Thursday, December 1 2022

Mark Carney is straddling two horses these days – as a climate change purist, via his role as UN climate envoy, and as a climate change pragmatist, in his role as ‘head of climate change’. ‘transition investment’ at Brookfield, the vast private equity group that is one of the world’s largest investors in oil and gas infrastructure.

Last week, he appeared to be riding the purist steed. Addressing the Net Zero Delivery Summit in London, the former Governor of the Bank of England told the great and good of the Green Revolution that they should not use the market turmoil caused by the war in Ukraine to delay decarbonization commitments. “The climate doesn’t care why emissions happen, only how many happen,” he said. “We need to speed up, not slow down.”

Midway through his speech, however, Carney acknowledged his inner realpolitiker to argue that new investments in fossil fuels would be needed to ensure “a smooth transition.”

Realpolitik is fashionable. BlackRock has spent the past few years trying to convince skeptics that its push into ESG investing is truly underpinned by an agenda that supports real environmental, social and governance improvements, rather than empty public relations. Chief Executive Larry Fink has campaigned for climate risk to be taken more seriously by investors.

But the world’s largest asset manager initially struggled to match action and rhetoric, rarely voting in favor of pro-climate or social shareholder proposals. That changed in 2021, when he backed 81 out of 172 votes. Last week, however, he backed down, arguing that environmental and social proposals were becoming so “prescriptive” and “binding” that he would not be able to support so many.

A test of the extent of the new realpolitik is how investors treat companies desperate to resume trade with Russia despite Vladimir Putin’s war on Ukraine. This somewhat undermines the ESG claims of these companies. Take Volkswagen, which is rapidly moving into electric vehicles and moving away from combustion engines, and churning out slew of ESG disclosures (on everything from decarbonization to diversity).

VW Chief Executive Herbert Diess suggested in an FT Live interview last week that appeasing the Russians and restoring access to the Russian market should take priority over the integrity of the Ukrainian nation, triggering a violent reaction around the world.

The dissonance almost makes you crave the honesty of hard-core capitalism. At the right time, last week, Carlyle agreed. The US private equity group has announced that it is consolidating its energy and infrastructure businesses into a new integrated unit. Covering renewables, fossil fuels and infrastructure, it will have nearly $14 billion in assets under management.

Unlike rival firms, which have pledged to reject fossil fuels in future funds, Carlyle boss Kewsong Lee is enthusiastic about the opportunity. The global divide, particularly the war in Ukraine and heightened geopolitical tensions between East and West, will provide the company with “plenty of investment opportunities”, he said.

This is likely a lucrative strategy, given the upward pressure on oil and gas prices. But even Carlyle’s approach is not fully reconstructed.

Like Carney, Fink and Diess, Lee likes to talk about the carbon “transition”, pointing out that Carlyle will encourage all companies in its portfolio to decarbonise. As proof, he cites his 2020 acquisition of SierraCol in Colombia, where he claims carbon emissions have been reduced by a third (although there is a fairly obvious limit to CO₂ reduction when your primary business is production). of a fossil fuel).

Carlyle has a ‘playbook’ that it uses to integrate ‘carbon management’ into all of its energy investments. Renewable energy should be used where possible, for example, with holding company Copia Power available to help if needed. Other suggestions are less convincing. Encouraging more remote working, for example, could take the carbon off the company’s books, but just shift it to private households.

The bottom line is that the world is not ready for an immediate switch to green energy. During a period of transition, it is commendable that owners of fossil fuel companies are pushing them to decarbonize part of their operations. Pushing them out of fossil fuels into renewables is the next step – but a less attractive step, as long as ultra-high oil and gas prices persist. Being upfront about this is as important to ESG’s reputation as it is to the future of the planet.

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