How Carlyle scales portfolio decarbonization with Watershed

Introduction

Carlyle has a demonstrated track-record on climate as one of the first major private equity firms to announce and achieve its goal to be carbon neutral in the firm’s operations (f.1) in 2018. In 2022, Carlyle announced a goal to achieve Net Zero greenhouse gas (GHG) emissions by 2050 or sooner across their Direct Global Private Equity and Global Credit investments, with two near-term goals:

1. 75% of Carlyle’s in-scope (f.2) portfolio companies’ Scopes 1 and 2 emissions will be covered by Paris-aligned climate goals by 2025; and
2. Beginning in 2025, all new direct, majority-owned Corporate Private Equity, Energy and Power portfolio companies will set Paris-Aligned climate goals within two years of ownership.

Carlyle has made climate a key pillar of its investment and portfolio engagement strategy:

“Measuring actual emissions across portfolio companies… is critical to developing decarbonization pathways, which we believe are increasingly important for our portfolio companies to thrive in what many consider to be a rapidly decarbonizing world.”

ESG Report,
June 29, 2023

Challenge

Carlyle’s emissions profile comprises both the firm’s operational Scope 1, 2 and 3 emissions and Scope 3.15 financed emissions of its investments. New regulations, LP expectations, and a core belief that decarbonization can potentially drive return-on-investment (ROI) for certain portfolio companies, meant that Carlyle needed to streamline its GHG accounting and reporting while engaging its portfolio companies at scale.

“We realized we needed technology to integrate between our operational emissions and our entire portfolio’s financed emissions.”

Megan Starr,
Partner and Global Head of Corporate Affairs

Solution

Carlyle’s team needed a climate and ESG data collection platform. “We prioritize strong core capabilities over bells and whistles,” Steve Hatfield, Co-Head of Global Sustainability, shared. “We really checked under the hood.”

Carlyle partnered with Watershed because its team and platform offered:

• Data the company can trust: “The ESG landscape is evolving quickly, and our data has to be audit-grade. Spreadsheets are old technology for a public company like Carlyle with thousands of transactions on an annual basis. Our team has confidence in Watershed to produce our data.” -Steve Hatfield
• Seamless data connections: “Watershed has pre-built connectors that allow us to connect our data warehouse and portfolio companies directly with their platform and map data to PCAF (the Partnership for Carbon Accounting Financials).” -Steve Hatfield
• Improved data coverage and accuracy: “Data accuracy is a journey in decarbonization, and Watershed’s tools for data extrapolation are a huge win for us. We went from measuring just a few Scope 3 categories to using Watershed templates with our stakeholder teams to fill gaps in a very approachable way.” -Steve Hatfield
• End-to-end capabilities: “Measuring emissions is not the end of the journey. We were looking for an end-to-end solution to track progress towards our climate goals, build dynamic visualizations for key stakeholders, identify reduction levers, decarbonize, and also report.” -Steve Hatfield
• Depth of expertise and support: “The Watershed team is critical for us and really understands the intersection of finance, technology, and climate science. They have climate credibility seamlessly woven into the carbon accounting platform.” -Megan Starr

Spotlight: Portfolio company example

As Carlyle streamlines its GHG measurement and reporting, its Sustainability team has been able to focus on using sustainability action to seek accelerated value creation for portfolio companies.

A global aviation services company in Carlyle’s portfolio recently measured their emissions to meet regulatory requirements. Carlyle’s Sustainability team helped them take the next step: achieving seven-figure per year cost savings through increased energy efficiency. The company feels confident that its net zero goals and lower carbon intensity will be a competitive differentiator. Carlyle calls this “the EBITDA of ESG.”

“ESG is professionalizing. It used to be a nice-to-have, and now it’s firmly in the CEO’s office. Watershed is helping Carlyle make that transition.”

Steve Hatfield,
Co-Head of Global Sustainability

Results

As of December 2023, 22 Carlyle portfolio companies had set Paris-aligned climate goals, and many more taking first steps to measure, report, and reduce their emissions. One year into Carlyle’s Watershed partnership, their team sees the difference:

• Scaled portfolio engagement: Starr notes that portfolio decarbonization is uniquely challenging because it requires both (1) high-quality data across Carlyle’s entire portfolio and (2) hands-on engagement tailored to each portfolio company’s needs. This now feels achievable:

“We can sleep better at night because we have more visibility into underlying portfolio companies’ emissions, which can help us target action, track progress, and see overall results. Watershed helps us address this notoriously tough resourcing challenge for sustainability teams and investment managers.”

Megan Starr,
Partner and Global Head of Corporate Affairs

• Real ROI for portfolio companies: Portfolio companies face many competing pressures and priorities. Carlyle’s Sustainability team helps them develop the business case for climate action, including potential operational cost reductions, protections for at-risk revenue, preparing for disclosure requirements, and working toward a reduction in climate-related risks.

“We’re past the era of broad statements about a correlation between business and climate. Instead, we’re helping our portfolio companies build a data-driven case for working on climate. We believe decarbonization can have ROI, whether from energy savings, selling products and services into companies with net zero requirements for suppliers, or something else.”

Megan Starr,
Partner and Global Head of Corporate Affairs

Footnotes

(f.1) Carlyle measures and offsets the carbon footprint of its operational greenhouse gas emissions inclusive of the following categories: office utilities (Scope 1 and Scope 2), data centers (Scope 2), and employee business travel (Scope 3, category 6).

(f.2) In-scope companies include direct, majority-owned Corporate Private Equity, Energy and Power funds’ portfolio companies in the following 2021 and earlier vintage funds: Carlyle Asia Growth Partners (CAGP) IV, Carlyle Asia Partners Growth (CAPG) I, CAPG II, Carlyle Asia Partners (CAP) III, CAP IV, CAP V, Carlyle Japan Partners (CJP) III, CJP IV, Carlyle Europe Partners (CEP) II, CEP III, CEP IV, CEP V, Carlyle Europe Technology Partners (CETP) III, CETP IV, Carlyle Partners (CP) V, CP VI, CP VII, CP VIII, CP Growth I, Carlyle Global Financial Services Partners (CGFSP) III, Carlyle Equity Opportunities Fund (CEOF) I, CEOF II, Carlyle Global Partners (CGP) I, CGP II, Carlyle International Energy Partners (CIEP) I, CIEP II, and Carlyle Power Partners (CPP) II.