The Brief: LA fires expose climate risk in muni markets

Greetings Agents of Impact! Muito obrigado to all of you who joined yesterday’s Call to survey Brazil’s impact investing landscape. We’ll have the recap and replay tomorrow. – David Bank

In today’s Brief:

• Will wildfires reprice climate risk in muni markets?
• KKR takes shared ownership strategy to public markets
• Reshaping passive investing
• Flexible finance for climate resilience

Featured: Muni Impact

LA wildfires spur a climate-risk reckoning in the $4 trillion muni market. It wasn’t only houses. The string of blazes that tore through Pacific Palisades, Altadena, and other Los Angeles neighborhoods, destroyed recreation centers, street lights, water pumping stations and much more. The damage to public infrastructure in the city of Los Angeles topped $350 million in the first three days of the fire, according to a city report. The fires themselves have made paying for rebuilding municipal assets trickier, as climate risk threatens to upend the once-sleepy, $4 trillion municipal bond market, Louie Woodall reports for ImpactAlpha. Issuers and investors could be thrown for a loop. “This is a big deal,” says Municipal Market Analytics’ Tom Doe. “As Mike Tyson said: ‘Everybody’s got a plan until you get a punch in the face.’ Well, I think this was a pretty good punch.”

• Ratings downgrade. Already, the ratings agency S&P has downgraded bonds issued by the Los Angeles Department of Water and Power, while rival rating agency Fitch has put a host of LA issuers on Rating Watch Negative, meaning they are now more likely to be downgraded than they were before the fires. “With homes destroyed, people move away. Businesses close. Property values decline. In turn, tax receipts drop, limiting available cash for municipalities to pay their debts,” says Alice Hill, who served on President Barack Obama’s National Security Council. “As climate extremes continue to pound communities, those communities could find themselves in a downward economic spiral.”
  
• FEMA reaction. President Donald Trump’s musings that he might shut down the Federal Emergency Management Agency, or FEMA, could accelerate the reckoning. A halt to federal aid could prompt cities and states to spend more to climate-proof their populations, requiring cities to issue more debt. Doe believes municipal bond issuances will rise to $1 trillion a year by 2035, as state and local governments overhaul their infrastructure and protect residents from climate shocks.

• Tax exempt? Increasing the urgency is the possible loss of the ability for states and cities to issue tax-exempt bonds, which represent a de facto federal subsidy on the order of $40 billion a year. Trump may be looking to close muni tax exemptions as a budget saving measure that can offset other tax cuts and spending. “Right now the discussion is that the new administration wants to eliminate the exemption so that he can extend his tax cuts,” Doe says. If the tax-exempt munis are scrapped, investors could become choosier about issuers’ climate risks. “The ground really is shifting for bonds in riskier places,” says Susan Crawford, whose Moving Day site covers climate risk and adaptation. “It is high time that the markets started pricing in physical climate risk.”
  
• Keep reading, “LA wildfires spur a climate-risk reckoning in the $4 trillion muni market,” by Louie Woodall on ImpactAlpha. Catch up on Woodall’s earlier post, “LA wildfires push California’s insurance market to the brink.”

Dealflow: LP / GP

With its stake in Henry Schein, KKR pushes shared ownership of public companies. The ironies are rich. KKR, the private equity buyout giant, has become the largest non-index fund shareholder in Henry Schein, a publicly-traded supplier of dental and medical products. With its $250 million investment, the erstwhile “barbarian at the gate” has secured a 12% stake – along with the mantle of “white knight.” KKR had been amassing shares in Henry Schein, but partnered with the company after it faced a campaign by the activist investor Ananym Capital Management. “This is a role we can play, being a long-term shareholder to a company truly under attack from activists,” KKR’s Pete Stavros told The Wall Street Journal. “If you’re a public company under attack give us a call,” Stavros added on LinkedIn. 

• Shareholder activism. Ananym, co-led by Charlie Penner, who ran Engine No. 1’s successful bid to shakeup ExxonMobil’s board, has been pushing the medical supplier to lower costs, optimize capital allocation, and replace long-serving board members it says lack industry experience. Stanley Bergman, Henry Schein’s CEO and chairman, has held the roles for more than 35 years. “This just shows that, when you apply pressure to the right place, a variety of good things become possible,” Penner said. (Penner’s old firm, Engine No. 1, has recently cozied up with Chevron in a joint venture to develop natural gas to power data centers. Chevron’s Mike Wirth touts the move as “bringing to fruition President Trump’s vision for a new American golden age.”)
  
• Worker ownership. Stavros, who has championed shared-ownership strategies at KKR and other private equity investors, said KKR “will pursue a broad-based employee ownership program” as part of a “host of operational improvement initiatives.” The latest stake brings KKR’s investment in Henry Shein to $1.2 billion. Stavros has launched Expanding ESOPs to educate executives and policymakers. Henry Schein would be the first publicly listed company in KKR’s shared-ownership portfolio. KKR has an option to up its stake with an additional 2.9% shares via open market purchases.
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Valency International secures $15 million to expand cashew products in Côte d’Ivoire. A year after Valency International, a Singapore-based agricultural processing and trading company, set up shop to do cashew processing in Côte d’Ivoire, British International Investment made a $15 million equity investment. Valency, now in its third year in the country, has secured a fresh $15 million from the UK development finance institution to expand into cashew waste processing and biofuel production. The deal will create local jobs and retain more of the value of cashew production locally. Côte d’Ivoire rivals Vietnam and India as a leading cashew producer, but just 10% to 20% of the processing is done within the country.

• Cashing in on cashews. Valency launched in Côte d’Ivoire in 2022 with $20 million in debt from Norfund and Finnfund to set up a processing facility. Last year, it secured $50 million in trade financing from the International Finance Corp. and Absa to procure cashews, as well as sesame seeds, shea nuts, ginger and soy beans from 150,000 farmers in Côte d’Ivoire and three other African countries. Côte d’Ivoire’s government last year tightened regulations with the aim of strengthening local processing and companies. Cashew production in the country has also been supported by the five-year, $27 million Prosper Cashew program, funded by the US Department of Agriculture during President Trump’s first term.
  
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Dealflow overflow. Investment news crossing our desks:

• Netherlands-based Borski Fund, a women-led firm that invests in women-led companies developing products and services for women, inked an investment from M&G Investments and reached a final close after nearly five years in the market. (Impact Investor)
  
• Veir, a superconductor technology provider based in Woburn, Mass., snagged $75 million from MunichRE to boost the transmission capacity of grid infrastructure. Microsoft’s Climate Innovation Fund, National Grid Partners, Breakthrough Energy Ventures, Galvanize and others also invested. (Veir)
  
• French development finance institution Proparco invested €10 million ($10.4 million) in private equity firm AfricInvest’s Small Cap fund to back small and mid-sized African businesses in education, health and agriculture. (Proparco)
  
• Renewable energy infrastructure investor Quinbrook Infrastructure Partners raised over $450 million in debt from Deutsche Bank, Bank of America, Mizuho Bank and other banks for a large battery storage project in Australia. (ESG News)
  
• Vancouver-based lithium refining company Mangrove Lithium secured $35 million from Breakthrough Energy Ventures, Mitsubishi Corp., Orion Industrial Ventures and others, to set up a refining plant in British Columbia. (Mangrove Lithium)
  
• Swedfund invested €40 million ($41 million) in the Emerging Africa and Asia Infrastructure Fund to back sustainable infrastructure projects in Africa and Asia. (Swedfund)

Impact Voices: Impact in Public Markets

How the FDIC-Vanguard agreement could transform passive investing. A brewing confrontation between financial titans and regulators could reshape passive investing. For ESG and impact investors, “the knock-on effects could reshape how passive index funds engage with companies across industries and limit (for better or for worse) their influence on corporate behavior,” write Spectrum Impact’s Rehana Nathoo and the Cordes Foundation’s Eric Stephenson in a guest post. The backstory: In December, banking regulators at the FDIC took aim at one of the industry’s biggest passive players: Vanguard. In a signed agreement between the two parties, various measures were outlined to ensure Vanguard remains a “truly” passive investor in FDIC-supervised banks. It restricts Vanguard from influencing management, policy or board decisions at these institutions and requires disclosure of holdings exceeding specific ownership thresholds. In contrast, competitor BlackRock is pushing back, requesting an extension until March to respond to similar regulatory pressures.

• Why it matters. While the Vanguard-FDIC agreement specifically applies to banking institutions and their subsidiaries, “it could serve as a template for forthcoming policy shifts across other heavily regulated industries,” the authors say. For example, the SEC could adopt comparable frameworks for passive investors in energy companies, potentially limiting index funds’ ability to influence corporate policies around carbon emissions and renewable energy transitions.
  
• Active management. Nathoo and Stephenson spot an upside for active managers, who have struggled to differentiate themselves from low-fee indexes. “Does the narrowing of the aperture mean that true values-based investors who champion robust methodology, active engagement, and deliver risk-adjusted returns will have their moment in the sun?” they ask. “Certainly we could imagine that these types of regulations will preserve the distinction between passive and active strategies, even allowing investors to choose vehicles more closely aligned with their goals and encouraging further innovation in ESG products.”
  
• Keep reading, “How the FDIC-Vanguard agreement could transform passive investing,” by Rehana Nathoo and Eric Stephenson on ImpactAlpha.

Agents of Impact: Follow the Talent

Energy Impact Partners welcomes Taylor Rowe, previously with The Clean Fight, as vice president… Impact Community Capital names Michael Lohmeier as president (see, “Putting an ownership lens on the preservation of affordable housing“)… Autodesk Foundation is hiring a portfolio engagement manager in Denver… Sorenson Impact Foundation is looking for a portfolio management associate in Salt Lake City.

Community Investment Management seeks an investment director and an investment analyst… Blue Haven Initiative is recruiting a summer intern… CapShift is looking for an impact investment assessment and reporting intern… The NYU Stern Center for Sustainable Business will host its eighth annual practice forum on sustainability-driven value creation, Thursday, March 27, in-person and online.

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

– Jan. 30, 2025