Originally published in Nikkei Asia's “Henry Kravis: My Personal History"
Chapter 21
Addressing climate change and workplace disengagement
My support of capitalism revolves around the fact that it absolutely can contribute to solving some of society's biggest challenges. One of the most pressing -- and increasingly urgent -- challenges of this generation is climate change. Last year was the hottest on record, and the 10 warmest years have all occurred in the past decade. Another, which plagues Japan just like it does many other countries, is sliding workplace engagement.
Countries and companies alike must adapt to the realities of a warming planet, and, from a private-sector perspective, this means engaging to understand the financial risks posed by climate change, as well as seizing the opportunities that will come as the world shifts to become carbon neutral by 2050.
As a long-term investor, we can help to address this major challenge. It will cost approximately $200 trillion to decarbonize the economy by 2050. Governments alone cannot finance this -- most of this will need to come from private capital. At KKR, some ways in which we are helping to manage climate-related risks and opportunities include engaging with our portfolio companies to help them stay competitive in this evolving landscape and investing our capital behind the energy transition.
We work with our portfolio companies to support the direct measurement of greenhouse gas emissions, where relevant, and help them create plans to decarbonize over time when climate is material to their operations and where we believe it contributes to value creation and risk mitigation. We also invest behind transitions in carbon-intensive sectors -- for example, we are supporting one of our energy portfolio companies in meeting its target to replace all of the coal consumption in its plants with renewable energy by 2030.
Where KKR invests in oil and gas, we emphasize progress toward a stable energy transition. We believe this is a better approach than simply selling the asset to another owner who might not share our goals as a responsible investor.
We also invest behind climate solutions. Since 2010, KKR has committed over $34 billion to climate and environmental sustainability investments. We launched a climate strategy last year that is focused on driving down real-world emissions by investing in areas like electrification, transportation, agriculture, energy efficiency and in heavy industries like steel, cement and aviation. The steel industry alone accounts for six percent of global emissions. Decarbonizing this sector in a manner that delivers a premium for investors will create a meaningful impact in support of the world's climate goals.
On workplace engagement, a 2023 Gallup survey found that only 6% of Japanese workers were engaged at work compared to 23% globally and 18% in East Asia. It revealed that, in 2023, Japanese companies lost over 86 trillion yen ($600 billion) in earnings from low levels of employee productivity and engagement. This is unproductive for companies and employees alike. And it is compounded by the acute labor shortage that Japan faces.
What if companies could change this?
Previously, I discussed how one of the key levers to unlock value in a company was making sure management teams were rowing in the same direction and everyone was aligned on the business plan. One way to do this is to tie their compensation to their performance with a management equity program.
Fast-forward to today, and we at KKR are working with companies on implementing ownership programs for their employees in new PE investments where we have majority control. There is one major difference -- the employees don't invest any of their own money, and this is not part of their compensation or benefits. It's part of creating a culture of ownership, something that can help close the wealth gap and make work more fulfilling for them.
Earlier this year, we supported a Japanese pharmaceutical company called Bushu Pharma in implementing their ownership program. This marked the first time a Japanese company backed by a private financial sponsor offered broad-based ownership to all its employees. It's too early to share any results, but we are optimistic.
Of course, the program is more than just granting ownership. It's about creating an ownership culture, where everyone has a voice in how the company operates, and engagement is regularly measured. The program also provides employees access to training and coaching to boost financial literacy so they can make the most of their stake in the company.
One of the best examples of this was Ingersoll Rand, a leader in mission-critical flow control, where the company granted ownership to all 16,000 employees and had a strong employee engagement program that was led by the CEO, Vicente Reynal. He was a huge champion of the ownership culture and to make this work, it really does need to start at the top.
Between equity ownership and giving employees a voice, Ingersoll Rand saw impressive results. From 2013 to 2021, worker safety improved significantly, there was an over 80% decline in voluntary turnover rate, and ultimately $500 million of value was delivered to colleagues across 80 countries.
The effects of broad-based employee ownership can be felt more widely as more companies adopt these programs. One of the key benefits is higher levels of job engagement, which has helped boost employee retention, an important metric in an increasingly tight labor market.
This is not to say that an ownership culture is a silver bullet for inequality and labor shortages, but we think it can and should be a part of a multi-faceted approach to these issues in any business -- in Japan and globally. We have seen it work time and time again.
On both challenges, we believe quite strongly that private capital can play a major, active role in being part of the solution. In fact, we believe that private capital is better suited than public capital for decarbonizing the economy in a way that supports value creation and value protection.
In many ways, private capital can be the "patient" capital needed to support large, complex and time-consuming corporate transformations with its longer-term time horizons, and also be a positive catalyst.
We still have a long way to go, and no single actor -- government, regulator, corporation, private capital -- will be able to solve the climate crisis, labor shortage or close the wealth gap alone. We need industrialists too.