Ken Mehlman, co-head of KKR’s Global Impact platform, reflects on the last year and looks ahead to 2023.
Looking back at 2022, were there any pivotal events, moments or developments in terms of sustainability in private markets?
2022 was an important year for sustainability because of the recognition that environmental sustainability has to also be built on affordability and security, and important steps were taken to advance all those goals. The passage of the Inflation Reduction Act (IRA) in the US was a pivotal moment for dramatically accelerating private investment in the energy transition and making all components of green energy more affordable.
The scale of the IRA is unprecedented for climate action, and together with the bipartisan infrastructure legislation, it will make the energy transition more affordable for all Americans. Europe also took steps to accelerate its energy transition and its recognition of the need for energy security after Russia’s invasion of Ukraine made its reliance on Russian oil, gas and coal unstainable from both an environmental and a security perspective.
On the social sustainability side, the launch of Ownership Works (OW) in 2022 represented critical progress for workers, management and investors. Launched by my partner Pete Stavros, in collaboration with KKR and other investment firms, labour advocates, corporate leaders and civil society organisations, OW engages with companies to establish broad-based ownership programmes and provide their employees with the opportunity to participate meaningfully in the value they help create. It is a fantastic win-win model.
Lastly, the progress that the International Sustainability Standards Board (ISSB) has already made since its launch in late 2021 is significant and we think this organisation will have a meaningful impact on disclosure standards in the years ahead. The ISSB will have an outstanding board member in Elizabeth Seeger, our colleague for more than 14 years.
Thinking specifically about private markets, do you think the industry has made progress on climate in the last year? Where are the bright spots? Where has it disappointed?
2022 was the year that climate moved into the mainstream for private markets. Some of us in the industry have been investing behind the climate theme for years and incorporating climate risk into our diligence and portfolio management processes. Yet, for years, many private asset managers saw climate as a niche area and primarily an issue for ESG reporting.
The amount of capital raised for private climate-related strategies shows just how mainstream climate has become. Although full-year data for 2022 is not yet available, the trend is clear: the amount of capital raised for private climate-related strategies was nearly $45 billion in 2021, according to Pitchbook data, and it is growing.
The move away from divestment and towards investing in climate solutions and supporting “brown to green transformations” reflects this maturation. Given the scale of investments that we collectively manage, private markets investors have an exceptional opportunity to help companies decarbonise and otherwise improve their environmental footprints across industries and geographies.
Looking ahead to 2023, what is your firm’s next priority in terms of the climate? What would you like to have completed over the next 12 months?
Climate change is a mega theme that will shape the investment landscape for decades. We want to be part of the solution and are approaching it in three ways:
First, we are seeing much more interest in the opportunity for private capital to accelerate “brown to green” transformations, helping privately-held companies to decarbonise and otherwise improve their environmental footprints in ways that are smart for the overall value of the enterprise. We are working toward investing in companies that are helping scale such solutions. For example, one of our portfolio companies, CMC Machinery, installs and operates 3D packaging machines that match packaging size to product size, which has reduced the amount of cardboard in packaging by 130 metric tons.
Second, by integrating climate risk mitigation and value creation into our investment processes across all asset classes. The risks come in many forms; they can be physical or regulatory, they can come from weather changes or transition risk. The opportunity, however, is the ability to transform operations in ways that mitigate those risks across all businesses where it makes sense for the bottom line.
Third, by providing our portfolio companies with a variety of resources to support climate-related priorities. We have a team of more than 15 full-time, sustainable investing professionals and subject matter experts within KKR Capstone, our in-house operational improvement team, who are dedicated to supporting decarbonisation across our portfolio. We also offer our portfolio companies a climate training programme and provide additional training to KKR executives on portfolio company boards.
Aside from climate, which other areas of sustainability will be prominent on your agenda and why?
We need to rebuild, reskill and re-engage the global workforce. According to data from Lightcast, a leading labour market analytics provider and KKR portfolio company, the top skills in the average US job are 37 percent different than they were just five years ago. We are also seeing demand for highly skilled workers significantly outpacing supply in a number of sectors including aviation, nursing and engineering. We have made a number of investments focused on addressing this issue globally.
Since 2011, KKR has implemented a broad-based ownership and employee engagement programme for workers at more than 25 portfolio companies and has committed to implementing these programmes across all new control investments within our Americas Private Equity business. To date, this model has awarded billions of total value for over 50,000 non-senior employees and has seeded a much broader movement through OW, which I mentioned earlier.
We will also continue to invest in solutions that further diversity, equity and inclusion (DEI) and support DEI efforts at our portfolio companies.