Many of the largest private-investment firms are taking steps to reduce emissions from their portfolio companies. They understand the need to do so to win investor commitments, particularly from the $5.2 trillion public-pension sector. Private-equity firms like Blackstone, KKR, Carlyle, and Apollo are quickly moving to profit from decarbonization as an investment theme, competing in a crowded field of solar-panel suppliers and climate-data providers. However, this is a challenging and messy undertaking as private-equity firms risk alienating Republican-led states if they view these efforts as left-leaning. Environmental advocates are also concerned that selling assets to irresponsible buyers could render their efforts in vain.
The International Energy Agency estimated that annual global clean-energy investments would need to triple to $4 trillion in the next few years to achieve net-zero emissions by 2050. This urgency presents an opportunity for private-equity firms, which are increasingly influential and flush with cash from investors allocating more money to private markets. However, competition is fierce, and characterizing the overall effectiveness of private-equity's climate-crisis response relative to public-money managers is difficult because some firms have more robust decarbonization plans than others.
While some private-equity firms are committing to reaching net-zero emissions across their investments by 2050, others prefer to stay invested in conventional energy, arguing that it needs to be part of the transition. Carlyle, for example, is collecting the first year's worth of data from its portfolio companies after committing to reach net-zero emissions across investments by 2050. It has also set targets to get three-quarters of its majority-owned power-and-energy portfolio companies' emissions covered by Paris-aligned climate goals by 2025.
Apollo has committed to reducing median carbon intensity by 15% for new investments it controls in its flagship strategy. KKR is working with some of its majority-owned businesses to implement plans to reach net zero by 2050, while Blackstone has announced that it won't make new investments in companies involved in oil and gas production in two recently launched funds focused on the energy transition.
Private-equity firms have an advantage in implementing climate-crisis solutions because they have more influence and board seats than public-money managers, allowing them to have abigger say in business operations. Nonetheless, the industry has been slower to adopt a focus on these issues. As a result, firms must figure out how to explain their actions and commitments to investors across the whole universe of institutional investors in a way that avoids contradictions, given the different political views held by investors.
Overall, private equity has the potential to play a crucial role in the transition to a clean-energy economy. These firms have significant influence over the companies they invest in and can use this leverage to drive change. However, success will depend on their ability to navigate complex political and social pressures, and to adopt a comprehensive, effective approach to decarbonization.
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