At KKR, sustainability is one of the important tools we employ to create and protect value for the clients who are counting on us. We think of sustainability in terms of avoiding the factors that threaten value and seeking out those that can enhance it. These factors are constantly evolving. From navigating the financial impacts of climate change to the continued focus on labor shortages and an ever-changing regulatory environment, the past 12 months featured some notable transformative events.
We asked some of the firm’s leaders what sustainability issues they think will shape 2024. Here are some of their thoughts.
Investing in Sustainable Business and Future-Proofing the Portfolio
Ken Mehlman, Global Head of Public Affairs and Co-Head of KKR Global Impact, noted that he is focused on two of the ways that addressing material sustainability-related issues can help investors make more money. The first is by investing in businesses that simultaneously promote sustainability goals and financial goals, for example, energy efficiency and data centers, sustainable packaging that uses fewer throwaway materials and reduces costs, worker preparedness platforms, and businesses that help electrify bus fleets.
“Investing behind these types of companies is not about a moral mission,” Mehlman said. “It’s about identifying ways that customers can get better financial outcomes by optimizing their footprint or workforce. Sustainability can also create and protect value across multiple companies if you identify what matters to the bottom line. These are themes with strong secular tailwinds, and we think they are going to become more important as time goes on. It’s an opportunity for value creation.”
When it comes to value preservation, ignoring sustainability-related issues is inviting additional risk and missing potential opportunities.
“Strengthening governance, promoting employee engagement, maintaining strong cybersecurity protocols, and managing environmental risks is a way to future-proof businesses and ensure that we preserve value,” he said.
Other leaders also zoomed in on climate and the state of the workforce as particularly relevant issues heading into 2024.
Climate: Time for Scaled, Proven Solutions
In 2023, proactive government policies such as the Green New Deal in Europe and the Inflation Reduction Act in the United States have accelerated progress on the energy transition. The policies have done this in part by derisking investments in decarbonization, which in turn has contributed to job creation and economic development around the world. In parallel, the business community has embraced investing in climate solutions as the financial sector has come to understand the economic opportunities tied to the energy transition.
“The next year will be an important one for showing there are real solutions to climate issues that work for consumers and investors,” said Neil Brown, who serves on the Infrastructure & Climate team and as Managing Director of the KKR Global Institute. “There has been a tremendous amount of policy development and many project announcements, but most of that is still prospective. Industry needs to show that climate change mitigation solutions are real, that they create jobs, and that they offer both security of supply and affordability of cost for consumers and offer attractive return profiles for investors. That will boost credibility and keep up momentum.”
Brown noted that one way to make progress is to work through joint ventures and other creative structuring options that would allow strategics to invest without taxing their balance sheets. Grid storage, fleet electrification, and distributed generation are also de-risked and ripe for scale, he noted.
Charlie Gailliot, a Partner on the Infrastructure team focusing on climate-related investments, said he is watching how specific climate-related businesses transition from good startup ideas to later-stage investment opportunities. As an example, he pointed to the rapid development of the electric vehicle market of late. The share of the automobile market has nearly tripled in just two years, going from 5% of vehicles sold in 2020 to 14% in 2022, according to the International Energy Administration.
“We’ve watched the electric vehicle market develop over the last few years,” Gailliot said. “Now, we’re waiting for similar maturation of the technology, customer offtake, and production roadmap in sustainable fuels and materials, fleet charging, and other industrial subsectors.”
Emmanuel Lagarrigue, also a Partner on the Infrastructure team focused on climate investing, recently called out the need for more capital to decarbonize heavy industries, pointing out that most existing investment goes toward renewables, which have very well-established business models, or venture capital investments in riskier start-ups. The middle, where companies with proven decarbonization technologies may lack the capital to scale, is vastly underfunded. The steel industry, representing 6% of carbon emissions, could adopt a zero-emissions production process with existing technology. But private investment (as well as government support at the beginning) is necessary to scale these processes.
Adjusting to a New World of Work
In 2023, it became clear that the world of work is changing dramatically in ways that will profoundly affect businesses and workers. Artificial intelligence (AI) became kitchen-table conversation as new generative AI models were released. Labor shortages remained a feature of daily life, with many industries still struggling to hire enough workers.
Labor markets are likely to remain tight into the future, thanks to a combination of demographics (aging populations), relatively low labor force participation rates, and a mismatch between existing skills and the skills employers need, according to research authored by our colleagues, led by Henry McVey, Head of Global Macro, Balance Sheet and Risk and Chief Investment Officer for the KKR Balance Sheet.
Providing ongoing education and training to workers so that they can match available jobs in high-demand sectors is likely to be critical to dealing with tight labor markets. This is a theme that KKR has invested behind and continues to see as critical.
But retaining and engaging existing workers is also an important tool for companies. Workforce engagement has been a significant challenge for many businesses, particularly in the wake of the pandemic.
Going into 2024, Global Co-Head of Private Equity Pete Stavros stressed the importance of continuing to build the movement for broad-based employee equity programs, including with international expansion and into new strategies beyond traditional private equity.
Employee well-being, particularly with regard to financial wellness, and engagement are particular areas of focus. When employees at portfolio companies have the bandwidth, capacity, and encouragement to not only engage in their work, but to think like owners, it lays the groundwork for employees to make a meaningful difference in the company’s performance, he said.
“Companies that share success with employees, treat workers with fairness and respect, and transparently share information around company priorities and performance will be best positioned to succeed in the face of ups and downs in the economy,” Stavros said.
2024 will surely bring as many surprises as 2023 did. What won’t be surprising is that thinking about sustainability at every level of the organization is key to better managing risk, identifying ways to operate more efficiently, and capturing opportunities to create value.