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Giant Brookfield Fund Draws Line on Growing Energy Transition Debate

Brookfield's $15 billion energy transition fund highlights an industry split over whether these strategies should invest in fossil fuel-based assets.

Brookfield Asset Management just finished raising $15 billion for a global transition fund aimed at transitioning toward a net-zero carbon economy. BlackRock also jumped into the investing theme last month by announcing a perpetual infrastructure strategy that will launch several open-end vehicles this year. And both managers fall on one side of an unsettled debate: whether investing in the energy transition should include investments in traditional fossil fuel assets.

Both the $725 billion Brookfield and the $10 trillion BlackRock, which are likely to raise large sums for their energy transition strategies, say it’s necessary to deploy capital into older, carbon-heavy technologies in order to meet long-term goals to achieve future netzero emissions.

But as companies work in swarms to further decarbonization goals, a debate over sustainable investment strategy is unfolding. Some profess that investor capital aimed at the energy transition should focus on newer, cleaner technologies, while others say it must incorporate investments in older power sources and fuels.

“It’s really a debate on how to keep the lights on while transitioning to renewable energy. It’s happening around the world,” said Irene Mavroyannis, managing partner of infrastructure and sustainable investing at Sera Global.

There is no “consistent opinion” among firms or sectors on how to incorporate fossil fuels amid changes either, she explained.

Some are taking a heavier approach to the transition and emphasizing a need to narrowly invest in assets that harness renewable energy.

The reality is the present-day power system uses fossil fuels and renewable energy today and likely will for some time into the future, said Quinbrook Infrastructure Partners co-founder David Scaysbrook. But that should not be a green light to keep propping up old technology, he added.

“[It] would be a fundamental mistake to interpret the issues that we’re seeing in the energy crisis around the Ukraine situation to somehow overturn the current trend [toward] decarbonization of the power sector,” he emphasized.

Quinbrook has over $3 billion in assets under management, more than 70% devoted to renewable energy assets, Scaysbrook said, noting the firm has achieved good, if not higher returns on those assets compared to its conventional power-reliant investments.

While there is a need to invest in fossil-fuel assets to decommission their carbon output, it would take a “ton of capital” and re-tooling to make them viable over a longer term, said Tideline co-founder Ben Thornley.

“I think any new investments in the development of fossil fuel infrastructure would be considered inconsistent with efforts to achieve the transitions and zero [emissions],” he stated.

However, others are adamant that some older fossil-fuel-dependent strategies are needed to ease the shift.

“You cannot just flip a switch and all of a sudden transition into carbon-neutral or less carbon-intensive assets,” said Carlyle CIO of infrastructure Pooja Goyal. “It’s not a revolution, it is a transition.”

Carlyle has over $13 billion in infrastructure and energy assets under management and upwards of $1 billion committed to renewable energy assets globally, per its website.

Goyal said that means companies need to put capital to work by identifying new streams of sustainable investment, while also taking carbon-intensive assets and operating them responsibly toward decarbonization.

Limited partners have ample appetite to invest in the transition, drumming up demand for both renewables and decarbonizing efforts given the commercial outcomes, she added.

“More and more capital” is being allocated toward “thoughtful deployment and sustainable investments,” said Justin DeAngelis, Denham Capital’s co-head of sustainable infrastructure.

But offering limited partners sustainability with good returns requires mapping out and benchmarking procedures for investments, he said.

Denham Capital’s sustainability screening will generate more capital for the firm, DeAngelis added. The company’s screening doesn’t rule out fossil-fuel-powered assets if they possess “the best available emissions control technologies that are supporting intermittent renewables.”

Mavroyannis anticipates investor capital will experience a “great divide” during the transition now that the world is challenged with finding energy independence and security due to the conflict in Ukraine.

Clearly, Brookfield’s final close in late June has proven investor interest in its approach, with the manager dubbing it the “world’s largest private fund” dedicated to the energy transition, focusing on investment to develop clean energy sources and transform carbonintensive assets. Brookfield contributed to the fund alongside 100 limited partners, including sovereign wealth funds, endowments, foundations, insurance companies, family offices and public and private pension plans, a news release stated.

According to Brookfield, the fund exceeded its hard cap. While the fund is closed to institutional investors, it remains open to some private wealth investors through Brookfield’s joint wealth management group with its Oaktree Capital Management affiliate.

Brookfield has allocated approximately $2.5 billion toward acquiring U.S. and Germanbased solar power and battery developers, a carbon capture and storage developer and a partnership with a battery storage provider in the United Kingdom.

“With the global carbon budget being rapidly run down, now is the time for comprehensive, determined action,” said Mark Carney, Brookfield vice chair and head of transition investing.

“That means deploying capital across the economic spectrum, from scaling clean energy generation to transforming traditional utilities and to providing sustainable solutions for heavy industries like steel and cement,” he added.

BlackRock is seeking founding partners for its perpetual infrastructure strategy. Half of the strategy will be distributed to its European operations with the expectation that it becomes more global over the next decades, the company said in a news release.

Much of the capital raised will be distributed into fully integrated businesses such as utilities, data centers, battery storage systems, natural gas facilities and others. And when investing in those companies, the firm intends to help its partners shift toward lower-carbon models.

A report from FEG Investment Advisors asserted energy needs to be at the forefront of LPs’ minds, despite institutional investors having avoided the sector for the last 10 years due to energy funds’ feeble performance and fossil fuel divestment initiatives.

But this year, the tide has changed amid record-breaking inflation, lessons learned from the European energy crisis and an all-out push from many to commit to sustainable energy practices, the report said.

The idea of narrowly investing in renewable assets is attractive from a marketing standpoint but may not be the best economic plan granted fossil fuels are a necessity at this time, said David Evans, co-head of the Americas energy and projects group at Clifford Chance.

“There is no alternative right now to fossil fuels to meet the totality of the energy needs – you can’t shut it all down,” he said, noting that natural gas will be a key fuel in bridging the transition.

Natural gas is a greener option compared to harsher fossil fuels that emit more greenhouse gases, such as coal and oil, Mavroyannis said.

“Gas is a good candidate to provide [an] uninterrupted flexible energy supply as you think about the intermittency of output from wind and solar. The sun doesn’t always shine, the wind doesn’t always blow,” she said.

She also pointed out natural gas’ potential as a tool in fighting energy poverty in a place like Africa where there is an abundant amount of it that can be combined with renewables to help developing countries.

FEG’s report indicated valuations in the energy sector should be uplifted with increased commodity prices, which the firm believes will provide a “compelling” opportunity for limited partners.

Oil and natural gas assets haven’t quite attracted capital, leading to a lack of financial infusion across the sector.

“This has created an attractive environment for investors with capital to deploy as competition for deals has diminished significantly. With the ongoing focus on energy transition and moves by investors to divest from fossil fuels, we believe this will likely continue to be the case over the course of the year,” FEG said.