Who’s responsible?

The largest private equity firms in the world have committed to consider socially responsible investment guidelines. Is this all just PR window dressing? asks Christopher Witkowsky.

Member firms of the Washington, DC-based lobbying group the Private Equity Council have signed on to a string of socially responsible investment rules, which, who can argue, appears to be a move in the right direction.

Those firms include Kohlberg Kravis Roberts, Bain Capital, TPG, Permira, The Blackstone Group, Apollo Global Management, The Carlyle Group, Apax Partners, Hellman & Friedman, Madison Dearborn Partners, Providence Equity Partners, Silver Lake and Thomas H. Lee Partners.

KKR has taken the lead in revealing this week that environmental friendly practices at three of its portfolio companies have saved it more than $16 million. Among those practices, the firm reduced paper consumption, reduced waste and decreased greenhouse gas emissions and improved fleet productivity.

The industry is in major need of an image overhaul, as a senior advisor with KKR said at a recent conference.

The firms’ move to incorporate socially responsible investment considerations when deciding whether to buy into a company seems right on the surface, but the timing is convenient. The question also arises as to whether adherence to these rules will really change the way firms do business, or if this is all window dressing.

The timing of such a media-friendly story coincides with increased scrutiny on the industry by regulators around the world. Two US Senators introduced the Hedge Fund Transparency Act earlier this month, which would require private funds with $50 million or more in assets to register with the Securities and Exchange Commission. Private funds under the proposed law include hedge, private equity and venture capital funds.

The rules do not prevent firms from investing in any company or in any industry. Firms can target companies that make weapons, produce toxic chemicals and have shoddy corporate governance structures.

What the guidelines do is force the members firms to take into consideration what kind of impacts the companies in which they invest have on the environment, public health and safety and other social issues. The rules also force firms to implement strict policies against bribing of public officials, respect human rights and confirm that their investments do not go to companies that use child or forced labour.

Monitoring compliance with the rules works on a buddy system: the firms themselves have to make sure they adhere to the rules, and the firms LPs are supposed to monitor compliance.

It remains to be seen if voluntary compliance with the socially responsible investment standards will really change anything about the way the industry conducts business. But if KKR’s actions are a sign of things to come, then the industry could be headed for a much greener future.