Ask an investor to clean their portfolio of companies that put greenhouse gases into the atmosphere and chances are they will divest any holding that has significant carbon emissions.
While this approach is easy and enticing, its impact can be insidious: The benefit is a false one.
The investor can tell clients they are “low-carbon,” but the atmosphere remains laden with the same amount of greenhouse gases. The carbon hasn’t disappeared, it is just in someone else’s portfolio, more likely than not, owned by someone who doesn’t mind the mess at all.
There is a better solution: favoring investment over divestment. The resources needed are time, capital, and expertise. Orderly, long-lasting change requires a mindset of sustained action over time. You must operate better by building new habits, creating new processes, and remaining vigilant.
Many publicly traded companies, including our own, have devised paths to get to Net Zero by 2050. That may sound too slow, but real and lasting change takes time and discipline. The energy transition is just that–a transition. We cannot flip the switch overnight, which is why Carlyle’s commitment not only establishes the ultimate goal of Net Zero but also sets near-term goals across our majority-owned power and energy portfolio companies. 75% of Carlyle’s portfolio companies’ Scopes 1 and 2 emissions will be covered by Paris-aligned climate goals by 2025. After 2025, all new majority-owned portfolio companies will set Paris-aligned climate goals within two years of ownership.
The energy transition is a journey that private equity investors understand. Our job is to make companies operate better over the long haul. From initial due diligence through exit, our industry is at its best when we partner with management teams to improve all aspects of a business. In a rapidly decarbonizing world, that increasingly means helping companies to be at the forefront of the energy transition.
We believe that for the world to be on a Paris-aligned trajectory–limiting global warming to well below two degrees Celcius (preferably 1.5˚ C) compared to pre-industrial levels–private equity firms need to invest in this business transformation, not make it someone else’s problem through divestment. This is a role that our industry is incredibly well-positioned to fill. All investors can–and need to–play a part.
Some say that investments in carbon-intensive industries must stop immediately. However, we believe that a climate strategy must be tied to transition across all sectors of the economy. For example, conventional energy companies have some of the greatest decarbonization potential.
Divestment from these companies will not reduce demand for oil and gas or other fossil fuel-based energy sources. It will simply constrain supply, which can lead to an inequitable transition, and significant economic disruption. Rather than divesting from these companies, we should make a commitment to devote the resources and expertise necessary to transform these businesses by investing in new technologies such as green hydrogen, renewables, and carbon removal as they diversify into the energy companies of the future.
In every investment, there is the opportunity to make the business better: reducing energy demand, switching to renewables, investing in more efficient technologies, engaging with the supply chain, innovating on lower-carbon products, and more.
This is “responsible” investing–doing the hard work. Reducing portfolio emissions by divesting a handful of companies is simply making it a problem for another day or somebody else. Real emissions reductions need to be driven consistently across all individual companies or assets at the micro-level, not solely by macro portfolio allocation decisions.
Private market investors must do the hard work of improving companies and making them better. When applied with commitment, the outcome is real emissions reductions in the atmosphere–not just on paper–and the result can be sustained. This is the path to Net Zero.
At Carlyle, we are committed to ensuring all of our companies are set up for success with robust, Paris-aligned climate goals and pathways to achieve them. We know this is not easy, and there will be learnings along the way.
Our industry can play a key role in energy transition, and we must apply what we do best to make that happen: invest in the future.
Kewsong Lee is the CEO of Carlyle.
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