It sounds nonsensical at first. To help decarbonize the global economy, Carlyle, one of the world’s largest private equity funds, is doubling down on its most carbon-intensive businesses, not divesting from them. “We didn’t…want to make [decarbonization] someone else’s problem,” the company’s head of impact told me. Does it make sense?
On its face, no. “We are hurtling towards disaster, eyes wide open,” U.N. Secretary-General António Guterres said earlier this summer, as yet another report laid out the doomsday scenario on global warming. “Current policies are taking the world to a 2.8-degree temperature rise by the end of the century,” he said. “That spells catastrophe.” Averting the worst-case scenario means stopping making investments in new fossil fuel supply projects, divesting from fossil fuel interests, and stripping out fossil fuel assets entirely from investment portfolios.
Megan Starr, the company’s head of impact, begs to differ. It’s not that she questions the need to get to net-zero emissions. As 90% of global GDP is now covered by net-zero agreements, she told me, decarbonization is becoming “mission critical” for the customer base of many of its portfolio companies, creating a “net-zero domino effect.”
But divesting from its companies with the heaviest carbon footprint, she said, is not the best way to get there. “The easy math is that across 250 portfolio companies,…if you sold a dozen, you can reduce your carbon 1-2 footprint by 95%,” she said. “But that doesn’t change a molecule of carbon dioxide in the atmosphere.” So instead, Carlyle decided to “stay invested and drive real-world decarbonization.”
The benefits of divestment versus investment are debatable. But what’s interesting about the Carlyle case is that it developed a playbook for what to do next.
Since setting its carbon strategy, Starr told me, Carlyle worked with 22 of its most carbon-intensive companies to develop their “Paris-aligned” decarbonization goals for 2030 and 2040. And it shared with these companies knowledge and resources to decarbonize and find cleaner avenues of growth.
The CEO of one of these companies, Michael Koenig of the German chemical firm Nobian, told me of the benefits that approach yielded for the firm.
For one, Nobian was able to secure better terms for its loans. As Nobian hits goals on its way to reducing its direct carbon emissions by 50% by 2030, the “green bonds” it secures for these investments have a lower cost of capital. “We can easily get to 10 basis points” in reduced interest rates if decarbonization targets are met, Koenig said. “That makes it a lot easier.”
Carlyle also helped Nobian to “flexibilize” its plants, so that it can more easily use renewable energy in its production. “Carlyle provided the framework, financing, regulations, around it,” Koenig said. “We’re now on our way to become one of the fastest chemical companies to be decarbonized.”
And with Carlyle steering its companies away from carbon-heavy markets, Nobian is now exploring decarbonized revenue opportunities, such as converting empty salt caverns into hydrogen storage facilities for storing renewable, weather-dependent sources of energy like wind.
“The fact that renewable energy will never be as continuous…means it will be all about storage,” Koenig said. That’s because while hydrogen is used to store renewable energy, it in turn must be physically stored. Koenig explained that one of the two ways to do so is by using depleted salt caverns. And his company happens to be one of the few in Europe that can do this.
With this capability, Nobian, a company with €2 billion ($2.17 billion) in revenue, has unlocked huge growth potential: The market for hydrogen storage is estimated to be at least €4 billion ($4.35 billion) a year in Germany and the Netherlands alone.
Such is the end game for Carlyle. Hold onto your carbon-intensive companies, it figures, help them decarbonize their operations and future business opportunities, and you have a great outcome for your investments and the climate. “We put in sweat equity and time because it will drive long-term business,” Starr said. “Macroeconomic tailwinds are coming. We’re really seeing the payoff in time.”
Net zero and decarbonization will also be two prominent topics at the Impact Initiative next month in Atlanta. If you’d like to join us for this two-day event, you can sign up here.
More news below.
Peter Vanham
Executive Editor, Coins2Day
[email protected]
This edition of Impact Report was edited by Holly Ojalvo.
ON OUR RADAR
Employees say corporate claims of ESG progress are baloney, according to a new survey (Coins2Day)
“43% of employees think short-term focus, lack of investor interest and leadership that is apathetic towards sustainability is a challenge for their company,” my colleague Lila MacLellan reported in Coins2Day’s Modern Board this week, based on a survey by the Harris Poll and the University of Pittsburgh. “And only about one-third of workers say their companies have made 'significant strides' toward hitting environmental goals. Perhaps most alarming? The line 'Our leaders don't believe in sustainability' resonated with 40% of respondents,” she reported.
SEC lawyers subpoena fund managers over ESG disclosures (Financial Times)
“The US Securities and Exchange Commission [SEC] enforcement division has sent document requests, including subpoenas, to several asset managers relating to their environmental, social and governance [ESG] investment marketing this year, suggesting a potential crackdown looming for the sustainable fund world,” Patrick Temple-West and Madison Darbyshire reported in the FT. The names of the companies involved are not known, but BNY Mellon, Goldman Sachs, and German DWS faced similar charges last year and paid up or set aside money to do so.
