Carlyle Group Inc. is using data to turn the environmental, social and governance achievements of its portfolio companies into financial gains, according to an impact report the asset manager released on 22 June.
The firm last year helped portfolio company Jeanologia SL, a Spanish manufacturer of equipment for fabric and garment finishing, to secure a term loan with costs tied to water-saving targets. Interest rates on the loan decrease if Jeanologia meets those goals and go up if the company misses its targets by 15% or more, according to the report.
“That’s a great example of how the data helps us be better investors,” said Megan Starr, Carlyle’s global head of impact. Carlyle initially backed Jeanologia in 2018.
Jeanologia’s equipment is used to produce about 15% of the 6 billion pairs of jeans made annually world-wide, and it cut the amount of water used in manufacturing the clothing by roughly 10.7 million cubic meters last year, according to the report. Just one of Jeanologia’s technologies, its 5.Zero laundry plant, can cut water and chemicals used in denim finishing by as much as 85% compared with the industry average, according to a Carlyle report last year.
“They’re using less water, they’re using less chemicals,” Starr said. “So, if you’re able to actually quantify how your goods are more sustainable vis-à-vis peers, that can be a real value-add in terms of the revenue side of the business.”
In another portfolio company example, cleaning-product supplier Weiman Products LLC set out to meet environmental specifications set by regulators such as the Environmental Protection Agency and giant retailers Target Corp. and Walmart Inc. Weiman added a sustainability expert to its board of directors and acquired other companies, Starr said. As of April, nine Weiman products sold at Target had been awarded the “Target Clean” icon, and its score rose by 24 percentage points in Walmart’s sustainability scorecard in a year, the report showed.
Weiman’s improved score “helped it demonstrate to consumers the sustainable characteristics of the products,” Starr said. Carlyle and private-equity peer TA Associates acquired Weiman early last year.
Carlyle also is using ESG data at a portfolio level to spot profit opportunities. For example, the firm recently found a correlation between board diversity and annual earnings growth, the report showed.
Carlyle is increasing its focus on ESG-related data while more asset managers are embracing techniques to measure and manage the social and environmental impact of their investments. A recent survey by the Global Impact Investing Network, an advocacy group, showed that after a period of experimentation, asset managers are converging on using common impact measures such as its IRIS metrics.
But Carlyle has chosen a more independent path. Although the firm follows industrywide standards for reporting ESG-related information, it hasn’t adopted IRIS metrics.
Also, Carlyle hasn’t signed the International Finance Corp.’s operating principles for impact measurement—a framework that helps investors integrate impact aspects into their investment processes. A hundred entities have embraced the principles, including KKR & Co., BlackRock Inc. and TPG’s Rise Fund.
“We spend a lot of time engaging with different frameworks and making sure we’re up to speed on the latest developments in the field,” Starr said. But, she added, Carlyle doesn’t focus on ESG data “just to say we’re measuring it.”
“That doesn’t make us better investors and doesn’t lead to better investment outcomes,” she added.
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This article was published by Dow Jones NEWSPLUS.