The largest-ever impact fund has $15bn for dirty companies

Hello from New York. Many of us in the US and Europe are reacquainting ourselves with the notion of realpolitik, that a government’s pragmatic foreign policy must be balanced against — or even supersede — the moral high ground. See, for example, Joe Biden’s upcoming trip to Saudi Arabia amid concerns over surging oil prices. The president previously condemned the kingdom’s human rights record.

Realpolitik is a place where Mark Carney, climate warrior and investor, finds himself these days.

In an interview with Simon, the former Bank of England governor talked about Brookfield Asset Management’s giant $15bn transition fund, which he wants to help put high-polluting companies on a greener path. It is a space where KKR, Blackstone and other big private equity groups have started funds and are hunting for opportunities.

But the transition space is also a difficult place for Carney. Global carbon emissions are going in the wrong direction, and continuing to invest in brown businesses — even if these companies are cleaning up their practices — puts investors in line for fierce scrutiny. Please read on for Simon’s full report.

See also Simon’s piece on Carbon Tracker, a watchdog, and its analysis of the carbon emissions from companies listed on global stock markets. (Patrick Temple-West)

Carney goes big on transition finance

Mark Carney has had a hyperactive couple of years since stepping down as governor of the Bank of England, taking on a role as UN climate envoy and spearheading a welter of climate-focused financial sector initiatives. It is easy to forget that he also has a salaried day job, as vice-chair and head of impact investing at Brookfield, the $700bn Canadian asset management group.

This week, Carney’s team announced the close of their new Global Transition Fund, with a $15bn haul that makes it the world’s single largest impact fund to date. Rather than simply focus on investing in green assets, Carney told Moral Money, this fund will seek to “go where the emissions are” — meaning it will invest in companies with big carbon footprints in order to speed up their transition to cleaner business models.

Talk of “transition finance” has been increasingly conspicuous over the past year — for example, in the February communiqué from G20 finance ministers and central bank governors who had gathered in Jakarta. This focus is vital according to Carney, who says it would be counter-productive to starve high-emitting sectors of funds when they need to invest heavily in greening their operations. Without a pragmatic approach from investors, he told us, such companies would find their access to capital comes at increasingly “punitive rates”.

Punitive rates, of course, are exactly what some would like to see for heavy polluters. That is part of the logic behind the divestment and exclusion movement that has so far attracted investors with $40tn under management, according to campaign group DivestInvest (even though many argue that this has done little to move the cost of capital for the targeted companies).

What is Carney’s message to those who say funds like his should be giving carbon-belching industries a wide berth, rather than steering funds in their direction?

“They’re just absolutely wrong about that,” Carney told us. “It’s just not right that we can flip some switch.” A large chunk of global emissions comes from the real estate sector, he noted. “What are you going to do? Knock down every building?”

Carney has been giving versions of this message since his time at the BoE — notably at the UN in 2019, when he urged delegates to take a broad-minded approach to climate finance and support companies in “50 shades of green”. Today, he said, he is finally gaining traction with his message that “this isn’t just about the pure green, it is about the transition”. And by setting a standard for investment in this space, he said, Brookfield wants to bring it firmly into the financial mainstream.

The fund’s strategy contrasts with others such as the TPG Rise Climate fund, chaired by former US Treasury secretary Hank Paulson, which is looking for opportunities to carve green assets out of dirtier companies, but not to invest in those companies themselves. The Brookfield fund will consider investments in renewable energy and other clean technology assets, said Natalie Adomait, the asset manager’s head of transition investment. But it will do so only where it can be confident of “additionality” — that is, of producing benefits that would not happen without its investment.

“What we won’t be doing is just buying, for example, an operating wind farm that’s already creating impact in the world today, because then our capital hasn’t actually contributed to further decarbonisation,” she said.

That focus on additionality will be particularly crucial when it comes to Brookfield’s investments in high-emitting businesses. The fund will invest only in companies with credible plans to align their businesses with the Paris agreement target of limiting global warming to 1.5C, Carney said. “We’re not going to do something unless we can have the rigour around the pathway.”

To achieve that rigour, Carney and Adomait said, they are using an “impact management and measurement system” aimed at assessing how far their investments are helping companies to fall in line with the Paris goals. Given the notorious difficulty of developing such metrics, we were keen for more information on how this system works.

But while Brookfield has given those details to the dozens of external investors in the fund, it was not yet ready to share them with the general public. That seems unfortunate, given Carney’s hopes of galvanising activity by other investors. In the meantime, we will be watching to see how Carney’s fund deploys those billions — and whether his bullishness on transition finance proves justified. (Simon Mundy)

Carbon risks: Spotlight on the stock market

As it prepared to host last year’s UN climate summit, the UK government was keen to trumpet the country’s progress in cutting carbon emissions nearly in half compared to 1990 levels. Critics observed that this grossly understated the UK’s overall climate impact, given its huge consumption of products made in power-hungry factories abroad. And that’s before you get to the carbon footprint of its capital markets — something highlighted in an eye-opening report published yesterday.

The study, by think-tank Carbon Tracker, analysed the fossil fuel reserves of companies listed on global stock exchanges, and calculated the carbon emissions that would result from their use. For companies listed in London, that figure was 30 times the potential emissions from the fossil fuel reserves found on the UK’s physical territory — and 10 times the country’s official carbon budget for the next 15 years.

At the global level, the findings were no less stark. According to estimates from the Intergovernmental Panel on Climate Change, for a 66 per cent chance of limiting global warming to 1.5C — the target enshrined in the 2015 Paris Agreement — total future emissions must be no more than 320bn tonnes of carbon dioxide. But the potential emissions from the fossil fuel reserves of all listed companies are well over three times that figure, according to Carbon Tracker.

That means we are headed for climate disaster, or stranded assets on a massive scale — or some combination of the two. Carbon Tracker is urging authorities in London and elsewhere to force listed fossil fuel companies to report on the potential emissions from their reserves. More radically, it is urging a ban on equity and debt listings where the proceeds would go towards new coal, oil or gas development.

“The key point here is that you cannot burn all the stuff that’s been found to date,” report co-author Mike Coffin told Moral Money. “This stuff needs to stay in the ground.” (Simon Mundy)

Smart read

• London-listed consumer goods group Unilever has positioned itself as a leader on sustainable business, including in the responsible use of plastics. But it has been quietly working to undercut laws aimed at tackling plastic pollution in developing Asian nations, according to this in-depth report from Reuters.