 years now. I came to TPG at the request of one of the founders of the firm, David Bonderman, who really believe strongly that TPG needed to take on a much more systematic look at the way the firm was addressing environmental, social, and governance issues. There was really no formal or structured program to do that at TPG before I came to the firm.

The firm had considered it and looked at different alternatives, whether that function might be outsourced. And they decided to build that function, the ESG function, from within the firm. And so I came to TPG 4 and 1/2 years ago to help TPG think that through it and then set it up.

We essentially gave the role two primary functions. One was to look at our portfolio companies and how they were addressing ESG issues. And the second and very important role was to look at how we were doing environmental due diligence and risk management and sort of opportunity foresight with respect to our investment decisions.

Those were the two primary roles that I was charged with developing. And that's basically what we've done. initially I was the person doing it. Recently we brought on Beth Lowery, who had extensive experience doing this at GM. And then we have another person who was assigned the role of helping us do research and communicating both within and outside the firm. Our principal effort has been to try to enlist the knowledge and experience of our portfolio companies and also the people at TPG who work on investment decisions in really helping them develop their capacity to look at these different issues and functions.

Snow: Ed, I'm glad you mentioned Beth. Of course, we have Beth here today. And so talk about how your role was conceived at TPG and what you do now.

Beth Lowry, TPG Capital: Sure. With the leadership of Ed in really establishing the program at TPG, it was an easy decision to decide to come and join and really look at how ESG and sustainability can really add value to both the portfolio companies and to TPG as a private equity firm. So it's been really exciting to learn about the diverse portfolio and to figure out where we can go with the program, because this is becoming so important with respect to the GPs and for society as a whole to really look at all of these issues at a global scale. And certainly private equity has the ability to do that.

Snow: And Bryan, and we're going to touch on this in a bit, but every private equity firm that has established an ESG program or whatever they call it has established it in a different way. So I'm

© Copyright 2013 Privcap. For more information, visit http://www.privcap.com or call 855-PRIVCAP interested in your view on sort of how Carlyle came up with the function and what you do and how they structured it.

Bryan Corbett, Carlyle Group: Sure. Carlyle began to really think more systematically about ESG issues really in 2008, 2009. We reached out to some other GPs, also reached out to the Environmental Defense Fund to begin to talk about how we should approach ESG issues. And I'm part of our external affairs function at Carlyle, and we house our corporate citizenship ESG issues within our external affairs group. So I spend a good chunk of my time working with our investment teams and with our portfolio companies to talk about ESG issues that they may be encountering.

So my role is really one of helping to encourage, coordinate ESG activities across our portfolio. We don't have Carlyle employees that are embedded with different portfolio companies, so we don't have a lot of resources on the ground. So as Ed said, it's really important to leverage your investment teams in the portfolio companies to get them to buy in and to really help push ESG programs.

So one of the things we've tried to do and, to your point on culture, we have 100 funds. We have 32 offices around the country, so it's impossible for us to be on top of everybody at one time monitoring what's going on. So we really try and set a tone from our sort of Washington office, work with the investment teams, and really serve as kind of a clearinghouse for information, for relationships, expertise.

So if a company's interested in an issue, I'm talking to them. I can put them in touch with the right resources. And we can really facilitate their understanding of ESG and help them find the right people to advance their agenda.

Snow: Let's get a bit more into the subject of culture. Every firm has its own culture. And that informs everything they do, including how they select investments and the kinds of people they like to hire. How does culture and how should culture affect the way that a private equity firm might establish an ESG function or however you might want to call it. How did TPG do it?

Lowery: Well, and I think you're right. Culture is very important to each of the companies and each of the private equity firms. And certainly the culture at TPG, there's very strong passion and leadership at the top of the company, which is very important. So as Ed mentioned David Bonderman really bringing Ed in and establishing the program, so you have to have the tone at the top.

And then it's very important to get the commitment and get the processes and the networking. What I've also discovered that this encouraging and an advocacy role in persuading people, it's very different than say my role at a large corporation like General Motors, where for the plants we would say, you need to do X, Y, and Z. With the portfolio companies, it's really encouraging them to do the right thing because it's going to increase the value of the company.

Snow: Ed, can you talk about what it was that David Bonderman in particular saw in the world or saw in his responsibilities as a person running a major private equity firm that led him to have a conversation with you?

Norton: David has a long history of very intense, deep involvement in conservation and environmental issues. I think that was certainly part of what caused him to think TPG needs to approach this more systematically. I think that David and other people in the leadership of the firm, Jim Coulter and others, really thought, approach this from the very beginning from a business point of view.

When I came to TPG 4 and 1/2 years ago, it was very clear to me that the work that I was going to be doing was not part of what you would call corporate social responsibility. I was instructed very clearly to build this program as a part of the business of the firm. And both David and Jim Coulter and other people in the leadership of the firm said very clearly to me, we are doing this for the following reasons. We are doing this because we will make better investment decisions. We will minimize risk. We will find better opportunities.

Secondly, we are doing it because our portfolio companies will operate more efficiently and more profitably. From the very beginning they told me that they wanted a program that was focused on ESG's contribution to the bottom line and to adding value.

They also said, we think it's very important because as we look at the world, we need to do this because we will hire better people. Younger people coming into the firm are increasingly asking these questions about this.

And finally, and Jim Coulter said this very clearly to me, we're going to do this because we want to be on the right side of history. This is the right thing to do. It's important for the firm to be identified as taking the initiative and taking a leadership role in building out a program like this. So there were four very clear reasons from the get-go.

Corbett: Yes. I would agree with that, Ed. I think those sort of internal themes are very consistent with what we saw at Carlyle in terms of trying to create value with finding win-win situations where you identify opportunities that have a good environmental impact plus also a positive financial impact.

I'd say there was one other impetus as well, which was the limited partners. You began to hear from LPs that they were increasingly interested in and how GPs were thinking about ESG. And it became part of LPs' due diligence around investments.

So increasingly we were finding ourselves in situations where we were explaining to LPs what we were doing. But we decided to take the next step and become much more systematic and organized about how we described our efforts and how we report on it. And I think the LP dynamic is one that continues to play out as well.

Snow: Well, it's fairly clear how you measure success in the investment business. It's what return did you get. How do you measure success in the ESG function within your firms, given that you're measuring the impact on investments but also did you do the things that you said were going to do to ensure that there's a positive impact on the environment, for example, or ensure that there was better corporate governance in place. So the question is all about how do you measure the impact that you're having on your firm's success?

Lowery: Well, I think metrics in this whole area are very challenging and very difficult. I think one of things that we've really focused on is looking at, for example, in the operational efficiency what's the improvement from an emissions standpoint? And then what are the cost savings associated with that? It's very important to look at the programs at the portfolio company level.

I also think-- one of the things we measure is we have a sustainability leadership council. And it's made up of our portfolio companies. And so how many people are actively involved in that? What companies have specific policies and goals and metrics? So we want to make sure we're measuring each of those portfolio companies to make sure they're making progress on the issues that we think are critical.

Snow: Ed, thoughts on measuring success?

Norton: I think that from the very beginning developing measures of success and metrics has been-- as Beth said, it's a challenge, but it's been very important. And we have a strategy with respect to our portfolio. We ask our portfolio companies to, and we help them, develop a sustainability policy.

We also ask them to select or to identify a particular platform, we call it, or activities. It might be energy, energy efficiency. It might be waste. It might be water. It might be any number, but it's a specific area of focus where they believe they can create the efficiencies with the best return really the quickest.

In other words, we all are working through this process and trying to develop strategies. And so one of the I think goals at the beginning in working with a portfolio company or working within TPG is to identify what we call the low-hanging fruit, the quick wins, the places where you can really begin to get traction. And so we've ask our portfolio companies to identify particular goals, targets for doing that, and to set up a system of metrics.

On an activity like energy or energy efficiency, that's not difficult to measure. And it's really you can look at the amount of energy you're using, the cost of that energy, and then the reduction in energy costs that occur because of the steps that you take. And then it's very easy to calculate the environmental benefits

© Copyright 2013 Privcap. For more information, visit http://www.privcap.com or call 855-PRIVCAP that flow from that. I mean, you can look at your energy and energy reduction and calculate the greenhouse gas emission reductions. So in all of these areas, you really can set up both financial metrics and environmental metrics.

Corbett: I would add that we do spend a lot of time thinking about the right set of metrics to track our companies. And it's difficult. And it's difficult for a whole host of reasons. Some companies are more efficient than others. And some have a water issue while others have a waste issue. And sort of finding common metrics is very difficult.

So one of the things we've focused on is, as an organization how can we, Carlyle, track how we are better spreading ESG thinking across our portfolio? So it's not necessarily at Company A, but it's more broadly across the organization. So for example, we have a set of responsible investment guidelines that we adopted several years ago. And now we track the number of boards of directors at our companies that discuss and review those guidelines each year. We also very closely track the number of companies that have started new initiatives.

And so there's kind of a qualitative measurement metric that I would say is out there as well, which is not just CO2 reduced, but what's the buy-in like? Are you seeing more people across your investment teams take up this idea? So for example, we launched an initiative this year focused on our US real estate portfolio. We don't have specific dollars around that yet, but the fact that we have now expanded beyond buy-out into new asset classes is a positive indication that we are seeing success with our program.

Snow: I would imagine that there's also the challenge of it's hard to measure the value that you've brought by avoiding a possibly catastrophic deal or a catastrophic situation like not investing in a company perhaps overseas that had catastrophic labor practices or a shortfall. And so you see the headlines and you see other corporations going through these reputation-destroying incidents. And that's what you're trying to help your firms avoid.

Corbett: Right. And Ed made that point, which I think is a good one, which is sort of the risk mitigation element of this, looking for those reputational risks that you can mitigate before you go into investments is crucial. And we had an investment a couple years ago in a company called China Fishery, which is one of the largest commercial fishing companies in China. And we very early identified fish stock sustainability is a real issue.

And going into that investment, we talked to the portfolio team about it, both on our side and we talked to the company management about how do we mitigate this, because we were concerned about the reputational risks. So going into the investment, as you said David, you can begin to sort of take some of those risks away. And that's hard to quantify, but you know it has value.

Lowery: And all that is really driven by making sure you're having those discussions early on within the firm and with the management of the company. So it's everything from doing the work up front with respect to what investments are appropriate from a due diligence standpoint, and then actually through the operations really trying to improve some of those activities. :