Fund targets transition for large industrial polluters

Hundreds of billions of dollars will be needed for heavy industries – such as steel, cement and chemicals – if they are to swap fossil fuels for clean energy and help the world avoid catastrophic climate change.

And providing that funding is the goal of a one-of-a-kind fund from Canadian asset manager Brookfield. It plans to allocate half of the $15 billion it has raised to high-polluting companies with the aim of accelerating their transition to greener and more environmentally sustainable business models. If successful, it could encourage others to adopt similar strategies.

“We want to go where the emissions are,” says Natalie Adomait, managing partner of the team that manages the new Brookfield Global Transition fund, co-led by former Bank of England Governor Mark Carney. In his role as UN climate envoy, Carney has argued forcefully that denying high-emitting companies the investment needed to decarbonise would be counterproductive.

Yet environmental activists are reluctant to provide more funding to companies that are contributing the most to global warming.

Paddy McCully, senior analyst at sustainable investment campaign group Reclaim Finance, says the fund will prove a “green smokescreen” if it helps companies extend their use of fossil fuels and does not speed up the shutdown of carbon-intensive operations. Brookfield also owns fossil fuel assets. He was part of a consortium that invested $10 billion in Abu Dhabi’s gas pipeline business in June 2020.

The transition fund will also make allocations to renewable energy and other clean technology projects when Brookfield can be sure of “additionality” – environmental benefits that would not otherwise occur. “We will not only buy portfolios of existing renewable assets; we want to add new capabilities,” says Adomait.

As a private manager, Brookfield argues that its ability to gain majority control of a company should mean it is in a stronger position to deliver decarbonization than a public fund manager who has limited ability to influence companies through engagement and voting as a minority shareholder.

Other private equity managers, including KKR, Apollo, Bain, TPG and Generation Investment Management, have also created “impact” funds that aim to deliver environmental benefits by supporting green solutions. But Brookfield says it does not directly target the highly polluting industries it intends to transform.

Damian Payiatakis, head of sustainable investing at Barclays Private Bank, says the fundraising shows that the perception of investment opportunities associated with climate change is changing.

Brookfield is the biggest investor in the new fund after making a commitment of around $2 billion. “We have access to large-scale capital to invest alongside us with the recent closing of $15 billion from Brookfield’s Global Transition Fund – which is a significant advantage given the increasingly volatile financial markets,” said Connor Teskey, head of Brookfield’s renewable energy and transition group, in August. .

Brookfield says the new transition fund will only invest in companies that have credible plans to align their businesses with the Paris Agreement goal of limiting global warming to 1.5°C. It will aim to achieve reductions in the absolute emissions of its portfolio companies, as well as reductions in emissions intensity – where greenhouse gases are measured as a share of a company’s revenue.

Verification of the fund’s greenhouse gas emissions reporting will be provided by accountant EY to assure investors that Brookfield is not “marking its own homework”, Adomait says. But ‘Scope 3’ emissions – the greenhouse gases emitted by a company throughout its supply chain and when using its products – will not be targeted by Brookfield due to unreliable data. . Any performance fees earned by Brookfield will be based entirely on the financial returns of the fund and not on the achievement of emission reductions or any other measure of performance.

Brookfield thinks assets in its climate transition business could grow to at least $200 billion over the next decade and Adomait says investors will decline to participate in future fundraising rounds if they think the inaugural transition fund won’t. fails to achieve its goals. Investors in the inaugural fund include Ontario Teachers’ Pension Plan, Temasek, PSP Investments and Investment Management Corporation of Ontario.

The new transition fund was built on the Operating Principles for Impact Management, a framework designed to enhance transparency and address concerns of “impact washing” – where managers make misleading or unwarranted claims. on their strategies. Third-party verification of the manager’s role in achieving the goals of the impact strategy is a key requirement of the framework.

BlueMark, a specialist impact audit consultant established in 2020, will provide an assessment later this year of the Brookfield Fund.

“We compare impact funds to their peers to assess their alignment with best practice standards,” says Christina Leijonhufvud, managing director of BlueMark, which has conducted 95 impact audit studies to date. “Our analysis goes beyond assessing compliance with standards, such as the Impact Principles, to also identify gaps and recommendations for improvement through robust analytical processes, including interviews with key It is the interests of investors that we seek to protect.

Payiatakis agrees that the review is everything. “It is the quality and credibility of impact measurement processes that will give investors confidence that they are not being duped by greenwashing,” he says.

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