Brookfield’s Global Transition Fund have the opportunity to support projects with enormous emissions-reduction potential.DADO RUVIC/Reuters
Michael Sambasivam is a senior analyst with Investors for Paris Compliance.
Last month, Brookfield Asset Management announced a $10-billion first closing on its second Global Transition Fund. This is a follow-up to a similar, $15-billion fund that seeks to invest in “the transformation of companies operating in carbon-intensive sectors to more sustainable business models.” The funds aim to support Brookfield’s broader commitment to investing in the transitioning of high-emitting assets.
At face value, private-equity transition funds are a welcome contribution to the $5-trillion annually in financing needed to limit global warming to 1.5 degrees. As private equity takes over a growing swath of global markets, more than quadrupling in size between 2010 and 2022, substantial investments in climate solutions can simultaneously help economies meet climate goals while offering private-equity exposure to the growth associated with investments in the green economy. With less need to produce quarterly earnings for public shareholders and a broad focus on finding unrealized potential, private equity may be more suited to funding the transition.
However, not all climate-branded investments are solutions, and Brookfield has a ways to go in demonstrating its claim of being a “leader in decarbonization” – which is impossible to substantiate without comprehensively disclosing its carbon footprint. Recently, Investors for Paris Compliance published a report on Brookfield, highlighting its failure to account for as much as 92 per cent of the emissions associated with its investments and lending. This is predominantly due to a lack of reporting on downstream emissions.
Brookfield’s transition funds have the opportunity to support projects with enormous emissions-reduction potential. For example, wind, solar and battery investments can drive growth in core sectors needed to fulfill ever-growing energy needs.
But there is a necessary debate on what counts as a “transition asset.” Brookfield’s original transition fund included over $1-billion invested in carbon capture and storage technology. While preventing some emissions from entering the atmosphere seems like an obvious step for a transitioning economy to take, carbon capture has come under fire for prolonging unnecessary fossil-fuel production instead of replacing it, which is what true transition requires.
Transitioning high-emitting assets raises another challenge that underscores the need for careful planning and comprehensive disclosure. That is, transitioning energy infrastructure assets with high degrees of transition risk comes with the job of navigating political and regulatory roadblocks. And Brookfield has not been sufficiently transparent in disclosing this.
Brookfield’s first transition fund recently attempted to purchase Origin Energy, a utility that runs the largest coal-fired power station in Australia. The deal, which aimed to replace coal generation with cleaner energy, was the kind of investment that is essential to transitioning to a cleaner economy. Fifty-seven per cent of Australia’s energy comes from coal power, and the financial firepower of Brookfield could make a substantial dent in those emissions.
Ultimately, the acquisition was rejected by Origin shareholders. Throughout the deal negotiations, the New South Wales state government pressured Origin to extend the life of the coal plant and delay its transition over concerns about energy security. This highlighted the risk to transition fund strategies that not every asset transition may be feasible in the short term, owing to regulatory and political environments.
In order for Brookfield’s transition model to be credible, it must buck private equity’s reputation of opacity. In addition to political and regulatory risks, the publication of key transition-related performance metrics such as emissions from production and consumption of products, new renewable energy capacity, and net-zero criteria on conditions on acquisitions and exits are essential. Investors need to know they are not being misled into greenwashed fossil-fuel investments.
Then there is the matter of the wider investments that Brookfield holds. While Brookfield claims to be “going where the emissions are,” many of its other funds are invested in high-polluting assets with no real plans to transition. Brookfield has exposure to a number of oil and gas companies, such as Caerus, Strawn Petroleum and Diversified Energy. Many of these investments are made by Brookfield subsidiary Oaktree and are not accounted for in Brookfield’s emissions disclosures, nor are they considered in Brookfield’s public net-zero aspirations.
Offering investors exposure to the transition only works if they can be assured of the investment’s impact and legitimacy as transition assets. Many investors have their own net-zero commitments to uphold and need more transparency than what Brookfield has provided to date to ensure that financed emissions reporting is valid and that it meets upcoming reporting requirements.
Brookfield must provide greater transparency and better reporting or risk a loss of credibility, not just for Brookfield, but for the broader energy-transition project that we all have a stake in.