The Brief | January 12, 2023

The Brief: Catalytic capital for scaling, billion-dollar climate funds, diverse asset managers, grid-scale battery storage, costs of the ESG culture wars

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Greetings, Agents of Impact! 

Featured: Scaling Impact

Indispensable growth factor for impact funds, strategies and fund managers: catalytic capital. Impact investors often use catalytic capital to seed social and environmental innovation or subsidize strategies, managers and business models that are demonstrably impactful but not yet commercially investable (for more, take a look at the Seeding Impact series). A few catalytic investors are going further: using patient, flexible or risk-taking financing to take early successes to scale. “Pay attention to deals that catalytic capital providers are advancing,” says Laurie Spengler of Courageous Capital Advisors. “Their participation signals a level of expertise and opportunity that the broader market has yet to recognize.” Spengler led a learning lab for the Catalytic Capital Consortium and kicks off our new series, Scaling Impact in partnership with C3. A guidance note from the consortium details catalytic strategies to scale impact used by foundations (including Rockefeller, MacArthur and Shell), family offices (Ceniarth and RS Group), development finance institutions (Africa Finance Corporation and FMO) and other asset owners. 

  • Compelling opportunities. “Even the most promising investments often struggle to transition from initial signs of positive performance to attracting sufficient amounts of capital to move along the scaling trajectory,” Spengler writes. Some of the reasons: demonstrable but limited track record, sub-scale operating size, and market-risk perceptions. “Catalytic capital can serve as a bridge that connects the promising expansion of nascent investment activity to long-term, sustained impact and financial performance.”
  • Strategic flexibility. Catalytic capital can often sit idle, as investors wait for the perfect opportunity in a narrow sweet spot. To overcome the challenge, German development finance institution KfW will issue a request for proposals from fund managers pursuing carbon-sequestration investment strategies. The “approach allows KfW to benefit from managers’ proximity to the market and range of solutions, inviting them to demonstrate how they will best use the development finance institution’s concessional capital in pursuit of CO2 reduction,” states the guidance note. “By running a flexible window, KfW hopes to support the best available strategies and ideas.” 
  • Closing gaps. Most impact strategies, managers and models “move along a trajectory of development that can easily stall if they can’t attract the right partners and financing,” says Spengler. Capital gaps will likely close with more time to demonstrate results. “Can we help reframe transient capital gaps as ripe opportunities to scale up impact?” asks Spengler. “Can we help investors rethink their expectations, share information, ease burdens on fund managers, and expedite urgently needed financing for catalytic strategies around the world?’

Dealflow: Climate Finance

Goldman Sachs climate fund hits $1.6 billion. We daresay Goldman’s Horizon fund is… small, for today’s private equity climate funds. Goldman Sachs Asset Management enters a market that includes $7 billion funds from TPG Rise Climate and Brookfield and a $3.5 billion fund from General Atlantic. Horizon makes growth-stage investments of up to $100 million in clean energy, sustainable transport, waste and materials, food and agriculture, and water. A key focus: companies helping other companies decarbonize with “products and services that enable other organizations to cost-effectively meet their sustainability objectives,” GSAM’s Ken Pontarelli told Reuters. GSAM had targeted $1 billion when it launched the fund in 2021. Horizon counts Danish insurance company PFA Pension among its backers.

  • Climate portfolio. The fund has made a dozen investments, including Sweden-based battery manufacturer Northvolt, which raised $2.7 billion in 2021 from Horizon and a raft of European pension funds to build a “gigafactory” for battery production. GSAM’s climate fund peers include Lightrock, which raised €860 million ($838 million) for its first climate impact fund in October. Climate Asset Management is in the market with a billion-dollar natural capital fund.
  • Solar unicorn. Separately, TPG Rise Climate led a $230 million equity round for German’s Enpal, a residential solar leasing company. The Series D round values the company at $2.4 billion.
  • Dive in.

TPG NEXT secures $500 million from CalPERS for underrepresented alternative asset managers. Diverse managers, which includes women, LGBTQ+ and people of color, manage less than 2% of the trillions of dollars in alternative assets. San Francisco-based TPG launched TPG NEXT in March 2021 to invest from TPG’s balance sheet in diverse alternative asset managers and investors. The firm has backed Harlem Capital, Latino-led early-stage tech investor VamosVentures, and Black-owned real estate firm LandSpire Group. TPG NEXT will use the commitment from CalPERS to set up its first fund. It already has a pipeline of 150 diverse managers. “To really address the talent gap in alternatives and bring our industry more in line with demographic trends, we needed to be able to scale this initiative,” TPG’s Pamela Pavkov told ImpactAlpha. Pavkov declined to disclose the size of the fund.

  • Returns on inclusion. The U.S. Securities and Exchange Commission in October released a guide on diversity, equity and inclusion (see, “Policy Corner: Diversity in asset management). CalPERS made the allocation to TPG NEXT as part of a mandate to give “access and opportunity to new and innovative talent in the investment industry,” said CalPERS’ Nicole Musicco. “We want to create and nurture an ecosystem that will serve as a catalyst to seed the next generation of diverse talent and foster different ways of seeing and solving problems.” CalPERS also allocated $500 million to Chicago-based GCM Grosvenor to make seed-stage investments in emerging and diverse private equity fund managers.
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Dealflow overflow. Other investment news crossing our desks:

  • Ghana’s Jetstream Africa secured $13 million in debt and equity for its tech and financing platform that helps goods move more easily across Africa’s borders.
  • Bangalore-based Banksathi raised $4 million to connect individuals in India’s second and third tier cities with financial services products and providers. 
  • Castleton Commodities International acquired a majority stake in Netherlands-based S4 Energy, which builds and operates grid-scale battery storage facilities. 
  • A Morgan Stanley India Infrastructure fund invested $9.3 million in Athulya, which provides home care and assisted living for India’s seniors. 
  • Nigerian gender-lens investment fund Aruwa Capital reupped its investment in AgroEknor, which procures and exports hibiscus flowers from farmers in northern Nigeria.

Signals: Muni Impact

The billion-dollar cost to the ESG culture wars. Banks that use environmental, social and governance frameworks in their investing practices are being targeted by state legislators across the country. More than a dozen states with primarily Republican-led legislatures have banned government business with those financial institutions, or are considering bans in the future. A new analysis finds that limiting the pool of banks for government contracts is likely to cost states hundreds of millions of dollars in additional bond underwriting costs. “The firefighters, school teachers and municipal workers in these Republican-controlled states are the folks suffering from the actions of their elected officials” says Andrew Behar of As You Sow, which released the study with Ceres.

  • Texas test case. The Lone Star State in 2021 passed laws prohibiting municipalities from contracting banks that adhered to ESG principles or policies. A 2022 study found that limiting competition for municipal-bond underwriting cost taxpayers an extra $300 to 500 million. The Sunrise Project, on behalf of As You Sow and Ceres, commissioned the same economic consultant who ran the Texas numbers to come up with totals for states where similar legislation is under consideration or has recently been adopted. 
  • Mounting costs. The As You Sow-Ceres analysis examines six states: Kentucky, Florida, Louisiana, Oklahoma, West Virginia and Missouri. It finds that taxpayers will be on the hook for up to $708 million more if legislation is enacted, pushing additional estimated costs across the seven states to over $1 billion. That total masks some regional differences: a small state like West Virginia might see additional costs of $9 million to $29 million, while a powerhouse like Florida could bear up to $361 million. 
  • Free-market principles? In an announcement introducing the report, As You Sow and Ceres representatives point out that managing financial risk – including the ESG varieties – is precisely what taxpayers require of their elected officials (see Imogen Rose-Smith’s latest column, “GOP ditches ‘pro-business’ with attacks on ESG that hurt corporations, investors – and red states”). Said Ceres’ Steven Rothstein, “These actions will increase costs and interfere with the free market in states that move forward.” 

Agents of Impact: Follow the Talent

Bain Capital is looking for an ESG manager for impact measurement and reporting… Harvard Medical School is recruiting a sustainability manager… MAKE Corporation seeks an ESG reporting and engagement consultant in Chicago… NextWave Partners is hiring a sustainability and ESG vice president in Los Angeles… Franklin Templeton is looking for a remote vice president and director of sustainability global markets… Hivos is hiring a finance officer in Tunisia. 

The Bill & Melinda Gates Foundation seeks a program officer for digital learning and evidence-based teaching in Seattle… Accion is hiring a global investments intern and a director of public relations in Washington, D.C… The Rockefeller Foundation has an opening for a managing director of operations in New York… The U.N.’s Food and Agriculture Organization has several open positions in the Philippines, including an anticipatory action specialist, a project administrative and finance assistant, and a national project coordinator

Flag is looking for an account director and a senior account director for sustainability reporting in New York… KPMG seeks a community impact manager in New York… PepsiCo is recruiting a sustainability data steward manager in Chicago… Alice+Olivia is looking for a director of sustainability in New York… The Cook Inlet Lending Center is hiring a residential lending manager in Anchorage, Alaska… Second Nature is looking to fill several full-time and remote positions.. 

The U.N.’s Sustainable Development Solutions Network is accepting applications for a 16-week investment readiness accelerator program for young social entrepreneurs until Friday, Feb. 10… The Brookings Institution seeks proposals on state and local fiscal policy and public finance for its annual Municipal Finance Conference, July 18-19 in Washington, D.C… The Housing Affordability Breakthrough Challenge will open applications on Jan. 31 for grants and technical assistance. 

Thank you for your impact.

– Jan. 12, 2023