Private equity becomes an unlikely player in the global warming fight

Moral money is under threat. No, not this newsletter, but the idea of moral money seems deflated as Russia invades Ukraine. As we pressed publish this morning, Russian troops had advanced on Kyiv and appeared poised to take the Ukrainian capital.

Defence contractors’ share prices are up, as well as prices for energy commodities. Human rights are being trampled on and the EU’s green deal efforts seem to have been put on the back burner.

In the weeks ahead, we will see how environmental, social and governance (ESG) investing evolves. There is evidence that some people are finding their ethics as some former government officials resigned yesterday from Russian boardrooms amid the invasion.

For a reflection on what a lifelong commitment to humanity looks like, please take a look at Gillian’s piece on the life of Paul Farmer, a doctor who dedicated his life to treating tuberculosis and other disease in some of the poorest countries in the world.

In today’s newsletter James and I cover an unlikely pair teaming up to take on Australia’s biggest energy provider, AGL Energy — which creates more emissions than some mid-sized nations.

Then, Kristen and I cover the criticism HSBC has received after releasing a long-awaited update on how the bank is reducing its exposure to fossil fuels.

Have a good weekend, and we’ll be in your inbox on Monday. Patrick Temple-West

The Financial Times is making key Ukraine coverage free to read to keep everyone informed as events unfold. Please share with your friends, family and colleagues.

Celebrity financiers hunt for renewable riches in Outback

They might not strike you as likely teammates: Mark Carney, the former Bank of England governor and current executive at Canadian private equity group Brookfield, and Australian billionaire Mike Cannon-Brookes, founder of the software company Atlassian.

But together, the duo are urging one of the world’s dirtiest power producers to clean up its act — and profit from the effort.

Brookfield’s $7bn global energy transition fund has teamed up with Cannon-Brookes to make a $3.6bn bid for AGL Energy, Australia’s largest energy provider.

The investors’ plan is to replace 7 gigawatts (GW) of thermal coal and build at least 8GW of clean energy and storage to “ensure this proud Australian company has a future in a net-zero world”.

AGL emits more than Sweden, Ireland or New Zealand, the investors said, and “will be one of the biggest decarbonisation projects in the world”, Cannon-Brookes said. AGL has rejected Brookfield’s initial bid and talks are ongoing.

The gambit is part of a growing trend by investors hoping to clean up utilities to drive up their share prices.

RWE, Germany’s largest electricity provider, is fighting with activist investment firm Ekraft, which is pushing the company to separate and discontinue its lignite businesses. A showdown is expected at RWE’s annual meeting this year.

In 2020, activist ValueAct’s Spring Fund settled with Hawaiian Electric Industries, the state’s largest electricity producer. That year, the company announced one-third of its electricity sales came from renewable energy, up 28 per cent from 2019.

For AGL, the board has refused to engage with Brookfield and Cannon-Brookes, who say they are now talking to big shareholders directly. A hostile takeover would be difficult though. AGL is largely owned by small retail investors, so getting a critical mass of investors on board through back-room deals might not work.

At least one major shareholder — BlackRock, which owns 4.1 per cent of the company — could prove willing (though the firm declined to comment). In 2020, BlackRock voted against the AGL board on a shareholder resolution calling on the company to bring forward the closure of its coal plants. Getting BlackRock onside would clearly boost the bidders’ chances. 

Brookfield is not an activist and its takeover bid at AGL has not gone hostile — yet. The private equity sector has traditionally been dogged politically for buying companies, cutting costs and then reselling them. If value can be created by killing of carbon-intensive businesses — private equity could become a value weapon in the fight to combat global warming. Patrick Temple-West and James Fernyhough

HSBC draws criticism over net-zero target disclosures

It was one of the biggest sustainability fights in banking last year: asset managers Amundi, Man Group and other investors filed a climate resolution at HSBC demanding the bank publish a strategy and targets to reduce its exposure to fossil-fuel assets.

After negotiations with investors, HSBC put forth its own shareholder proposal at its annual general meeting, pledging to overhaul its financing of coal and set targets to reduce its exposure to carbon-intensive assets. HSBC said it would set short and medium-term targets for lending with oil, gas and utilities.

This week, HSBC published its first progress report. The bank said it was preparing to cut financing for oil and gas emissions by 34 per cent by 2030. And utilities-financed emissions would be slashed 75 per cent over that time period.

But the bank’s targets do not cover emissions arising from its capital markets activities, despite reporting on those in its 2021 annual report, said ShareAction, the responsible investment charity that brought the shareholders together last year. The majority of HSBC’s financing to top oil and gas companies is in capital markets, according to the activist.

Notably, ShareAction applauded rival Barclays for “leadership in this area by including facilitated emissions in its energy portfolio targets in 2020”.

“We welcome the bank setting an absolute target for the oil and gas sector,” said Jeanne Martin, senior campaign manager at ShareAction. HSBC’s decision not to include capital markets activities, however, “should raise questions about the credibility of its strategy”, she added.

“We consider this omission to be a breach of the spirit of the agreement that was reached with HSBC, ShareAction and investors in March 2021.”

In a statement to Moral Money, HSBC said it had “committed” to setting short- and medium-term targets for financed oil and gas companies that included capital markets. But “an industry-accepted approach for assessing this area is still under development”, the bank added. “As soon as an industry-wide capital markets methodology is launched in 2022, we will work to set short-term targets here too.”

Other banks are making slow, incremental progress towards publishing emissions reduction targets. Citigroup, for example, said most of its clients “are not yet disclosing their emissions, specifically their scope 3 emissions”, according to Val Smith, Citi’s chief sustainability officer.

Due to this limited disclosure, the bank itself relied on estimates — rather than hard data — for some its net-zero plan for scope 3 emissions. 

So it is an evolving process that banks are grappling with as they disclose their plans for cutting carbon. Central banks are watching as stress tests are looming. And investors — such as the asset managers that went after HSBC initially — are unlikely to ease off pressure if banks fail to follow through. Patrick Temple-West and Kristen Talman

Chart of the day

Companies’ main driver for offsetting their carbon emissions is a sense of responsibility and reputation, the International Carbon Reduction and Offset Alliance (ICROA) found. The results of ICROA’s poll show corporations’ focus on maintaining a positive external image with a variety of stakeholders.

The sectors most likely to offset carbon emissions — perhaps not surprising to Moral Money readers — are the energy, transport, finance and insurance industry, according to the report.

Smart read

• Companies that “do obvious harm to society by improving their bottom line” are still able to garner top ESG ratings due to the lack of adequate social data points, 60 Decibels, a data collection firm focused on impact, wrote in the Stanford Social Innovation Review. The group writes that the frameworks must be overhauled and separated by ‘E’, ‘S’, and ‘G’ scores to evaluate a company holistically.