Private Equity Watch: Fossil fuel investments undercut impact claims (podcast)



ImpactAlpha, Nov. 5, 2019 –– Now that big private equity players are spinning up impact funds left and right, the impact of the rest of their investments is getting a lot more scrutiny as well. 

ImpactAlpha’s roundtable regulars recorded a podcast episode recently keying on Blackstone’s investments in Brazilian agricultural processing plants linked to deforestation in the Amazon (here’s Blackstone’s statement on the deals) . But other private equity giants have stepped up with their own deals of questionable impact. As a source for stories, keeping watch on private equity impact is the gift that keeps on giving.

For private equity giants, $1 billion is table stakes for entry into impact investing

Take, for example, the jarring note struck by KKR’s announcement in June that it was going in with Blackrock to put up $4 billion for a 40% stake in the pipeline infrastructure of the Abu Dhabi National Oil Co., or Adnoc. The deal came at the same time KKR was raising more than $1 billion for the Global Impact Fund. 

Fossil fuel infrastructure investments raise obvious concerns, as they “lock in” carbon emissions for decades to come, and also represent a firm’s judgment call on the likelihood of effective climate action by governments and other actors. The climate emergency demands that investors should decapitalize fossil fuel infrastructure, rather than add it to their portfolios, said Imogen Rose-Smith, a longtime writer for Institutional Investor magazine.

The $206 billion KKR has had a longstanding partnership with the Environmental Defense Fund; the firm’s Green Solutions platform is organized around “eco-efficiency, eco-innovation, and eco-solutions.” The Global Impact fund has invested in Barghest Building Performance, which provides energy efficiency services, and waste management company Ramky Enviro Engineers. 

“It’s not enough to just get a pat on the back for starting an impact fund,” Rose-Smith said on the podcast. “You need to actually start making business decisions that are meaningful.”

What we know about KKR’s $1 billion Global Impact Fund

Total impact

The movement of private-equity into impact, and particularly impact infrastructure, funds has invited a closer look at the rest of their portfolios. “$1 billion sounds like a lot of money, but it’s a small percentage of their entire portfolio,” I offered in the podcast. “Shouldn’t we be looking at the impact of their total portfolio, not just of their self-defined impact fund?”

The podcast’s host, Brian Walsh, suggested that such added scrutiny could serve as a disincentive for firm’s to make any impact commitments at all, a case of “no good deed goes unpunished.” 

“The logic of the disclosure and metrics and reporting is that it gradually takes in ever greater parts of their portfolios and the broader financial markets,” I said. “One implication of that is why would any firm make any kind of impact commitment at all, because all they’re going to get is grief from it when they don’t live up to it.”

Rose-Smith said the impact of private equity investments is fair game, regardless of the launch of an impact fund. “They are all taking investment capital, taking public pension money, sovereign-  wealth money, university-endowment money. We should be scrutinizing them. Full stop,” she said. “They’re investors are asking for this. It’s not because they’re launching an impact fund. It’s because they are having an impact on the world.”

KKR’s Global Impact Fund has taken an interest in the future of work with a majority stake in Boston-based Burning Glass, a software company that identifies labor market patterns and sell those insights to companies and educators. Burning Glass analyzes hundreds of millions of job postings and career transitions to illuminate issues like the aging workforce and looming skills gap in the infrastructure sector.  

The role of other parts of KKR has been spotlighted in the demise of Toys ‘R Us. The Private Equity Stakeholder Project and other critics lay out a particularly harsh account of the firm’s actions in “Pirate Equity: How Wall Street Firms are Pillaging American Retail.” 

KKR’s collaborator in the Toys ‘R Us deal, of course, was Bain Capital, which has its own impact fund, the $400 million Bain Double Impact Fund, managed by former Massachusetts Gov. Deval Patrick. In its purchase of Rural Sourcing, an Atlanta-based software provider seeking to create high-quality tech jobs in small cities and rural parts of the U.S., Bain Double Impact committed to track job creation, employee engagement and local economic development through metrics like the company’s job and tax revenue multiplier effect. 

Bain Capital’s Double Impact fund acquires tech employer Rural Sourcing

Separately, another part of the $105 billion Bain Capital now is looking for a buyer for Los Angeles-based Toms Shoes, Bloomberg reports. Toms, a certified B Corp, was once famous for donating shoes and eyeglasses in developing countries. Bain acquired a 50% stake in Toms in 2014 but was unable to drive the company’s growth; the company is now struggling under its debt load and has a $290 million loan coming due next October. A Bloomberg story last year laid out the tale of Toms. 

The $323 billion Apollo Global Management, which is raising its own $1 billion impact investing fund, “has a history of investing in businesses that prey on low and moderate income people,” according to the Private Equity Stakeholder Project.

Material factors

Back at  Blackstone, the $512 billion private equity giant announced its new impact investing platform in May. In August, the firm opted out of the pledge by CEOs associated with the Business Roundtable to respect the rights of corporate “stakeholders” in addition to shareholders. 

(A Blackstone spokesperson offered: “Because our own corporate social responsibility policies are carefully tailored to our owners and other stakeholders, we had reservations that the BRT statement could be read as potentially inconsistent with our fundamental commitment to serving those who entrust their capital with us, like our 31 million pensioners.”)

Even more striking: Blackstone is doubling down on an oil and gas pipeline company it invested in earlier this year. Blackstone, which raised a $12 billion infrastructure fund, invested $3.3 billion for a 44% stake in Tallgrass Energy, a Kansas-based pipeline company. Tallgrass’ stock has fallen by nearly half in the bear market for energy stocks. Rather than cut ties, Blackstone is offering to take the company private.

Blackstone’s embrace of impact investing brings new scrutiny

“People are getting to the point where it’s fair game to say, ‘What about the total impact of all of your portfolio, of all of your holdings?’” I offered. For once, Rose-Smith agreed with me.

“We need to scrutinize these companies that we invest with much more broadly and much more diligently,” she said, “not because we’re being the morality police, but because as investors these issues matter.” 


 

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