This Wall Street monolith has been lately expanding beyond PE, shoring up its abilities to invest across capital structures of a company. Yet, the firm, considering its storied clout and reputation, has been unable to shake off an annoying tick; an unseemly epithet that likens it to a 'barbarian.'

It comes from 'Barbarians at the Gate', the title of a bestseller and later, a movie, which capture KKR's dramatic $ 25 billion takeover of the cigarettes and foods giant RJR Nabisco years ago. The account lays bare the hubris, greed and irresponsibility that permeate high finance.

The heady leveraged buyout (LBO) days of the '80s, symbolised by the huge RJR buyout, a record which stood for 17 years, bared the steely doggedness of Henry Kravis and his cousin George Roberts, KKR cofounders, in breaking new ground.

The duo wants to do it all over again.

KKR is keen on turning into a champion of Environment, Social and Governance (ESG) issues in finance and is beginning to integrate it into the firm's investment processes. IDFC in India has been an early convert. "All our projects are operation al because we paid attention to ESG," says MK Sinha, managing partner and CEO, IDFC Alternatives with assets under management (AUM) of over $3 billion.

ESG is slowly coming under the spotlight, and Kravis, as always, wants a piece of the action, just as he desperately wanted to be in the thick of the largest LBO deal when he was initially excluded from it by the then RJR Nabisco management. If it makes business sense, KKR has to be there.

Henry Kravis now insists that "responsible investment is all about a new way of looking at needs and opportunities" and is certain that it can make them "better, smarter investors." KKR's recent push into emerging markets also makes it an imperative.

"We look at ESG more from an opportunity perspective than a risk perspective," says Steve Okun, KKR's director public affairs — Asia Pacific. "The emphasis is on value creation." Here, KKR scores over India entities still caught in a compliance approach to ESG.

Global Ecosystem

As KKR embarks on its sustainability journey, it has adopted a layered approach. It wants to integrate ESG only in PE, for starters. Other asset classes are to be tackled in phases.

Simultaneously, KKR is also helping build the global responsibility ecosystem.

Global finance has been reviled for too long for its unbridled excesses.

Sinha, however, doesn't even want to begin to influence his Indian peers. "Who has the time," he asks. "I can't stop making money for my investors and turn into an activist."

KKR has engaged with the US- based Private Equity Growth Capital Council members to draw out guidelines for responsible investment even as it turns the lens inwards to restructure and align its people and various divisions to ESG.

It's also, just as IDFC, a signatory to the UN-backed Principles for Responsible Investment, which has over 1,260 member institutions with over $45 trillion in assets under management. It's also involved with the Sustainability Accounting Standards Board that is crafting a new generation of accounting norms for corporations.

All of this is beginning to rub off within KKR. The results are showing.

The more withdrawn of the cousins, George Roberts, in KKR's latest sustainability report, the first one on Wall Street, highlights over a billion dollars in financial impact (cost savings and added revenue) from companies participating in its signature Green Portfolio Programme (GPP). These companies also avoided 2.3 million metric tonnes of GHG emissions; 6.3 million tonnes of waste and 27 million cubic metres of water use for 2008-2013.

Twenty five of its portfolio companies signed up for GPP by mid-2014. Dalmia Cement's Ariyalur plant is a star performer.

Dalmia avoided $7 million in costs and avoided 122,400 metric tonnes of GHG emissions since 2010.

What is it that is transforming this swashbuckling Wall Street firm earlier reputed to have an eye only for cold cash?

The genesis of its green consciousness can be traced to another of its blockbuster acquisitions — the biggest LBO in history — that of the $45-billion takeover of the Texas-based energy giant TXU (renamed Energy Future Holdings and now into bankruptcy) in 2007.

Even before the KKR takeover of TXU, environmental groups including the NGO Environment Defense Fund (EDF) had been hounding TXU through street campaigns and lawsuits for its planned investment in 11 new coal- fired (polluting) power plants.

Henry Kravis, surveying the rather grim situation, then did the unthinkable.

EDF was formally invited into the takeover negotiations in what is possibly the high watermark in private equity-NGO engagement anywhere.

EDF took the risk of being seen supping with the devil but was keen on convincing the new owners that the company could run profitably without the polluting coal plants. (Energy Future went into bankruptcy in 2014 for a host of other reasons including the collapse of natural gas prices, which KKR didn't foresee).

It was agreed, through painful negotiations, that TXU would commission only three of the 11 coal plants. "We also promised to clean up TXU's old power plants so that by 2020, we get down to 1,990 greenhouse gas emission levels," recalls Okun.

"If we did all of this, EDF said, it would support the deal." In February 2007, the takeover was announced. A long-term partnership was in the making.

Refining the Processes

It grew stronger and EDF helped KKR devise the GPP in 2008; ironically, in the same year, the financial crisis, wrought by another recurring round of greed and pelf, streaked through parts of the global economy. Those at KKR began to appreciate the colour green, other than greenbacks. The responsibility seeds had been sown.

"It was a natural evolution," says Okun. "The deal solidified everything." The outside lawyer who facilitated the dive into the environmental domain and nurtured the NGO engagement is now global head of public affairs at KKR and is involved in all ESG processes. How deep is the KKR commitment?

Obviously, hedge funds with their rapacious conduct cannot come anywhere near responsibility. The firm is upfront about the fact that asset classes like hedge funds, fixed income or private debt have to be treated separately (see chart) due to "different governing structures and our varying levels of influence." Private equity, on the other hand, fits into responsible investing quite well for its long-term approach and its inherent stewardship style of functioning.

Therefore, in PE, there is progress, not only within KKR but also at the upper echelons of the sector. Carlyle, another PE major and its closest competitor, traditionally looked upon ESG as simple risk mitigation but has now acquired a more nuanced outlook with tools like its Eco Value Screen designed for sustainability opportunities.

Carlyle started its ESG journey in 2009; a year after KKR took to the path. In 2014, it even appointed a chief sustainability officer, perhaps a first for the industry. There is now a competitive aspect to ESG in PE.

KKR is refining its processes. It has developed 22 ESG sector and subsector guides, which are unleashed on a potential investee company during the pre-investment/due diligence stage. It's now being given more teeth with a little help from Sustainalytics, a sustainability analytics firm. In 2013, KKR held 34 diligence meetings in which it reviewed four companies per meeting for the first time or as a follow up purely on ESG.

While these exercises lend the firm a tight grip on ESG risks and opportunities, KKR confesses that "a decision to invest or not is rarely due exclusively to ESG issues."

However, trends are changing. PRI's 2014 progress report reveal investors are not really averse to abandoning potential investments if they feel engagement on ESG or risk management would be futile.

Abandonment was reported by 45% of PRI signatories reporting on PE assets.

ESG issues, expectedly, have also impacted PE terms and covenants with investees (see chart).

These days, more and more PE firms are f leshing out ESG in the 100-day plan which deals with priorities and goal setting immediately after an investment is made.

Last October, KKR made a $200 million investment in Weststar Aviation Services, its first in Malaysia. Due diligence betrayed less-than-adequate safety standards. Clear safety goals including the hiring of a chief safety officer, says Okun, were incorporated into the 100- day plan.

In the post-investment period, KKR's Portfolio Management Committee works in tandem with public affairs and an entity called KKR Capstone with a mandate to drive improvements including those on ESG in KKR portfolios. IDFC has also crafted a pre- and post-investment process for its portfolio companies.

Can this makeover of KKR, and a few others, be solely attributed to a genuine change in heart? Or, is there more to it?

Clearly, there are external triggers at work. Societal clamour to hold high finance to account is getting louder.

Numerous global institutions and alliances — the UNEP Finance Initiative, IFC, CDP Climate Change, Portfolio Decarbonisation Coalition — are beginning to influence and change organisational mindsets. Businesses themselves — Unilever, Patagonia — are demonstrating that good conduct is also good business.

And, more importantly, there is increasing pressure building up within finance itself.

Tough Questions

In 2008, only two General Partners (GPs) had signed up to the UN-PRI; by 2013, more than 130 Limited Partners (LPs) and 150 GPs were brought into the fold.

In five years there has been a sea change in mood and outlook.

Most PE funds are financed by cash-rich LPs, usually large pension funds, insurance companies or wealthy individuals.

GPs are firms like KKR, who as investment managers, manage these funds, picking up equity in promising investee companies for a period of around seven years or so, and eventually exiting for a profit. A growing number of LPs are now beginning to sing the ESG tune. GPs have no choice but to dance.

The LPs, in turn, are constrained to do this because they are themselves under increasing pressure from their constituents, pensioners, for instance, to invest responsibly.

"When LPs do a due diligence on us, the ESG questions asked of us just go up and up," concedes Okun. The European LPs are more insistent on altering the status quo. Sinha of IDFC speaks in the same vein. Earlier, LPs were just interested in knowing whether IDFC had ESG processes in place. Now they want to know how these are actually enhancing performance and outcomes.

LPs are also teaming up. One such heavyweight, the California Public Employees Retirement System (CalPERS) with $ 288 billion in assets, working with 40 other LPs, recently released sets of questions that LPs ought to ask GPs, both during fund raising and through the life of a fund.

An EDF study recently asked funds what factors will drive an increased focus on ESG. Nearly 69% pointed to 'LP expectations.' Carlyle co- CEO David Rubenstein has unabashedly confessed that his firm ventured into ESG partly because CalPERS wanted him to.

ESG is also benefiting funds in terms of better access to monies. Earlier this year, the $25 billion New Zealand Superannuation Fund committed $250 million to KKR for investing in North American oil and gas opportunities.

It's the first PE firm the fund has invested in. Okun reveals that the fund clearly told KKR that it wouldn't have invested in it but for its commitment to ESG.

While a few PE pioneers reap the benefit, it is disquieting that the large majority in finance continue to look upon ESG through the risk management lens. A 2014 global survey of investors, representing over $ 7.6 trillion in assets under management, conducted by the PWC's Investor Resource Institute, reveal that 73% considers risk mitigation as a driver for adopting ESG issues. It's reactive, defensive, and minimalist.

"We are not here to promote the environmental agenda or ensuring stability in society," says Sinha of IDFC, reflecting this larger mindset. The case for value creation is being missed. It's not done because it's the right thing to do.

As a key player in energy, even KKR is ambivalent on its stand on renewable energy or a process called hydraulic fracturing (fracking) for extracting natural gas from shale.

While natural gas is changing the energy dynamics globally, PRI is valiantly trying to bring fracking into the conversation in finance. Fracking is associated with a host of problems from widespread aquifer pollution to displacement of communities.

A PRI survey indicates that globally, just one company has committed to free, prior and informed consent when large swathes of land and indigenous communities are impacted.

Though energy, infrastructure and real estate are non-PE asset classes, KKR and its ilk will have to eventually come to it and take on such intractable issues. Only then will the barbarians' moniker evaporate from public memory.