Private equity may be getting more sustainable

Private equity is one of the world’s largest carbon emitters, by virtue of its outsized role in the global economy. That also means it has the opportunity to lead on carbon emissions reduction, and there are indications that the industry is moving in that direction.

Driving the news: Carlyle Group this week committed to achieve net zero greenhouse gas emissions for its portfolio by 2050.

• It also said that 75% of its majority-owned portfolio companies’ Scopes 1 and 2 emissions will be covered by Paris-aligned goals by 2025, and that any companies bought beginning in 2025 will be asked to achieve those goals within two years of ownership.
• There also has been a steady stream of “chief sustainability officer” and “chief impact officer” hiring announcements by private equity firms, usually as new positions.

What to know: This trend is being driven as much by business needs as environmental concern, as sustainability factors are impacting bottom lines.

• Examples include new requirements for securing government contracts, climate risk assessment costs for real estate (particularly in coastal areas) and shifting sentiments among both consumers and job candidates.
• And, to be clear, this relates to much more than just energy-specific portfolio companies.

Key for private equity is actually reducing emissions, and not just pushing them elsewhere in the supply chain (i.e., the dirty clothes under the bed approach).

• Meg Starr, who joined Carlyle in 2019 as global head of impact, says: “The easy way is to divest 10% of your companies and then you’ve reduced emissions, but not a single carbon molecule in the atmosphere has changed. The hard way isn’t portfolio company math, but is to drive actual carbon emissions at portfolio companies. There’s now clear scientific protocol on where to start.”
• Starr adds that she’s heard from many industry peers since Carlyle’s announcement, noting that “ESG is one of the most collaborative corners of finance.”

Caveat: There are still plenty of PE firms that aren’t actively pursuing sustainability strategies for their portfolios, which is different from raising a climate or impact fund, and others are beginning from a standing start.

The bottom line: Private equity is poised to become even more powerful, judging by the gobs of money being raised. The question going forward is how it wields that power.