Private debt manager Oaktree Capital will consider fossil fuel-related investments that meet three conditions, Oaktree’s newly announced head of ESG, Priya Prasad Bowe, told New Private Markets. These three conditions are: if the firm believes the investment will be financially successful; if it will not frustrate the Paris Agreement goals; and if Oaktree believes it can positively influence borrowing companies’ sustainability practices.
Oaktree partnered with Sixth Street Partners last month to jointly commit $1.5 billion to acquire a portfolio of energy loans from Dutch bank ABN AMRO. The portfolio consists of approximately $3 billion in loans to about 75 North American oil and gas companies. Oaktree declined to comment on the deal, how much of the $1.5 billion it had committed or how it funded this investment. Sixth Street declined to comment on this deal.
A source with knowledge of the deal said the majority of those loans related to natural gas, which – said the source – is significantly more efficient and less polluting, and is viewed by some as an essential tool in the energy transition. Oaktree acquired existing outstanding oil and gas loans rather than providing original financing for the loans, noted the source. The acquisition facilitates ABN AMRO’s exit from oil and gas related lending in North America.
Oaktree’s recent oil and gas investments include an equity commitment of up to $900 million to acquire “large-scale, oil-weighted, producing oil and gas assets” in November last year. In October the firm committed up to $1 billion to acquire oil and gas producing assets over the next three years, according to a report, including a $58 million investment last week. Prasad Bowe declined to comment on specific investments but said Oaktree’s ESG policy does not require divestment from the energy industry.
“The energy transition is disrupting the energy industry, and that disruption creates attractive investment opportunities amongst the more traditional energy companies,” said Prasad Bowe. “From a scientific perspective, the transition to a low carbon economy will be a long one. Not every fossil fuel investment is going to be affected by the energy transition in the exact same way or on the exact timeline.”
Los Angeles-based Oaktree Capital manages assets worth $148 billion and has raised $13 billion so far for its 2020-vintage 11th private credit fund, according to affiliate title Private Debt Investor’s data. The firm is today announcing Prasad Bowe as its head of ESG. She assumed the position in February 2021, according to her LinkedIn profile.
Across its portfolio, Oaktree’s approach is to try to influence its assets to improve their sustainability practices, said Prasad Bowe. And oil and gas assets can have a role to play in the energy transition.
“If we’re not in a control position, the company doesn’t have to listen to us. And that doesn’t mean it’ll stop us from asking pertinent questions… But we have to be cognisant of that limitation”
Priya Prasad Bowe
“Take hydrogen, for example. To make certain types of hydrogen, you still need natural gas. And some of the existing gas infrastructure pipelines can be repurposed with more scientific intervention into hydrogen pipelines.”
‘Green’ hydrogen is produced by renewable energy – but production of this is limited and cannot alone support a transition to hydrogen-powered technologies and industries. ‘Blue’ hydrogen, derived from natural gas, can fill this deficit, as Allianz Global Investors’ head of private markets, Emmanuel de Blanc, wrote for New Private Markets.
Oaktree’s two-page ESG policy, dated June 2021, states that the firm has tailored ESG strategies for each of its different investment strategies, although it doesn’t disclose these specific strategies. Prasad Bowe said Oaktree considers ESG factors in its diligence process for potential investments, monitors portfolio companies’ ESG performance and engages with portfolio companies to enhance their ESG policies and practices.
But Oaktree has limited power to influence its portfolio companies as a private debt investor, said Prasad Bowe.
“We have different levels of control across our strategies, different levels of influence. If we’re not in a control position, the company doesn’t have to listen to us as they would have if we were in a control position. And that doesn’t mean it’ll stop us from asking pertinent questions or pushing the company to take their own actions or make disclosures. But we have to be cognisant of that limitation.”
What pertinent questions does Oaktree ask? Prasad Bowe declined to specify, because “we manage such a diversity of asset classes and industries. So, it’s very challenging for us to identify a set of KPIs that apply across all 150 billion of our assets”.
“You probably appreciate the challenges we have in terms of data quality and availability, and I don’t think that’s just Oaktree. That’s an industry wide issue.
“A KPI is different for each company; key performance indicators are going to align with the company’s specific business and metrics and goals. I’m not saying that doesn’t mean that there aren’t commonalities across companies. But I would say, generally speaking, most of our strategies have a sort of diligence checklist or similar that they complete for their investments.
“We’re starting carbon foot printing in our portfolio, starting with our liquid credit strategies, where the data is the best. That doesn’t fully cover our complete portfolio so we’ll need to also apply some estimation, which I think are pretty standard practice these days – although we hope that more disclosure will sort of fill in the gaps and help us help us better footprint our portfolio.”
Prasad Bowe again stressed the challenge of quantifying and measuring ESG data: “Let’s say we’re trying to understand the quality of a certain policy – if the company has a supplier code of conduct – that’s something that is more likely to be qualitative than quantitative and like many things, will require analyst discretion.”
Relying on qualitative assessments for investment decisions and to monitor progress can present asset managers with two challenges: how to scale these across a large portfolio and large team, and how to ensure consistency across the portfolio.
Asked how Oaktree tackles these for its qualitative assessments, Prasad Bowe said: “I think that is a good question and I think one that isn’t exclusive to sustainability considerations. Ultimately, there will be both qualitative and quantitative factors to consider when we make an investment or decline to invest in something. We’re a fundamental, bottom-up oriented investor, so we focus on credit fundamentals and some of those fundamentals are qualitative as well as quantitative.
“Think about ethnicity,” Prasad Bowe continued. “A lot of those factors are very difficult to explicitly take into a model, because what you’re evaluating are practices. Trying to distil that into a quantitative number – it can be quite challenging.”
There are a number of services and frameworks in the market to help asset managers quantify and measure ESG and non-financial factors, including Sphera, ERM, DiversityMetrics and LPI. Ares Management, a $197 billion AUM LA-based private debt manager, is a client of ERM and has developed an ESG data strategy which produces an ESG conclusion score for each of Ares’s investments, according to Ares’s latest sustainability report.
Oaktree declined to comment on whether it had signed up to an ESG data provider or system.
“One thing I can share is that we have just started to use the SASB [Sustainability Accounting Standards Board] guidelines as something that helps inform our investment processes. Those guidelines are fairly specific. They cover 77 industries, but there’s a lot of diversity within those industries. We try to identify the financial and material ESG topics of each situation and probe on those. And in some cases, that might be a qualitative and quantitative answer.”
Oaktree became a signatory of the UN-backed Principles for Responsible Investment in 2019 and a supporter of the Taskforce on Climate-related Financial Disclosures in November 2020. And the firm has taken a number of steps to promote diversity in its own operations and the private markets industry, such as its $30 million Black students programme.
Los Angeles-based Prasad Bowe reports directly to Oaktree’s CIO and co-founder, Bruce Karsh. She joined Oaktree in 2019 as a senior vice-president for credit products and previously held roles at Morgan Stanley and Citadel Securities.
“I’m very proud of Oaktree’s ESG policy,” Prasad Bowe concluded. “I think it’s something that we take so seriously. And I think it’s a big deal for us to have the buy-in from the investment team here at Oaktree, and to have such a strong commitment from the top to the bottom of the firm to invest with sustainability in mind and to really treat it as a material financial consideration when we’re underwriting our portfolio.”