Megan Starr, global head of impact at Carlyle, looks back at the past year and forward to 2023.
Looking back at 2022, were there any pivotal events, moments or developments in terms of sustainability in private markets?
Convergence is my word of the year for ESG in 2022. While accounting news rarely makes headlines, I was excited by the significant strides made by the International Sustainability Standards Board to consolidate the voluntary disclosure landscape, importantly embedding the work of the Sustainability Accounting Standards Board and Taskforce on Climate-related Financial Disclosures (TCFD) into its recommendations.
So much good work has gone into ESG reporting standards, but as an industry we need fewer, better data points and deep framework consolidation (not interoperability!) to actually move forward.
Thinking specifically about private markets, do you think the industry has made progress on climate in the last year? Where are the bright spots? Where has it disappointed?
While the passage of the Inflation Reduction Act was an unexpectedly positive tailwind for renewable and sustainable energy investing in the US, a less publicised bright spot for me this year was the field’s evolving understanding that climate investing can’t solely be focused on ‘green’ investment. Some of the largest decarbonisation potential can be found in investing in the most carbon-intensive businesses with the intention to transform them. If we want to decarbonise the global economy, we have to go to where the carbon is, and investors are starting to wake up to that (complicated, but) vital understanding.
Where we perhaps failed as an industry is that there is still far too much talking, and not enough action. This is supposed to be the ‘decade of doing’ on climate, and it is turning into the decade of dithering. If we spend too much time in working groups arguing about details at the margins of the multitude of climate frameworks, we are misallocating valuable and limited ESG resources that could be working to drive actual decarbonisation.
Looking ahead to 2023, what is your firm’s next priority in terms of the climate? What would you like to have completed over the next 12 months?
We are focused on working with more portfolio companies to help get them on Paris-aligned pathways as part of our firmwide net-zero goals announced in 2022, because we believe it will help them be more competitive across the board. While it is challenging to fully decarbonise a business in a typical private equity hold period, we believe we can help set certain companies up for success through efforts such as calculating bottom-up carbon footprints, setting short- and long-term Paris-aligned targets, and reporting on progress, ideally though the TCFD framework.
That work is hard and frequently requires a lot of capacity building within portfolio companies, as well as providing our companies with a new set of tools, including carbon calculation technology, carbon and energy management playbooks, ESG-linked financings, and more. But I think it is one of the most valuable roles private equity can play in the energy transition, while simultaneously strengthening our portfolios.
Aside from climate, which other areas of sustainability will be prominent on your agenda and why?
One of our biggest areas of focus has been the ESG Data Convergence Initiative – an initiative we co-founded with CalPERS and a group of global GPs and LPs to drive convergence around a standardised set of ESG metrics and a mechanism for comparative reporting to benefit stakeholders in the private markets. We’re now at more than 250 members globally, and are working to expand the collaboration, add new metrics, and drive further convergence in ESG!