Private equity embraces environmental due diligence

Francinia Protti-Alvarez
25 March 2010

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With the launch of Carlyle and EDFтs analysis tool for environmental due diligence, Francinia Protti-Alvarez finds that putting green issues on the agenda makes financial sense.

In March this year, The Carlyle Group and the Environmental Defence Fund (EDF) launched EcoValuScreen, a new tool to identify opportunities for operational enhancements, both for environmental and financial performance, before making an investment. "Environmental due diligence is on the way to becoming a necessity/norm for the PE industry as a whole," predicts Andrew Marino, principal at Carlyle.

Traditionally, environmental due diligence (EDD) has primarily been a concern for risk mitigation in industries that tend to have a heavy environmental footprint, such as manufacturing, energy and oil & gas. However, with growing public awareness and policy developments on environmental issues, the EDD process has also evolved. It is no longer just a matter of risk mitigation but also offers an attractive investment angle.

Carlyle aims to use the EcoValuScreen on potential investments in a wide range of sectors to highlight opportunities on how to improve efficiency, reduce costs and minimise environmental impact. Five key areas have been specified: greenhouse gas emissions, waste management, water use, priority chemicals and forest products. "The screen is a new paradigm in thinking about the potential avenues available for creating value in private equity investments," says Marino. Developed in partnership with The Payne Firm (Payne), an international environmental consultancy, the aim is for environmental management and innovation to become a standard best practice across the private equity sector.

Indeed, environmental concerns are already gaining in prominence on the private equity agenda. "We live in a resource-constrained world and pressure on these resources just keeps increasing. At the same time technological developments represent a growing pool of investment opportunities," explains Nick Cottam, corporate communications manager at environmental consultancy ERM. Yet, it has not been a straight forward process: "Environmental considerations are something that responsible investment specialists have found particularly difficult to move up the investing agenda. Investors tend to struggle to quantify non-financial risks like those related to environmental issues," Cottam continues.

Times are changing though and, with political and popular determination, EDD looks set to become more commonplace and fall neatly in line with its counterparts such as financial, legal, and commercial due diligence.