By Ken Mehlman, Robert W. Antablin Oct 11, 2022
We recently published our annual Global Impact Summary Report, which reviews key developments in our Global Impact strategy, launched in 2018 with the goal of investing behind scalable, commercial solutions that seek to solve global challenges. When reflecting on the Global Impact strategy, we thought it would be useful to examine macro trends, our investment themes and lessons learned along the way.
Macro Trends: Last year we noted that COVID served as a reminder of the importance of preparation and the need to build more sustainability, resilience, and equity across societies. In our judgment, Russia’s unprovoked attack on sovereign neighbors in Ukraine and its fallout this year reinforces some of these needs, as do supply chain and worker shortages plaguing many industries. The Russian assault has amplified a number of investment trends we have been following closely. For example, European leaders have accelerated their commitment to the energy transition; countries around the world have started to focus even more on building local supply chains for key products and services; worker shortages for key functions reinforced the need to upskill and reskill the global workforce; and cyber vulnerabilities came into even greater focus as a result of the war.
Investment Themes: We also reflect on recent trends related to our four key investment themes: climate action, sustainable living, lifelong learning, and inclusive growth. We have noted before the resilient nature of our investment themes, which are buoyed by governments, companies and consumers.
The regulatory requirements on climate action and other ESG priorities accelerated in 2021. In March 2021, the European Sustainable Finance Disclosure Regulation went into effect, setting a foundation for increased investor disclosure on ESG-related data. In the United States, the SEC proposed new disclosure rules on climate for public companies and on investment practices related to “ESG funds.” In addition to their effect on our own work, if adopted, these rules are likely to reinforce the importance of corporate ESG commitments, another component of the macro tailwinds behind our investment themes.
Lessons Learned: We have a deep and long-held commitment to being an active member of the impact investing community. As such, we look to learn and share insights more broadly, including those below.
Use of platforms to scale impact: When we established the Global Impact strategy in 2018, our thesis was that by investing in proven business models we could both create value and maximize positive societal impact. One way we have achieved this has been through thoughtful mergers and acquisitions and positioning our companies as platforms to support the scaling of impact. Today we are focused on building experience in critical components of the operational, cultural, and leadership tools needed to successfully merge existing enterprises.
- Need to advance climate action in our companies: Climate action is not just an investment theme for us; it is an imperative across our work. Since launching our Global Impact strategy, we have worked to understand climate-related risk and have helped our portfolio companies measure Scope 1 and 2 greenhouse gas emissions, including developing baselines for the seven companies that were not already measuring their emissions. We have also developed materiality-based approaches for our engagement on climate topics.
- Using management team incentives to align on impact and ESG management priorities: Because we invest in companies whose core business models contribute to achieving the SDGs and our management teams are invested in those companies, there is typically a natural alignment between maximizing positive societal impact and financial incentives in our portfolio businesses. To further align and reinforce our impact and ESG ambitions, we tied a portion of portfolio company management’s short-term bonuses to impact or ESG objectives in just over half of Global Impact portfolio companies this year. We intend to expand this effort in 2023, developing additional compensation guidance for portfolio company management through collaboration with third parties. It is our belief that such incentives can be a useful tool for aligning and reinforcing ESG priorities when done correctly.
- The power of employee engagement: Since 2011, KKR’s pioneering employee ownership program has awarded billions of dollars in equity to over 45,000 non-management employees across more than 25 portfolio companies. This approach strives to create value in companies by mobilizing employee ownership and providing equity ownership to employees below the C-suite level, including hourly workers. In future investments, we intend to deploy this playbook at U.S.-controlled investments and many non-U.S. companies where feasible.
*This 2021 Global Impact Summary report presents an overview and highlights from our full 2021 Global Impact Report, which is provided to Global Impact limited partners only, and includes all companies in Global Impact’s portfolio as of March 2022. Impact and ESG data are cumulative since investment as of December 31, 2021, unless otherwise noted.