Private equity giants vow to show their ESG credentials in 2020

KKR and TPG — two of the biggest, with about $330bn in total assets between them — have agreed to report by April on the positive environmental, social and governance impacts of their investments, as well as their potentially negative effects. Both firms have signed up to a set of principles laid out by the World Bank’s International Finance Corporation, under which fund managers will have their reports verified by independent assessors and will need to update information annually.

The aim of the IFC’s push is to ease concerns over “greenwashing” that have arisen in ESG circles. Without any clear standards on what it means to be an impact fund, “anyone could slap that label on themselves and investors would not know the difference,” said Adam Heltzer, head of sustainability at Switzerland-based Partners Group, which helped craft the IFC principles.

The goal is to assure institutions such as pension funds and insurers that they are getting “what they hope for” by committing money to an impact fund, added Neil Gregory, an official with the IFC.

The private equity firms’ public commitment to impact investing coincides with an unusual amount of political interest in Washington in their activities. Last year Democrats in Congress asked KKR and Blackstone, another giant of the sector, to provide detailed information about the expenses charged by the healthcare businesses in their portfolios.

Democratic presidential candidate Elizabeth Warren, meanwhile, has said she wants to withdraw the privilege of limited liability for private equity investments, making the acquiring firm liable for the debts of its portfolio companies. Such a move could severely threaten the firms’ business models.

At its core, impact investing is simple: aiming to combine investment returns with a social or environmental purpose. KKR’s global impact fund, which launched in 2018 and has yet to close, has raised $1.1bn so far. Texas-based TPG is soliciting money for a second impact fund after its first, known as the Rise Fund and which closed in 2017, drew $2bn. 

KKR’s impact fund has made five equity investments, each under $100m, according to the New York-based company. Late last year the fund acquired two wastewater treatment facilities, not long after the purchase of Burning Glass Technologies, a data provider concentrating on labour market information. Both deals can be considered impact investments because they align with certain UN sustainable development goals, KKR has said. 

In 2020 the firm expects to do more deals in areas ranging from infrastructure to mitigating climate change, according to Ken Mehlman, co-head of KKR’s global impact fund.

“Credible impact investors need an authentic and rigorous approach to assessing and managing impact,” said Mr Mehlman, a former Republican National Committee chairman, of the IFC standards.
TPG’s two impact funds have more than $4bn in assets under management. In November, its first fund bought the largest dairy processor in Uganda. Stephen Ellis, co-managing partner of the funds, said that the extra transparency brought by the IFC’s code should hold newcomers into the impact-investing area “to a very high level of rigour.”

TPG’s Rise was hit by scandal last year when the firm’s Bill McGlashan was charged by the Justice Department as part of the US college admissions bribery scandal. The fund was co-founded by Mr McGlashan and Bono, the lead singer of U2.

Still, TPG’s funds have raked in hundreds of millions of dollars from New Jersey and other state pension funds. UBS’s wealthy clients, meanwhile, have invested $225m with KKR’s impact fund. 

Impact investing had been around before big private equity firms got involved. Government-sponsored development funds, such as the Japan International Cooperation Agency, have been doing microfinance or renewable energy deals for years. But momentum is picking up. In July, Schroders became the first large European funds group to put a big bet on the impact investing market by buying a majority stake in BlueOrchard Finance, a Swiss firm that has signed up to the IFC’s impact investing principles.

New potential buyers for impact assets are emerging all the time, said Shami Nissan, head of responsible investment at Actis, a UK-based private equity manager. The IFC principles, she added, should help to “cut through some of the impact-washing” in the sector.

“People can be cynical about those big players but they are building their teams out,” Ms Nissan said. “We are coming to a point where if you are silent on impact, you will be conspicuous. You will stand out for the wrong reason.”

Source: Financial Times

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