By Alison Fenton-Willock, Director, Sustainability, KKR Viewed correctly, sustainability practices offer more than just downside protection; they can be highly strategic ways to drive innovation, resilience and long-term economic value.
At times, particularly in heavily regulated industries, ESG practices can be viewed as little more than a list of financially burdensome boxes to tick—the unavoidable cost of doing business in today’s market. Investors, however, take a very different view.
From the vantage point of entities whose business model is building valuable businesses, sustainability efforts, when pursued thoughtfully, can be an integral source and driver of commercial success.
At KKR, I am a Director on the Sustainability team, where our core mission is to support investment teams to ensure that ESG considerations are embedded across all aspects of our investment process, from strategy development and due diligence to portfolio management, stakeholder engagement and more1. KKR invests in the sustainability function, and we strive to focus on business-relevant sustainability topics both at KKR and across our $500B plus portfolio for a simple reason: our firm exists to create and protect value for our fund investors, and sustainability is one lever that helps us to do that.
It’s time to look at sustainability through an investor's lens – which means avoiding a one-size-fits-all, check-the-box approach and instead grounding these efforts in materiality where focus is placed on the particular set of topics that are meaningful to each individual business. Doing so will reveal entirely new dimensions to this aspect of your business, including areas of risk and opportunity that may otherwise have flown under the radar and left commercial value on the table.
12022 Sustainability Report, KKR.
Understanding your sustainability ecosystem
For firms like KKR, the process of evaluating potential investments involves more than analyzing a company’s financial statements in a vacuum. It involves mapping the broader landscape within which that company is operating—including its industry peers, partners, suppliers, regulatory environment, geopolitical situation, geographic setting and a host of other factors—then studying the company’s relationship to that terrain in detail to build a holistic and nuanced picture of its viability, performance and potential returns.
ESG considerations connect to all the various dots on this map, and can be highly relevant to the implications for business success for companies, and therefore also relevant to investment decisions.
The questions investors ask when evaluating companies are also useful for leaders to ask within their own organizations. The answers can complement management’s understanding of the company’s operations, financial health, market position and growth prospects, as well as how and the extent to which sustainability practices can influence each.
The Maven Report highlights the ROSI™ framework.2 as an effective starting point for understanding where your company stands relative to the pace of change and its commercial impacts. Developed by the NYU Stern Center for Sustainable Business (CSB), this framework identifies nine specific areas of business that can be positively impacted when ESG considerations are integrated into strategy and decision making. Each of these is an area in which you are already investing time, talent and treasure. A robust ESG approach ensures those investments yield an even bigger return, particularly when it comes to the following:
Identifying and mitigating risk – Consider the example of a healthy company located in an area physically vulnerable to weather events. Factoring in the potential impacts of weather or environmental events, regulatory policies or local political dynamics alongside other factors objectively leads to a more comprehensive risk management process that enables the company to better predict future scenarios and better prepare for and insulate itself from potential disruptions that would have very real dollars-and-cents costs. The financial fallout of the 2011 BP Deepwater Horizon spill, which included over $65 billion in costs and fines and a 51 percent drop in stock value,3 underscores the economic benefit of seeking out and addressing sustainability red flags before they flare. Likewise, brands working with suppliers who, unbeknownst to them, engage in poor labor practices have faced costly lawsuits and targeted negative campaigns which may have been avoided with a more vigilant supplier vetting process focused on ESG alignment. See whether your risk profile changes when you add ESG-related factors into your evaluation. If it does, strategize what you can do today to preempt ESG-related risks that may be waiting down the line.
Increasing operational and financial efficiency – Lower operational costs are one of the easier ESG benefits to quantify. Global management consultant McKinsey & Company has found ESG strategies aimed at addressing operating expenses such as raw materials costs can positively impact operating profits by as much as 60 percent.4 (See also, “From technical debt to sustainable success,”) Less obvious, but extremely significant, are the reduced capital costs ESG practices can lead to. Investors, governments and private lenders are increasingly offering access to pools of funding and powerful financial incentives—actual money on the table—to companies that can prove a commitment to sustainability and responsible governance. U.S. financial giant Bank of America has issued $13.85 billion in green and sustainable bonds since 2013.5 And in 2022, half of the European leveraged loans examined by data and analytics firm Reorg featured sustainability-linked interest margins, adjusted according to how well the borrower met predefined ESG criteria.6
Make sure your investor pitch includes a compelling portrait of your ESG efforts and their impacts and seek out funding sources that reward companies who commit to and prioritize sustainability.
2Return on Sustainability Investment (ROSI™) Methodology, NYU Stern Center for Sustainable Business, stern.nyu.edu.
Recruiting and retaining talent – At the end of the day, your employees drive the success of your company. ESG practices and policies aligned with their expectations and preferences may incline them to stick with you, as well as attract new talent with similar values. Those who fall short may send top performers elsewhere. There are measurable cost benefits to retaining top employees, and significant expenses, both hard and soft, associated with recruiting new ones. 2022 data from The Society for Human Resource Management (SHRM) found the average cost to recruit and hire a single new candidate was close to $4,700; some estimates put that number two to three times higher.7 (See also, “The ESG key to unlocking Millennial and Gen Z loyalty,”)
Open employee dialogues to make sure your ESG practices are aligned with your current employees’ desires and expectations—or are on track to—and integrate your ESG story into your recruitment programs and interviewing process. Have they factored into hires decisions to join you, or played a part in candidates rejecting your offers?
3Passwaters, Mark, “Deepwater Horizon disaster, 10 years later: Changes made but scars remain,” S&P Global Market Intelligence, spglobal.com. 4Henisz et al., Witold Tim Koller, and Robin Nuttall, “Five ways that ESG creates value,” McKinsey Quarterly, mckinsey.com, November 2019.
5Manning, Tom, “Financing Mechanisms to Support Sustainable Practices,” NYU Stern Center for Sustainable Business, stern.nyu.edu, November 2023. 6“2022 European Sustainability-Linked Loans Wrap: Sustainability-Linked Loans Continue to Gain Prominence in 2022 but Margin Adjustments Remain Modest,” reorg.com, January 2023. 7Navarra, Katie, “The Real Costs of Recruitment,” SHRM, April 2022. 8Kronthal-Sacco, Randi and Tensie Whelan, “Sustainable Market Share Index™,” NYU Stern Center for Sustainable Business, 2022 (updated June 2023). 9“Consumers want it all: Hybrid shopping, sustainability, and purpose-driven brands,” IBM Institute for Business Value in association with NRF, January 2022.
Attracting and keeping customers – Like employees, customers increasingly want the brands they transact with to reflect their values, which often include environmental and social responsibility. According to the 2022 NYU Stern CSB Sustainable Market Share Index™, sustainability-marketed products grew two times faster than conventionally marketed products between 2017 and 2022, and delivered 30 percent of CPG growth in that time—despite representing just 17 percent of market share.8 In line with these findings, 51 percent of respondents in the 2022 IBM Institute for Business Value consumer survey said environmental sustainability was more important to them today than it had been 12 months prior; 76 percent said they would maintain or increase spending on sustainable brands.9
Let your customers know about your ESG story. Integrate it into your brand messaging, marketing and enablement materials, and make sure your PR, communications, sales and marketing teams, and partners understand how to communicate it effectively, and why it matters to revenue. Just as importantly, educate yourself on how your sustainability practices and your message around them compare to those of your competitors—because consciously or not, your customers are doing just that.
Igniting and fueling innovation – ESG goals can be an incredible catalyst for innovation, sparking creativity and inspiring new products, services and business models that address environmental and social challenges while tapping into customer preferences for sustainable options.
One inspiring example of many is Atlanta-based flooring company Interface. They set a bold Mission Zero® by 2020 carbon-neutrality goal back in 1994, when corporate sustainability was in its infancy. That ambitious target spurred a host of industry-first innovations, including a fully carbon neutral (and in some cases, carbon negative) product line that, in turn, helps their customers meet their ESG targets through eco-friendlier-built environments.10 In 2022, they also became the first enterprise in the industry to be fully carbon neutral—all the way through their supply chains—and in 2023 they were named one of Time magazine’s 100 most influential companies.11 Talk about competitive advantage!
Devote serious, collaborative thinking to what opportunities for significant product evolution and powerful industry differentiation lie just beyond the tactical horizon of your sustainability requirements. Imagine what an audacious ESG commitment could push your teams to conceive of and achieve, that would transform outcomes for your customers and drive new revenue for your organization
You don’t need to be a climate change activist to accept that business success in the twenty-first century is indelibly linked to sustainability. With regulatory and societal pressures increasing by the day, ESG is no longer a niche interest or something to give a perfunctory, performative nod to.
Fortunately, you’re also not faced with a stark choice between meeting mandatory compliance requirements and upholding the tenets of capitalism. By adopting a comprehensive and strategic view of ESG, the same way investors do, you can keep your business on the right side of regulations, do the right thing for the planet, and deliver the bottom-line value your customers, employees and stakeholders expect and deserve.
10Sustainability Overview, Interface. 11Time100 Most Influential Companies 2023, Time magazine.
