Capital Dynamics, a fund of funds manager and investment consultant, does not plan to exclude carbon intensive or fossil fuel-related investments to reach carbon neutrality.
The firm, which has $13 billion in assets under management and advisement and invests in private equity, private credit and clean energy, has pledged to reach net-zero greenhouse gas emissions across its portfolio before 2050.
“It would be a pretty high hurdle for us to make a new oil and gas investment,” Bryn Gostin, head of product development and strategy, told New Private Markets. “And we’d be very reluctant to do so if part of the plan for this business wasn’t to reduce emissions intensity over time. But we don’t have a blanket ban.
“The sensible approach is to invest and engage. It’s pretty ineffective to say, ‘I’m going to divest these carbon intensive assets and leave them to someone else to worry about’. Private equity that does ESG effectively can help stop the problem of high-carbon assets simply moving out of public scrutiny by setting carbon emission reduction targets and KPIs.
“You can’t shut off traditional sources of energy today – it would create massive world hunger, for one thing. Transitioning off traditional energy sources is not something that can happen overnight. A shift too quickly [off fossil fuel energy sources] can create significant price shocks and create real hardship for people, especially lower income groups.”
Gostin added: “Many vertically integrated oil and gas companies – if they’re investing in technologies that are cleaner and greener, over time that can be part of the solution – and it probably should be.
“To some extent, you could say that if no one is investing, there’s no capital for those businesses anymore. I do think that’s a trend that will play out over time, but in the intermediate time it’s going to have an impact on supply and demand dynamics.”
Setting a net-zero target
Gostin co-led the working group behind Institutional Investors Group on Climate Change’s net zero private equity framework, released in February 2022, while developing Capital Dynamics’ own net-zero pledge.
“For fund of funds to achieve net zero, there need to be sufficient underlying managers who have also committed to net zero. There’s a dependency issue there,” said Gostin.
The firm has signed the Net Zero Asset Managers initiative, which requires signatories to measure their portfolio’s Scope 1, 2 and, “to the extent possible, Scope 3” carbon footprint. Capital Dynamics has joined the TCFD-aligned Partnership for Carbon Accounting Financials to conduct its carbon footprint.
The NZAM commitment also requires asset managers to “set interim targets for 2030, consistent with a fair share of the 50 percent global reduction in CO2” – which Capital Dynamics is in the process of setting, a spokesperson for the firm said. The firm has created a five-year climate plan, which involves “investing predominantly in managers who consider greenhouse gas reduction targets and direct greenhouse gas emission underwriting and reduction planning in our GP led secondaries”, the spokesperson said.
A call to action
“As an LP ourselves, we can provide useful direction to smaller GPs in terms of how to take their first ESG steps,” Gostin concluded. “Larger LPs who control more capital can have greater influence on GPs to amend LPAs or enter into side letters reflecting ESG KPIs and reporting requirements. It is incumbent on these larger LPs to take this role seriously because it facilitates smaller LPs to also make good ESG decisions when picking managers.”