KKR: Nature-based solutions offer chance for PE to ‘outperform’

KKR Global Impact director George Aitken said nature-based solutions are the ‘perfect assets’ for investors seeking arbitrage in combination with climate impact.

Nature-based solutions to climate change provide an opportunity for private equity investors to “outperform”, KKR Global Impact director George Aitken has told an emissions reduction conference in Sydney, Australia.

KKR’s Global Impact Fund has made two major investments in companies that work to provide nature-based solutions to climate change and that touch on natural landscapes: Resource Environmental Solutions, the largest ecological restoration company in the US; and GreenCollar, one of the largest environmental markets platforms in Australia and a developer of land-based carbon projects.

Speaking at the Carbon Market Institute’s Australasian Emissions Reduction Summit this week, Aitken said KKR liked gaining exposure to companies in this space because it fits with the mandate of its Global Impact Fund, but also because the firm sees nature-based solutions to climate change as “really the only solution that can address the issue at scale and at its lowest costs.”

He went on to say that the firm sees investing in companies with exposure to carbon markets and biodiversity restoration projects as a chance to “outperform.”

“When you’re an investor you’re looking for arbitrage, mismatched information. Nature-based solutions are the perfect asset for that. It isn’t commoditized – it’s rapidly evolving but it’s still very young,” he said.

“What a lot of newcomers don’t get is that credits from a REDD (reducing emissions from deforestation and forest degradation) project over here can be worth 5x what they’re worth from a project down the road over here, and it isn’t immediately obvious as to why.

“So there’s a lot of nuance and gray in the market. For an investor, that’s a good thing because it means you can outperform.”

However, Aitken acknowledged that the landscape could change as markets grow more mature and more players invest in the sector.

He said: “It will be a challenge over time as the market matures and becomes more commoditized. We all want that for the world, but I think for private equity in particular it’s actually harder to make outsized returns when things are commoditized.”

Aitken added that how to collect, aggregate and report data related to carbon emissions, including Scope 3 emissions among its portfolio companies, in an automated and unified way is “the most common topic we talk about a firm level.”

“At the moment, it’s literally an email and an Excel [spreadsheet], but we need to be able to drag that up through a process that’s pain-free. Some of these new businesses that are building this functionality, [making it] native in business systems, are going to be the key. It will take a long time to mature, but that’s a really exciting thing that, once it is embedded, it will be expected that everyone reports on it.”