A look inside TPG Rise Climate fund’s latest tactic

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One thing to start: a big gripe about the green finance market in recent years is that the standards have been so vague that there is plenty of “greenwashing”. Maybe so: as the DWS whistleblower Desiree Fixler told Moral Money a couple of weeks ago, some financiers have been using the environmental, social and governance (ESG) label as a marketing device, without proper accountability.

So it is intriguing and heartening to see that the European parliament is considering giving its green bond framework more teeth: a committee report suggests Europe should impose civil penalties if issuers mislead investors over green promises. This would be considerably tougher than the current proposals for a voluntary green standard — and bring Brussels into line with the focus on investor protection that defines the Securities and Exchange Commission’s mandate in Washington.

We do not know if this idea will fly. But the parliamentary committee report is worth reading, and we would love to hear your views.

Meanwhile, this week’s newsletter drills into how the biggest climate fund that has been raised so far — TPG’s Rise Climate fund — plans to deploy its capital. Take note of its predictions that we will soon see a wave of green spin-offs. And check out the piece on what the battle around Solvay tells us about an emerging trend in shareholder activism. Read on. (Gillian Tett)

Prepare for more green spin-offs?

A couple of years ago Moral Money coined the phrase the “olive spectrum” to describe what we saw happening in the corporate world: namely that a host of brown companies were trying to decarbonise, but moving along a transitional path in a way that made it hard to label them as either “green” or “brown” since they were a blend of the two.

But is it time to replace the word “olive” with “khaki”? The financiers behind the newly launched $7bn-plus TPG Rise Climate fund think so. They think that many mainstream brown(ish) legacy companies today contain patches of green — and these can be separated into different “blobs”. They are honing their own strategy to persuade the big industrial giants to conduct spin-offs and carve-outs to let TPG invest in those green blobs on the khaki landscape.

“A lot of our activity has [recently] been carving assets out of existing companies,” said Jim Coulter, head of private equity group TPG, who cites companies such as Tata, Nextracker and Monarch Bioenergy as examples of where this strategy has played out.

“By having [clean tech and fossil fuel operations] in one place they almost optimise for the lowest possible outcome. So you’re seeing more and more companies saying, ‘I have great green assets but no way to let people invest in them’. One path is to transition . . . but the other path is where you spin [those assets] off to help them grow.”

This tactic marks a subtle shift from the past, when investors generally backed self-standing green start-ups. TPG’s experiments are likely to be closely watched, given its high profile — not only is it the largest single climate fund launched to date, but it is led by Hank Paulson, the former US Treasury secretary.

Paulson says the group is trying to take a distinctive stance in several ways. One is a decision to ask two dozen industrial entities to invest in its fund, in a bid to build industry coalitions to source deals and connect suppliers and customers. “A good number of these companies have never been in a fund before as a [limited partner]. We chose companies that we thought were very progressive, and leaders in how they’re thinking about climate change,” Paulson told Moral Money.

Another strategic focus will be “the valley of death” in clean tech, namely the point when new green companies have good ideas but urgently need capital to conduct large-scale tests of their innovations. “In the tech world, you can run A/B tests [because] someone’s already set up the internet for you — you don’t need a huge amount of capital,” Coulter says. “In climate investing, if you have an idea that works, you generally need massive capital to have impact. There was a hole in the [funding] market.”

The group admits it is not always simple to deliver. This is partly because the internet-obsessed venture world has plenty of talent to analyse digital deals, but a paucity of expertise around heavy industry — where Coulter insists there is vast opportunity.

“About 95 per cent of the public market value in the climate area is in electric vehicles and renewables, which is probably 45 per cent of emissions . . . And so part of our role as practitioners is thinking — what are those companies in areas like methane capture and hydrogen — solutions that the public market hasn’t seen yet.” 

Or as Paulson echoes: “The thing that has surprised me, is the huge, huge amount of deal flow there is.” But the former Treasury secretary — a prominent advocate of a carbon tax and dividend system in the US — stressed that the next stage of development will need more government support to become more balanced and deep-rooted.

“Ultimately, these ambitions are not going to be reached unless governments provide more tools that are necessary. How carbon is priced is going to make a big difference — it will be the currency that will facilitate a lot of this industrial transition.” (Gillian Tett)

Solvay AGM highlights emerging ESG activist trend

Shareholders attending the annual meeting of Belgian chemical company Solvay tomorrow should be braced for a long haul. Last year’s meeting ran for about three hours, as management responded to 52 questions from a single investor. This year, the same shareholder — London-based hedge fund Bluebell Capital Partners — has filed no fewer than 106.

It is the latest flurry in a long-running campaign by Bluebell co-founder Giuseppe Bivona over the environmental impacts of Solvay’s Rosignano soda ash plant on Italy’s west coast. Bluebell has accused the company of creating an “open landfill” by discharging hundreds of thousands of tonnes of suspended solids into the ocean, containing significant quantities of heavy metals.

“We are asking them to do in Italy what they do everywhere else,” Bivona, a former Goldman Sachs and Lehman Brothers banker, told me. “They would never get away with this in Germany or France.”

With about $250mn under management, according to Bivona, Bluebell has been in operation for just three years — but it has made its mark with a series of activist campaigns. It helped to force Emmanuel Faber’s departure as chief executive of Danone last year with its attacks on the company’s governance standards. More recently, it has pushed for Glencore to spin off its coal division using a dual share structure, and for GlaxoSmithKline to offload its consumer arm.

What is different about Bluebell’s campaign at Solvay, however, is that it has no chance of generating returns for its investors — the fund holds only a single share in the company. Bivona says this is not a publicity stunt, but an attempt to use the activist investor playbook to tackle an environmental problem.

Solvay has hit back strongly against the Bluebell campaign. Its process at Rosignano is “safe and controlled, uses natural materials and is in full compliance with EU and Italian regulations”, it told me in a statement, noting the renewal of its official permit in January. “There is simply no basis for Bluebell’s statements,” it added, citing studies showing safe water quality levels in the area. In an open letter in February, it questioned Bluebell’s understanding of its operations, saying the fund had “no known expertise in environmental science or chemistry and no record of sustainability investing”.

But Bivona insists the campaign is achieving its goal of raising the bar for ESG standards. When Bluebell launched its campaign, Solvay enjoyed a top-notch AAA ESG score from rating provider MSCI. It lost that rating last March, with MSCI citing the Rosignano controversy, among other concerns.

Proxy advisers, too, have taken notice. Ahead of next week’s AGM, Glass Lewis cited the reputational risks from the Rosignano furore as it advised shareholders to vote against the ratification of board acts for the previous year. It then amended that advice to “abstain” — prompting Bluebell to question whether it had come under pressure from the company. (Glass Lewis said the revised advice reflected that the board had taken “a number of disclosed tangible actions” in response to shareholder concerns. Solvay said it respected proxy advisers’ independence and “following their guidelines [had] shared our feedback on their notes in due time”.)

Bluebell faces a mountain to climb in rallying fellow shareholders to its cause, with nearly a third of Solvay’s stock held by the founding family’s holding company. But Bivona has been jockeying for support among Solvay’s external investors — led by BlackRock, Vanguard and Norges Bank Investment Management — characterising this as a test of their vaunted commitment to sustainable investing. “In these campaigns, if you’re not supportive, you’re obstructive,” he said.

The result of tomorrow’s vote will give a sense of how seriously other shareholders are taking Bluebell’s push. In any case, boards would do well to take note of this saga, as well the moves by Engine No. 1 on ExxonMobil and by Carl Icahn on McDonald’s. ESG-flavoured activist shareholder campaigns look increasingly like a trend that companies ignore at their peril. (Simon Mundy)

Smart read

• The fast-fashion industry is a big target for the environmental lobby, which complains (quite correctly) that the supply chains that have been churning out endless cheap clothes for western consumers in recent years are adding to carbon emissions and have low labour standards. But what happens when one fast-fashion billionaire grows a conscience and decides to not just clean up his operations, but make amends? This New York Times account is a fascinating read.

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