Carlyle played with the data, got lost in the ESG game
In June of this year, private equity firm The Carlyle Group released their ESG report for 2023 titled the “EBITDA of ESG.” The self-published ESG report touts the firm’s “continued work in ESG integration” and its “Carlyle’s long history and industry leadership in this space.” Additionally, the report claims that Carlyle has an approach of “supporting the decarbonization of carbonintensive industries and once again shared the firm’s announcement of having “net zero greenhouse gas emissions by 2050 or sooner.” Unfortunately, the claims and reporting made by the 2023 ESG document do not take into account the totality of Carlyle’s energy portfolio. In the report, Carlyle defines the portfolio it counts toward its ESG and net zero goals as those titled “direct investments,” a term that explicitly omits the assets owned by and the emissions produced by majority-owned subsidiary NGP Energy Capital.
This omission is significant as NGP is Carlyle’s main vehicle for investments in “carbon-based energy” in the U.S. In fact, according to a 2023 report, energy investments were profitable for Carlyle in 2022, generating around half of the firm’s overall net income, which came mainly from over $660 million in NGP investment income. The same report disclosed that Carlyle’s fossil fuel assets, many through NGP, have dumped at least 277 million metric tons of CO2 and other greenhouse gasses into the atmosphere from 2011 to 2021.
Carlyle also specifically generated $33.3 million in carried interest allocations from NGP during the second quarter of 2023 and $145 million over the past year. Carried interest payments in particular have seen news headlines recently, as the carried interest loophole in U.S. tax policy allows private equity executives to substantially reduce their tax burden. Carried interest represents a portion of the profits that general partners in private equity, venture capital, and hedge funds receive. Sometimes effective tax rates on carried interest income can be lower than what middle-class taxpayers owe on their wages.
Unsurprisingly, the deliberate omission of NGP emissions from Carlyle’s 2023 ESG reporting is not a standalone event. Carlyle’s original net zero announcement and a past 2021 TCFD report also failed to account for its ownership of NGP and subsequent emissions. Also omitted entirely from the 2021 TCDF report and the net zero announcement are Carlyle’s indirect scope 3 emissions. Indirect scope 3 emissions account for about 88 percent of total emissions, and failure to account for them is an insufficient analysis of climate impacts. The new 2023 ESG report once again failed to include scope 3 emissions, with stated climate goals only accounting for “Carlyle’s In-Scope Companies’ Scopes 1 and 2 emissions.”
Repeated disclosures excluding Carlyle’s most fossil-fuel-laden subsidiary have been highlighted by multiple, high-profile media investigations calling into question the credibility of Carlyle’s own emissions declarations. In 2022, the AP published a story with the headline, “Emissions declarations by equity firm Carlyle under question,” noting that with the escalation of the climate crisis and the heightened examination of emissions, the significance of the information divulged by large corporations becomes especially crucial. In April of 2023, a Guardian story called into question Carlyle’s claims to be as a climate leader, all the while increasing fossil fuels emissions. The Guardian reported that in the last decade, Carlyle’s billions of dollars of investment in fossil fuels produced an estimated 277 million metric tons of CO2 emissions, as much as the “carbon bomb” that Alaska’s Willow arctic drilling project is set to emit in its entire lifetime.
Carlyle’s credibility in its energy investments could not be of more importance this year. In its recent 2nd quarter earnings release, Carlyle reported that overall fundraising has dropped by more than half over the past year. The firm also reported overall fundraising of $24.9 billion over the past year, a 52% decline from the $52.1 billion it had raised over the prior year. This decline in fundraising also corresponds to a period when Carlyle has seen dozens of longtime staff depart—from Managing Directors to its CEO Kewsong Lee to, most recently, the Chief Investment Officer of Carlyle’s private equity funds.
In all, Carlyle must do more to realize its own ESG commitments within its energy portfolio. A set of demands constructed by researchers of the Private Equity Climate Risks data consortium provides a key framework for The Carlyle Group to hold itself accountable to its investors and the public at large. The consortium also concurrently released a comprehensive climate risks scorecard which offered details on eight of the largest private equity firms in the world and their collective holdings of (at the time of September 2022) around $216 billion in energy and fossil fuels. The climate scorecard ranked the private equity firms based on metrics around their energy holdings and emissions, as well as their efforts to mitigate the damage of their investments on the changing climate. The Carlyle Group, notably, ranked last with an “F” grade, due to its large portfolio of fossil fuel holdings and weak climate policies.
The PECR report holds private equity firms like The Carlyle Group to five main demands:
- align with science-based climate targets to limit global warming to 1.5⁰c
- disclose fossil fuel exposure, emissions and impacts
- report portfolio-wide energy transition plan
- integrate climate and environmental justice
- provide transparency on political spending and climate lobbying
With Carlyle’s marketed drop in fundraising, as well as media stories calling its emissions declarations into question, will institutional investors move to place more scrutiny on the firm? One thing is for sure with Carlyle’s past greenwashing attempts (to echo the words of Britney Spears): Oops, they did it again; they’re not that innocent.