KKR & Co. Inc. (KKR) Earnings Call Transcript & Summary

Good morning, and welcome to ESG - The New Differentiator. My name is Susan Gray. I'm the Global Head of Sustainable Finance Business and Innovation at S&P Global Ratings. And just to start and note saying that our analytical colleagues are not present in the audience or on the panel, and this is a webinar run by the commercial organization at S&P Global Ratings. So first of all, I'm delighted to introduce our guests. We have Professor Bob Eccles, who is at the Said Business School at the University of Oxford, and is a very well-known commentator in the sustainability space and a co-founder of SASB; Ken Mehlman, who's the Partner and Global Head of Public Affairs and the co-head of KKR Global Impact; Jose Luis Blasco, who's the Global Sustainability Director at Acciona; and my colleague, Pamela Snyder, who's the Head of Investor Coverage at S&P Global Ratings. So welcome to all of you today. So today, we're going to talk about the role of private equity in the transition today, which is incredibly interesting because we've spent a lot of time over the last 2 years on this webinar talking about the impact of ESG and this whole movement around net zero commitments that have been made by companies and the impact on corporate banks and investors. But what we want to do today is really zero in on private equity's role here. But first of all, I think it would be really interesting to hear from Jose Luis about the recent announcement out of the EU Commission around the EU taxonomy and the expansion of the recommendation to include nuclear and gas, because as we know, this is a very fast-moving world that we're in. Companies are having to make decisions. Investors are thinking about allocation. And we're still not in a space where things are completely tied down yet. So Jose Luis, do you have any comments that you'd like to kick this off with, please?

Thank you, Susan. I think for those that are not familiar with the taxonomy, I'll say that this -- I think that this is very relevant, as you said, as a guideline for the investors who want to qualify their assets as green. The decision from the commission to include gas and nuclear, in practical terms, I think that for us, it's a missed opportunity to create a real gold standard in terms of sustainable investing. But in real terms, in real terms, Susan, I think that this has not so much effect. Why? Because I can give you an example. The climate stress test of the banks in the European Central Bank is performing this year is around -- not around the taxonomy assets that the bank has, it's around the intensity of the carbon emissions of the assets. And this is not affecting about -- it's not affected about this decision. The gas is an emitting technology and will be qualified as it is, an emitting technology. And another thing about the nuclear is that currently, amazingly, in France or Belgium, nuclear is not considered by the green labeling of the funds of the government. The official green label of funds don't consider nuclear as a green. I think that this is the way that I say that it's a missed opportunity to create a golden standard. But in the practical terms, I'd say that it has not so much impact in the movement on the appetite to invest on this. And for me, to be honest, I expect that in the coming months, other European institutions can show to the commission and the council that this is not the right way to define our taxonomy.

Jose, thanks for those comments. I mean, I think what it does do is it just -- it highlights the continuing uncertainty in this space that companies and investors are having to deal with. And I suppose from that, let's just switch to the purpose of the discussion. Ken, can you just talk about, first of all, what you see as the role of private equity in the decarbonization transition, please? And I think it's particularly interesting because in comparison to the public markets, an investor in private equity space tends to have a controlling interest in the assets that they're investing in. So that is kind of a big differentiator just to start with, isn't it?

It is, Susan, and thanks for the question. And I would thank you and your colleagues for the opportunity to visit today. I look forward to our discussion a lot. So in answering your question, I think you started with a really critical point. So it's first noting -- notable, what does private equity do? What's our role when it comes to companies? And then let's think about how that applies to the energy transition. So in my experience, what private equity does is unique, is we have several different tools and components of our strategy that can be very helpful in building capacity in companies as well as transforming companies. First, there's a real alignment between the company's management and, in some cases, everyone who works at the company along with us as investors and the limited partners who invest with us. So there's capital alignment. Second, we measure success over a longer period of time. It's not about quarter-to-quarter, but year-to-year. Third, many money companies, including a firm like KKR, has very significant operational resources. We have 75 people in an organization called Capstone that help our companies transform, go forward with whatever their operational and strategic agenda is. And finally, Bob Eccles is a good example. He shares an organization called the Sustainability Experts Advisory Committee that we have at KKR. So we're able to attract world-class advisers to help think about different topics. And when you take those 4 components, in my experience, you can accomplish 2 goals: one, you can help companies build capacity; and two, you can help companies change. So if you think about the energy transition, what do we need to do to get to a net zero world? We need to, one, build capacity in a number of different areas. First, we need to build capacity when it comes to the tools companies, industries, citizens and others can use to reduce the amount of energy to essentially decarbonize their lives, promoting energy efficiency. Second, we need to build the capacity in how we're going to move to a greater energy future. So it's not just investing in renewables. It's investing in things like storage, additional capacity, the tools that will help optimize renewable assets. It's investing in electric vehicles and the infrastructure around that. It's investing in electrification. Huge capacity needs to be built. Third, it's going to be very important to help companies that today operate in a way that use lots of carbon to decarbonize themselves. And finally, we're going to need to have significant investment in companies that help and are effective in mitigating the impact of climate change. Because even if we do everything right, we're going to have increased weather events. So companies that focus on things like, for example, green infrastructure. And in our experience, what we're able to do in all of those categories is to scale: scale solutions to things like building an industrial efficiency; scale solutions to expand and optimize renewable energy as well as help companies in their own transitions.

Yes. And that whole point that you're making about scale is a really critical one. I think because we are not going to be successful in making this transition unless we can scale across multiple technologies and multiple sectors, as you say. So maybe I'll now turn to Bob. Bob, you've done a lot of work over the last couple of years talking to investors and private equity players. And looking at the role of private equity and the transition, can you talk to us, please, about what you've found in that work that you've done?

Sure, I'd be happy to. Nice to see you again, Susan, online and Zoom. I mean it's really interesting. So kind of in the summer and early fall, I've interviewed maybe 90 people in GPs and LPs, and it wasn't a random sample. I mean it was leading GPs, some big ones like KKR that I've got a relationship with, as Ken said, some smaller ones like billion-dollar funds that are very sophisticated in what they're doing. So it shows you don't have to just be a big private equity firm to be on the leading edge. And I talked to a lot of the leading LPs, so the big asset allocators. Story kind of goes like this. 10 years ago, if you went to a private equity GP and you said, let's talk about ESG; they go, what's ESG? 5 years ago, you go, well, let's talk about ESG; they go, yes ESG, we do an ESG DDQ when we're raising a fund. And we all stir around in this kabuki dance and we fill it out, and it's really fun. And we send a DLP and nothing happens and they make their asset allocation decisions and kind of life goes on. In the last 2 years, there has been a dramatic change, if you look at who the leaders are. LPs are dead serious about this. They're evaluating the GPs on their capabilities. They're making their net zero commitments. The private equity industry is huge. It's got about, when all private markets -- last number I saw $12 trillion, $13 trillion. It's going to double over the next 5 years. So what you've got is the kind of scale and capacity that Ken talked about, but you've also got the issue that the LPs are concerned about at a system level, right, system-level risk like climate change, which is our focus here. So they're looking at this asset class through that same lens that they're looking at public equities. The irony of all of this -- so and the other thing I should say that's interesting, it's the same thing with private companies. If you went to private companies that are potential portfolio companies, 10 years ago, I don't know what ESG is. 5 years ago, don't know it, don't like it, give me your money and leave me alone. Now they are in the supply chains of big companies. They've got pressure on getting employees. So the private equity industry can bring these capabilities that Ken is talking about. They're not pushing a rock uphill. These portfolio companies know they need to manage their carbon, they need to reduce it, they need to be able to report on it. So you have this alignment that's beginning to happen really over the past couple of years. And so the irony, and I'm writing this up for an article in HBR, little joke I like to tell is you've got kind of the Gordon Geckos of the world are in a perfect position to be a force for good for the reason you said in the beginning, Susan. They've got control of the asset. They've got longer-term time frames, as Ken pointed out. I think public -- I mean private equity can lead public equities in terms of putting these principles of ESG integration and impact into practice. So I'm really quite excited about where we're at today.

Yes. Thank you, Bob. It is a really exciting time. And maybe I can just go back to Ken to talk a little bit more about this. So Ken, picking up on the point that Bob made about the demand for LPs and also thinking about the exit from private equity into either another fund or into the public markets. I mean how are you thinking about pricing of carbon risk internally and how you're balancing that sort of return and risk around the assets that you invest in?

Well, I think it's a very important factor that we try to consider. And the way we try to consider it is by bringing a number of different resources to the table that help us think about broadly climate and other ESG as well as other macroeconomic risks around investments we make. So we have, within KKR, built capacity to help us think about both macroeconomic, ESG, industrial, supply chain and other risks. And the reality is today, the question of climate change could affect all those things. So for example, if you're looking at a real estate asset, understanding the potential that, that asset could be impacted by increased storms is a big issue. Interestingly, also recently the insurance industry's declaration that there are certain areas where it's not going to provide insurance is a critical thing one has to consider. We also have to consider the supply chain question. What will the impact of climate change, both with respect from a regulatory perspective as well as from a kind of physical risk perspective because of increased events, whether they be weather events or other events, what that could mean to the supply chain a company faces. If you look today at the world, you'd have to say that companies that are higher emitters are paying a higher cost of capital. That's something one would need to think about and we try to think about in the investments we make. There's obviously regulatory questions. In many markets, carbon is in fact priced. And understanding what the pattern of decarbonization is, the road of decarbonization becomes critical. And then you mentioned exit, very smart point. So you end up with a stranded asset. So all of these are things that have to be part of an equation that we try to make, among other factors, as we think about an investment. And I think smart investors across the board, whether they be private equity or other investors, ought to be thinking about these important questions. And the increased focus on this will only grow over time, as we learn more, as we see the impacts of climate change and as climate action becomes increasingly important in different markets and different countries around the world.

Thanks. And so just digging into that a little bit more, did you use an implicit carbon price in your investment analysis? How do you take it into account? And how do you think about the opportunities that exist in sectors where high-carbon assets are going pretty cheaply at the moment? How do you [indiscernible] that opportunity?

So the answer is, both are things we think about. So on the one hand, one thinks about and one tries to look and say, what would the price be of reducing the intensity of emissions, of having this company -- helping this company operate in a net zero world? And one has to look at the particular industry, the company where it operates, et cetera, to help think about that question. Have we said no to investments where we think essentially the price of decarbonization is too high? We have. And then is that something we have to continue looking at? We do. But you raise another point, and that is the opportunity for a brown to green investments, the opportunity to go into a company and help them, because of the various tools I described at the beginning, through decarbonization. And we absolutely see that as an opportunity. It's an area we are focused on and continue to look for more investment opportunities. The other area where I think there's a huge opportunity is to invest in the sectors that will be necessary in order for that broad decarbonization to occur. I'll give you one example. We have a really cool company that's one of my favorites, based in Italy, called CMC Machinery. And what they do is they make customized boxes for e-commerce deliverers, Amazon and others, to the exact size of the underlying product, which has huge carbon and climate implications because what it means is: one, you're using less forest products; but two, you can put a lot more in a plane, on a train, in a truck or otherwise, so you're using less fuel. And if you step back and say, let's map out how every industry in the world is going to need to change how it operates, how to decarbonize, and how can we as a -- at KKR, but private equity broadly, invest in those companies? What you're then doing is that [indiscernible], you're scaling. Since our investment, that company has doubled its production of those customized boxes. So if we can scale these solutions, one; two, if we can help companies to the transition of decarbonization, two; and three, if we can make sure we're doing the price of decarbonization as well as these other factors, then I think we're doing our job. But we should approach this, and we do at KKR, with tremendous humility. This is hard. This is a constantly evolving process. And anyone who tells you they've got it all figured out, doesn't really have it all figured out. It's something that we have to work in a very [ iterative ] place with a growth mindset of trying to constantly learn.

Great. Thank you. And I think the subject we were discussing at the beginning of the webinar about the taxonomy is, case in point, in the context of this rapidly evolving market. So I'm going to ask Bob one more question and then come to Jose Luis. Bob, can you just -- one of the areas of focus that we've seen in the market and in the media has been of large companies who are essentially selling their high carbon-emitting assets to the private sector, clean up their [ up and ] balance sheet, so to speak. How should we think about that as from a, if you like, a community perspective?

So it's a really good question. I mean the irony here is that there's the storyline that the world is going to get worse because it's going to go into the hands of private equity. And I don't think that has to be the case at all for the reasons that Ken said. I think the community should be very skeptical. And let's talk about the investment community, which got its own issues. Like I'm just not a fan, let me just say this, of these asset managers and asset owners are going to get to net zero by divestment. You're just passing the problem on to someone else. And so when you see these major companies divesting high-emitting assets and they're kind of beating themselves, pounding their chests with pride and the investors are saying this is great, let's be honest with ourselves. That's really not solving the problem. So there's this irony, we're going to pass the problem along to private equity, and I think they'll do a good job dealing with it for the reasons that Ken said. But I think we have to have some healthy skepticism about these declarations that are being made, whether it's by companies or whether by its investors where they're basically going to reach their net zero targets or whatever targets they're establishing by getting rid of the assets. It's just passing the baton. I don't like it.

So just as a follow-on from that. What sort of disclosure should we be seeing? What sort of information should the market have to really understand what is going on in terms of what's happening to these assets as they sit in a private market environment?

So if the assets are going into the private markets, I mean it's an essential question. I mean the EU taxonomy and the CSRD, the Corporate Sustainability Reporting Directive, is going to apply to private companies. I know that's something that the United States, the SEC is considering. They first have to get through their disclosure. My personal opinion, just speaking for me, I think we should have the same kind of disclosures out of private companies and not just those owned by private equity firms. I mean carbon is a fundamental issue for the entire world. And I don't think it's unreasonable to say that any private company of a certain size shouldn't be reporting on its carbon emissions. Maybe as a first step, it kind of just goes into a regulator and it's not in the public domain. Certainly, the banks -- I mean this is an issue I'm looking into. Certainly, the banks can be asking for that and time in terms of the loans and the credit that they give. But we need to increase the level of transparency and think the transparency is not just something that we expect from listed companies, but we need to get them from private companies as well. And again, to Ken's point, I mean one of the great things about private equity becoming so large is that they bring these capabilities to the table, they bring the tools, they bring the knowledge, their software that's being developed that will make it -- it's never simple, as Ken said, but make it quite doable for private companies to have the capabilities to do this reporting. And as I said at the beginning, I mean I'm very impressed with some of the GPs that I met that some sophisticated LPs introduced me to where they are as good as you could find in terms of working with their portfolio companies, getting the data from them, helping them with their carbon transition plans. And so this is something that's very doable across the entire private equity industry.

Great. And if anyone's got any questions, please feel free to [ enter ] at the Q&A box. So I'm going to go to Jose Luis now. But then I think we can -- I'd be interested to circle back to Ken to see if he has any comments that he wants to make on this point. But Jose Luis, you're in a really interesting situation because you at Acciona have recently spun off an asset into the public markets in an IPO. So you're seeing, from that perspective, the endpoint or one of the endpoints of the investment process, where assets are going into the public markets and investors are looking at those assets and putting an ESG lens potentially on these assets. Could you please take us through your experience and your perception of investor market interest in ESG alignment of businesses?

To begin, landing an IPO is really an experience. Probably, Ken is more experienced, but the rest of the corporate usually is new for everyone in the team. And this is a very relevant because you will experience once in your professional life. But this is a decision thought for some time, but opportunistic in execution. But it is very relevant, the opportunity when you are launching this IPO. We thought that decarbonization is really the most interesting disruptor in the economy today. But to achieve these transformations, some experts say that it will be necessary to multiply investment in renewals by 6, by 3 to 6, not only to change the mix of the electricity generation, but also to produce the clean fuels that we need for transportation, to steel, for cement. More renewable energy will be necessary. Okay. When you are in a market that is ramping up, we are attracting a lot of operators. Your narrative is like wisdom [ truth to say ] we are not in the end, even the beginning of the end, but at half the end of the beginning. You are not talking about -- this is not a bubble. This is not a bubble. This is ramping up because we need this amount of renewables in order to make it, but it's difficult to differentiation. How to differentiate in a market that had massive group of new entrants attracted by the booming activity? It was our talent. There are 2 important factors for the carbonization and we need to take it very present. First, is the investment, more and faster. But the other part is that how we can increase the productivity, the total productivity of the investment in achieving the sustainability transformation. And this is important, not only about what you are doing, it's about how you are developing your activities. It is how we are convinced that Acciona Energia should be a leader in ESG because give us the opportunity to use ESG as a proxy to enlight how a new company in the 21st century who should be managed. Our result was very interesting. I focus on ESG investors. That's another opportunity for private equity when they are exiting their assets, broadens our base of investors and give us a more stable and committed shareholder because they are aligned with the company's purpose, and this is very relevant. The final result, you know. 20% of our renewals business is in the market. The value is 10 billion, is 20% more than the market cap of our parent company. I think that the results resume the success of the operation.

And one of the things you did in order to prepare the business for going to market was you did an ESG evaluation on the business, which we've attached to the materials to the webinar. Could you just talk a little bit about the investor reaction to that and how it was received by investors?

When you are in an IPO for a company who calls Acciona Energia is all renewable, and it's very easy to understand that this is the world independent renewable energy operator. That's a fact. But another thing is more qualitative aspects, like governance, risk management, talent attraction, policies in a bucket that's growing, and this is very relevant, that rotation. These kind of things are ingredients of the well-managed companies. You think you are doing very well. I do ask for your human resource general director and say, okay, we can -- but you don't know if this view is shared by the market. You just try to be ahead, but you don't know what you want to be at is really what investors value. And this is a challenge. It helped for us a lot, comes with an ESG rating. First, because all the criteria they use for their assessment -- you use because we were -- we chose S&P, makes sense to design and to improve. For example, one aspect we were very concerned about was the corporate governance in a new company that is a spinoff of a big one. We worked very hard to create a company to net expectations. But the easy way to give us an independent view about how far we were at least at S&P expectations. Credibility. Credibility in the ESG world is a very valuable asset. And the indicators are still immature, let me say, and we need external opinions that provide this independent assessment with the transparent criteria. I imagine that many of those listening to us face the same challenges, especially non-listed companies that are under different level of scrutiny. I want to create value by strengthen their ESG practices. I think that this kind of well-done reviews will help us to avoid a very green washing, as this is very, very certain. A real positive impact beyond, let me say, imitation gallery that will finally -- we see a lot in the reports and how the narrative is constructed. I trust on this independent operators in the market give us the opportunity to show the real well-managed companies who wants to drive the transition to a sustainable company. We are an example. But you will find -- you go through the ESG rating list of companies, you will find a lot of good practices. It's a good benchmark for us.

Susan, can I just jump in here and make a point, kind of a personal point, then I'm going to throw it over to Ken. So one of my son-in-laws is the CEO of a health care company that was owned by a private equity firm, and they went public last year. They went public exactly one week before their fifth child and only daughter was born. So it was like a race, what's going to happen first, the IPO or the baby.

And the IPO won.

The IPO won, but there was enough time and then they had the baby. So that was good. So there's a...

They didn't name her IPO. Please tell me it wasn't named after the IPO.

So [ Anicia ] is a little girl now with 4 older brothers that pick her up out of her crib and walk her down the stairs and it's like, please don't trip. So what's interesting -- so this is a health care company, right? It's not an of energy, and I think that the private equity firm was surprised in this IPO, as there's like the immediate questions when they were doing the roadshow, very prominent questions around ESG. And so kind of generalizing from that, and that's why I want to flip it to Ken, I mean the IPOs you've done, my guess is, regardless of the industry, I mean what the issues are from a SASB point of view, the materiality issues will vary, but pretty much any IPO that's being done by a private equity firm now, they're going to need to take account of not just the ESG investors, but mainstream investors doing ESG integration. And what's your experience on that, Ken? How have you seen that evolve over the past, say, 5 years or so?

Bob, I think it's a great question. And there's no question, you've seen a big evolution. It has real bottom line impact. I mentioned earlier, the availability of and the cost of capital, for example, high emitting companies versus those that emit less intensity, that's important. But IPO preparedness, and ESG is part of that, is a big component of what we try to do as part of our Capital Markets business at KKR. It's something we've done for a number of years. We're seeing it increase a lot. A company that's going to go public needs to tell us its ESG story as much as its financial story, as well as its human capital story. All of those are things investors are going to care about. And one of the reasons for that, and I think Jose Luis made a really good point, people are not just looking at what the company does, what it sells, its product or services, but how it operates. And how it operates can have huge bottom line implications. And certainly, a part of that is the SASB standards that focus on things like how carbon intensive it is. But there's a whole other set of human capital considerations. So as Bob knows, we've experienced at multiple companies the positive impact you can have in that company if you create real engagement and alignment with the entire workforce. So whereas, historically, in a private equity transaction, you sometimes and very usually have management which has skin in the game in a company. What happens if you add and have every employee have stock in the company, and you do it in a way that empowers those employees and you also give employees voice in how the company operates, and you listen and you help folks understand what it takes for the company to succeed? We've done this in multiple companies, and we've seen 400 basis point improvements in productivity. And so to me, a company that is being smart about its ESG questions needs to measure employee engagement. Are employees engaged? Are they bored? Do they feel good about what they do? Do they have voice? That's an important question. Diversity, equity and inclusion is an important question in companies. If a company possesses data, is it being responsible around that data regarding privacy and cybersecurity. All of these are how questions, but the point of Jose Luis and of course, Bob Eccles, who founded SASB, made, these aren't just important because they're nice to do. They have real bottom line implications as to a financial performance of a company, the productivity of a company, the company's ability to attract and engage its workforce. All of these are things we have to think about every day, and certainly a company to be better prepared for an IPO needs to be ready to answer these questions.

Susan, when I was doing my research, the 2 things that always came up were climate and carbon and DE&I. I mean like those are just becoming table stakes now. And I think the points that Ken makes are right in terms of you see what the impact is in terms of financial performance and having an engaged workforce. At a high level, I mean I think this is an issue that the whole private equity industry is facing in terms of credibility and license to operate. I mean there's the rap that they're going to buy the dirty assets and make them dirtier, but there's also the rap that they make a lot of money and it's unevenly distributed and the workforce really doesn't benefit; the LP does and the GP does, and the senior management. They're working with TowerBrook and some other people on this shared ownership idea. And I think that's profoundly important because the industry is so big. So here's another example, and I know we're talking about carbon, where private equity is in a good place to lead the way in terms of not only environmental issues, but social issues and to make sure that the wealth that's being created is being appropriately distributed. And so that's another thing I'm pretty excited about. It's in the earlier stages. It's very complicated, how you think about the metrics, how you structure it to be able to share this ownership. Ken, you can talk about it more and his colleague, Pete Stavros. But I think this is another important thing to be watching in private equity.

If we do our job, and we don't always get it right, we make plenty of mistakes. But if we do our job, what we at the end of the day are about, and I opened with this, I tried to communicate this, it's a governance model. And if you can measure governance over a longer period of time and you can put capital to work in an aligned way, you can produce the differentiated outcomes, not always, but you can certainly, in our experience, do better and constantly try to try and improve.

Absolutely. And I think this goes back to the point we started with, which is that on the one hand, you have the capacity of the private equity sector to have, because they've got a majority stake or full ownership, to really influence the direction of companies. And then the point that Jose Luis and Bob were getting at, which is that we have moved from looking at ESG as just performance -- past performance, to this point where it's actually about the strategic direction of the company and the extent to which environmental, social and governance priorities are integrated into the business model, and part of the company's preparedness to be successful in the future, which is really what the ESG evaluation is focused on. Jose Luis, could you just comment that having gone through the experience that you've gone through, what -- and as a developer and constructer of infrastructure assets in businesses, how -- what do you think the investment environment is going to be for assets in the future? How are you thinking about the future exits from businesses or future growth of businesses and the investor market that you're going to be facing?

From the ESG point of view, I think that we are -- we have the privilege to work in the infrastructure sector that highlight a lot of these topics. Infrastructure is the backbone of the society, in some extent. If you go through the -- for example, for the SDGs, for the 72% of the sustainable development costs are related to develop infrastructure. And is part of this value, the gaps in the investment in infrastructure are huge and the viability of funds now is almost unlimited. The problem is it seems that we can solve, but there are only a few greenfield developers capable to undertaking the complex projects required by the transformation we need to tackle. Operators that are financial robust and technically competent to deal with this complexity are not common in this moment. One area of concern is that the pure availability of the [ company ] governments to design bankable projects, the design of infrastructure itself. The social productivity of the infrastructure, not only the -- I am just not referring to the fundamental for manufacturing of our infrastructure. It's the fact that the infrastructure to go beyond their primary yields. I can give you an example. We are building the line 6 of the metro in Sao Paulo. We are employing 7,000 people, around 2.2 billion project. If you will look to the primary activity alone, moving 600,000 people daily is significantly impactful. But if we think about the project, the value of the project to provide additional infrastructure, for example, or to face electric transportation, you have an electric line in your metro, for example, or to improve sanitation because you have a tunnel, or preventing flooding, its capacity to transfer local innovation to increase the people qualification or even to produce geothermal energy beyond the marvelous metro will be part of their value in the future. How we can deliver or enhance prosperity looking for the design of this infrastructure when you are keen for the prosperity of the community. I think that we are looking for the next frontier, for the next screen, the segment -- second screen in the ESG will be to find how we can increase the total social productivity of the infrastructure in this case, but in many sectors, and beyond about what are you doing primarily, how you can complement, how you can optimize the investment for the well-being of the people. And I think that this is -- this extra mile is a good advice for the people who are trying to increase to enhance the value of the assets, their stakes, in case of the private equity, of course.

Right. So that's really going to impact. Bob?

Yes. Completely out of the blue, but as Jose Luis was talking about infrastructure and kind of emerging markets, one of the things that was striking to me was that if there is some emerging markets where private equity is quite well developed, I mean you see it developing quickly in China, earlier stages in Korea, India, but there's other places, Africa and Latin America, where as best as I can tell, it barely exists and there's kind of a whole bunch of reasons. And so I'd love to get the input from Jose Luis and Ken as to how do we think about what the opportunities would be for private equity to contribute in these emerging economies and what barriers need to be removed for them to be able to do so because the capital is there, but the kind of private equity infrastructure just isn't being built, as best as I can tell. Maybe I'm wrong.

No, it's true. I think that the -- our thinking is, we call it probably not a fancy word, that this is regenerative infrastructure. If you are building a highway, why you don't connect with solar panel in the middle of the highway? Why you don't use in order to prevent floods? This multifunctional infrastructure that deliver more value with the same investment, or almost the same investment, I think for the emerging countries is a good opportunity. And I think that the people who is better equipped to seed these opportunities are the private investment.

Look, I think it's a huge opportunity, and it's an opportunity to do well by doing good in a place where the scale of that doing good can be quite significant. And so, Bob, an example that I often talk about is we have a company that we've invested in, in India called Ramky. And if you go to India, what unfortunately is true in too many places is that while waste is collected, it's not managed in a responsible way. It's not recycled. It sits at open pits, which creates both environmental and social challenges. And what you need is a solution that manages waste in India the way it's managed in Indiana. And the way that's going to happen ultimately is a combination of capital, but also expertise with respect to operations. Our company brings the standards we have in Europe or the United States, and that includes protecting worker safety. That includes ensuring that operations don't affect the water supply. That includes responsible governance. Last year, 46 million people had access to safe and reliable waste management because of that investment. And so the scale -- again, it gets back to that earlier point I made. What we need in these markets is something that can scale in a big way. There's actually a lot of private investment. The question is, does that private investment provide the kind of scale you need? Another example is a company in India we've invested in that -- called Five Star that focuses on providing individuals, small business people, SMEs with access to capital to help their businesses grow. If we can have more abundant capital markets, if we can have better infrastructure and if we're going to have better operations in those places, there's a tremendous opportunity to do incredibly important work toward not just our goals with respect to climate, but to important social and other goals as well.

Yes, absolutely. And thanks, Ken, for those comments, and Jose Luis and Bob. Ken, I just wanted to ask you if you have any comments on the disclosure point, and then I think we'll jump to Pam, who is going to pick up a couple of questions that have come in while you've been talking because there is a lot of interest in this discussion out there in the -- in listener land. But first of all, Ken, this whole point of disclosure and communication with the market around what you're doing, how do you think about that?

It's incredibly important. So this is our recently filed TCFD report. If you ever have insomnia and would like to read it, please, be welcome to it. We filed a SASB report earlier this year. We provide significant reporting using the SASB standards on various ESG questions that we think are material to our investors, to our LPs. And we also, agreeing with Bob, believe very strongly that if we buy an asset that is an energy-related asset that has been reporting publicly, we need to continue, and in many cases, enhance that reporting. We think that's responsible. We think that's appropriate, and that's the approach we try to take. So I think the disclosure and transparency is extremely important. We filed our first ESG report a number of years ago. We have been members of the PRI since 2009 because part of that transparency project, in my opinion, isn't just about yourself, but being part of a broader community where you can learn from other people that think about these topics. So the answer to my -- what I would say is that kind of transparency is critical. And to your earlier question, Susan, companies that are about to think about going public, that have an ability to express and explain themselves from an ESG perspective in a way that the market will find relevant and interesting, I think that's critically important. The old days of being opaque and saying trust us are long gone. And more transparency, in our experience, often leads to better performance and what investors want to see.

Pam, can we turn to you?

Sure. So I think this question actually follows up a bit on what Ken was just saying. And so I think it would go to both Ken and Bob talking about or asking about tools in the market. So how widely are portfolio alignment tools being used by PE firms to understand their investment alignment around the Paris goals? Ken, maybe to you first and then to Bob?

So it's something that, as I mentioned at the beginning, we think about it quite a lot. And I think that the way we try to think about it is by using third-party frameworks. People like Bob have been thinking about these questions for many years. And so looking at whether it's the SASB standards or the TCFD standards, as a framework for us to measure and understand what is the scope of prospective risks that we face as well as opportunity, we think is very, very important. It's something that we intend to expand, but we've done it for a number of years, and we've always tried to use these third-party frameworks as the basis. We've also found over the years that there are advisers that can help you think about these questions. We made an investment earlier this year in a company called ERM. And ERM is a fantastic organization. It's an environmental -- it's an ESG consultancy that helps companies do exactly what you just asked, which is to understand and think about what is environmental, what is social, what is supply chain risk and opportunity in projects? And I think as the world becomes a smaller place and more and more people have questions on these, firms like that can be incredibly helpful. We found it so helpful, we decided to buy the company. And so I think the combination of smart advisers and frameworks are critical. But again, I would make a point I made earlier, approach this with humility. The reality is, the Bob Eccles of the world have thought about this for many, many years, and getting their sage advice and learning from their thinking is extremely important.

Fantastic. Bob, over to you.

Bob, I think you're muted.

It's a virtual world.

Well, I'm muted because I've turned off all my notifications and sound and everything and they keep coming in, so I don't know what to do. So I apologize for that. But what I was saying was that many, many years is Ken's codeword for Bob, you're old, and I agree with that. Just to go to what Ken was saying, I mean there's some interesting things going on out there. There's something called the ESG convergence project that if you're in the industry, you're probably familiar with. KKR was involved. Kind of Carlyle and CalPERS were sort of the people steering this. They've got, I think, 100 now GPs or something like that signed up, Ken. So what they've done is agreed upon basically 6, small numbers, start someplace. These are ESG issues, 3 environmental, 3 social, I think it is, that will be reported by the portfolio of companies into the GP. The LPs would have access to it. Big step forward. They're not going to set standards; the underlying standards will be SASB. So you've got an industry-led initiative, my personal opinion, I think that should go under [ ILFUB ]. We've got organizations like Novata, full disclosure, I'm an adviser to them.

And S&P Global is an investor as well.

And S&P Global is an investor, full disclosure on that, along with Ford and Omidyar and Hamilton Lane, to basically be a commercial platform so that the data can be collected, anonymized, put into a database, so that GP's portfolio companies can benchmark themselves. Then there's the technology solutions, again, a company called Persefoni. I'm an advisor to them. I don't have a real job. So all I do is go around and advise people and they can listen to me or not. What they've got, it's a SaaS business model, basically technology to really facilitate reporting on carbon. And I think you'll see people doing that and other things. So as we get technology solutions that can be applied at the level of these smaller portfolio companies, and again, this is where the GPs are important because they can help get their software implemented, you've got frameworks, you've got tools, you've got industry collaborations that even 3 years ago, this wouldn't have been imaginable. I mean the rate of change is just extraordinary.

Absolutely. Pamela, let me jump in on the reporting side. Sorry, I fully agree with Bob, but let me remark, as a corporate, as I reporter also point of view is beyond transparency, that is our accountability, that is a very -- is a good thing. That is the sunlight is the best cleaner. It's also an exercise for inside the company, for the strategy definition, because sometimes the exercise to report give you the information to integrate these aspects into your management systems. And before that, you have no requirement. Okay, guys, you can do it in a more material way. But if you have a clear set of indicators, you have also guidelines, a pathway, a compass in order to introduce this measure to manage. And I think that this is the beauty of reporting, but goes beyond the transparency exercise, this is, of course, a need, is also a healthy medicine for the corporates in terms of how they define their strategy. Sorry.

No, I think that's a great point. And in fact, consistent feedback we've had from companies doing the ESG evaluation is just having the internal discussions around strategic direction and across the organization and the narrative and how you're getting there is an incredibly useful exercise internally as well as communicating externally. We have one more question from which Pam will ask, and then we should just quickly jump into final closing comments, if that's okay with everyone, please. Pam?

Sure. I think you all discussed earlier some of the trade-offs you see with transitioning to a low-carbon economy. But maybe just a couple of words on some of the technologies that you've seen that as you're transitioning, maybe some of these technologies have challenges as well and how you would look at those challenges in terms of maybe more water usage or social implications. Bob, I know you had a lot of remarks about that. So I'll go to you first.

So I'm not sure I can even answer that if you're talking about technologies. We've already established that technology is not exactly a core competence of mine. Maybe I didn't understand the question.

All right.

Somebody else understands it better, I'll ask him, because the technologies for -- the reporting technologies, I know, but sort of technologies around kind of energy and stuff, that's kind of above my pay grade.

Okay. Sorry about that, Bob. I'll go over to Ken then. It's really just looking at different technologies and trying to choose between which are best and looking at trade-offs. And I think this is a conversation probably for a whole another webinar. So maybe, Ken, if you want to say something, or Jose Luis, otherwise, we can move on to the next question.

What I hear in the question, and please tell me, Pamela, if I understood it right, I might get it wrong, is 2 questions. One that Jose Luis opened by describing, which is the European Union is now wrestling and thinking about with respect to a technology question around what energy sources are the right sources for the future. And then there's a second question, which is as wonderful as technologies is, it can also be very disruptive to both workers that work in traditional modes of production, as well as it can be disruptive because this transition could be inflationary. And so making sure that the transition is a just transition and that the people who are being impacted by it in terms of the prices they're paying for energy and also people who are working in these sectors today that in the future might be a lot smaller, we need to have a plan for that. And if we don't, in my opinion: one, it won't be just and it won't be fair; two, we won't be able to maintain the political support we need for these changes; and three, we'll have all kinds of economic unintended consequences. So as much as we think about the future in terms of the land we all want to be in, we need to remember the journey world and to remember to bring people along. That's what I hear in the question and how I would interpret and answer that question.

Yes. Let me interpret it for me, from my side also. I want to introduce these tradeoffs in the conversation because I think the world is changing because it's more complex. You are operating in the energy sector, you have a clear pathway 10 years ago. But now, you are connected with another sectors. These sectors are the boundaries are more blurry and the solutions don't fit all. One [ follow ] solution not fit all. I can give you an example, desalination for places that we have no water. If you make this process with carbon-intense energy mix, finally, this is not a solution, and the technology is great. You need to invent, you need to develop, as we are trying to do also, how we can desalinate huge amount of water without energy -- a carbon and fossil fuel energy base. And this is a challenge. And if you think in the different sectors, they have this complexity in all of them because they're connected. This is not -- it's more complex than before.

So it's not that simple. Sorry. Back over to you, Susan.

Yes. No, that's great. And I mean, I think that was the point of the question. There is no free lunch here. There are either -- we are living in a complex world. And even when you look at the whole sort of offsets discussion, how many times over are forests going to need to be used? How do we work out the pathway for decarbonization for different sectors that is optimized? This is -- we are not in a simple environment in terms of this whole decarbonization discussion. So just running around the room again, alphabet order. Any closing comments here from each of you in terms of thinking about the role of private equity, the changing investor demand for really understanding the strategic ESG alignment of assets and where you think the market is going? Your thoughts around that. Maybe I could start with you, Bob, and then move to Jose Luis and then Ken, please.

Sure. I'll be quick. Let me just say, kind of emphasize something I said at the beginning, 5 years ago, ESG was a kind of kabuki dance, DDQ exercise that didn't affect capital allocation. That's changing dramatically. There's LPs that evaluate GPs on a scale of, say, 1 to 5, 5 as good, 1 is terrible. They won't give capital to the 1s, they will to the 2s, but then they expect them to improve every year. And if they don't, they're not going to get money for their next fund. You've got GPs that have got their own methodologies for evaluating the degree of maturity and sophistication of potential investments in the portfolio of companies. They could not be very good. If they see a path to improve them, they'll invest. If they don't, they won't. You've got portfolio companies, I said, who kind of realize that they need to deal with ESG just as well as the rest of us. And so what I think we're going to see over the next couple of years is just everybody raising their game in terms of how capital is allocated from the GPs -- to the LPs to the GPs and the GPs to the portfolio of companies.

Absolutely. And communication, a big part of that to the market. Jose Luis?

Very quickly, Susan. I think that given this history, to succeed in business, you need to read better the context. And now the context is sending us very clear message, will be digital and sustainable. And value is part -- and sustainability is part of this equation. It's part also how you are integrating this context into your business. And it is natural. And this is the part of the mine, but also you need to gain the herd because we do have in front of you the challenge of a generation -- our generation. And in the future, you will wonder in 20 years, where are you when the solutions we have been taken. And I think also is another point. All of us has a role to play personally, not only because it's good for business. In this case, it's good for business and also is a role that you need to play as an executive and also a part of this humanity.

Ken?

Great closing comments. I'll try to combine the two in my own thinking. So on the one hand, I've thought for a while that every company in the world, no matter who owns it, is going to be judged on 4 attributes: one is financial strength; two, how it handles digitization; three, its approach to human capital, including diversity, equity and inclusion. And four is ESG and how it handles sustainability or [ with a ] question, whatever the industry, whatever the business. That's the world that we live in today. What's exciting and the opportunity is, as Bob said, that we have an opportunity to have kind of a race to the top, where across multiple industries and multiple sectors, companies compete in each of those 4 areas, and that can produce very positive outcomes. I think we, as private investors to the private equity industry, because of the reasons I opened with, have a real opportunity to be important contributors there by virtue of, again, this alignment of governance, this long-term focus, the capital and expertise we bring. But to do that well, the point that Jose Luis made is so important. We need to understand the context, we need to understand that there are trade-offs and we need to approach this with humility. So when I hear people approach this and say it's going to be all wonderful, incredible future, I am a very optimistic person, but if we don't approach it also understanding that there are risks and there are trade-offs and plan for those, then what we're all working toward is going to be much harder to achieve. So I think we need to approach it with that kind of a mindset. And I thank you, Susan, for inviting us all. Next time, we'll do this in person.

I so hope so. Well, thank you, Bob, Ken, Jose Luis, and of course, Pamela. This has been a great discussion, really enjoyable. Really appreciate your comments and your insights. And we look forward to speaking in person very soon. The next ESG - The New Differentiator webinar is in 2 weeks at the same time, and we will be talking about the sustainable finance market, which is really growing incredibly, and the insights that we can provide on what's going on in that market to all of you. Thank you.