ESG is strategy at PE firm TPG

When private equity firms came under fire recently for the demise of Toys R Us and the harsh treatment of the company’s shop workers who lost their jobs without severance pay, it did little to suggest private equity investors were ESG-minded. Yet in an interview with Tanya Carmichael, managing director and head of global funds at Ontario Teachers’ Pension Plan, private equity firm TPG revealed it had been integrating ESG for years.

“ESG is a core value focused across the whole range of our business,” said TPG co-chief executive Jon Winkelried at the PRI in Person conference in San Francisco. “It affects how we think about the companies that we invest in, our due diligence process, the composition of our portfolio and how we want investors to think about us.”

TPG, a PRI signatory since 2013, has more than $84 billion in assets under management in buyout and growth strategies, along with a social impact fund named RISE. Winkelried believes ESG is now engrained at a cultural level, defining the firm as a GP.

The strategy is apparent in TPG’s daily work with its portfolio companies, Elizabeth Lowery, TPG’s managing director, sustainability and ESG told Carmichael. Lowery cited efforts to introduce initial cost reductions in portfolio companies around energy use or water waste as typical examples of ESG integration reducing risk and return value. It also focused just as much on the opportunities, building additional value like employee engagement or using renewable energy to save money, something TPG did with investee company Cirque du Soleil, Canada’s iconic entertainment group.

“We worked with Cirque on their touring shows on how to connect to the grid via renewables,” Lowery said. Another example was TPG’s work with portfolio clothing chain JCrew on sustainability in its cotton sourcing when it relaunched its brand.

TPG finds that its portfolio companies are open to integrating ESG.

“There is a perception that management teams are resistant about ESG,” Lowery said. “What we found is that ESG is already on their mind and not something to be avoided. We say it is part of how we build a sustainable business and that it is really important to integrate within the firm.”

Winkelried added that he found little resistance from chief executives of TPG’s portfolio companies.

“Companies partner with us in driving positive ESG outcomes. It comes back to the core of our identity,” he said.

In some cases, TPG can play a role in ESG education for limited partners that invest in its funds. It is also a journey that evolves, as more ESG issues such as diversity and inclusion emerge, Lowery said.

One of TPG’s flagship ESG innovations is its Rise Fund. With a $2 billion pool of capital, the fund invests and scales with companies, with real impact. Winkelried attributes part of the success of the fund to the fact TPG doesn’t run a segregated investment team for the Rise portfolio, rather it is managed through the main team.

Carmicheal noted encouraging signs of more convergence between mainstream private equity and ESG best practice.

“Some people are interested and others not,” she said. Continued dialogue and access to a good networking community to allow shared experiences and best practice are important. Carmichael also noted initiatives by the PRI and the Institutional Limited Partners Association to set up resources for investors to allow GPs to improve knowledge on ESG. Greater alignment around reporting would also help, Lowery noted, as would guidance in integrating new frameworks such as SDGs in private equity.