The mood music is changing on ESG. The latest evidence comes from a recent Carlyle Global Insights note. Divesting from fossil fuel-heavy companies is only a partial solution to climate change, the report argues, in what appears to echo a market-wide move back to fossil fuel investment. While divestment raises the cost of capital for polluters, it does nothing to address underlying demand, Carlyle says, leaving the work of creating a sustainable climate only half-done. The note comes as asset managers of all stripes pour funds back into oil and gas to chase returns in a volatile market favoring commodities.

Only a few years after large pension funds and endowments began tapering investment, oil and gas is back. BlackRock’s Larry Fink made headlines earlier this year clarifying his stance on sustainable investing: divestment is not on the agenda. Many large pension funds have followed suit as the energy sector provides a ballast from market chop.

Investors can have the biggest impact on climate change by investing in firms with the largest Scope 1 and Scope 2 emissions, Carlyle argues. Private equity can leverage internal influence to drive down emissions instead of chasing divestitures of high emissions assets into the hands of less scrupulous investors. Read: any investment is fair game, regardless of environmental impact.

Middle-market private equity funds may well follow in pursuit of returns, a general partner source tells me. The large range of ESG measurements firms deploy already gives funds considerable latitude in how to present environmental progress, he said.

Raising the cost of capital for oil and gas companies might paradoxically incentivize future high-emissions projects. Oil field developers unable to cheaply tap capital markets might instead turn to their own cash flows to finance new investment. “In recent quarters, integrated oil and gas companies’ cash from operations has risen so appreciably that they can boost capex budgets while also substantially increasing the share of free cash flow distributed to investors through dividends and stock repurchases,” the Carlyle report reads.

The report raises obvious questions about Carlyle and the industry’s commitment to ESG, especially given the firm’s leadership on creating industry-wide metrics by which to measure progress.

Increasing private equity ownership of companies actively driving human civilization to what the latest United Nations’ IPCC report calls the brink of collapse is not a obviously sound strategy. And the report raises questions it doesn’t answer. Divestment may fall short of reducing demand for fossil fuels, but how likely are companies whose entire business models are based on pollution to stop, when asked by investors? In fact, why would a firm aligned with such firms’ profits even pose that question?

For now, these questions could fall on deaf ears, the GP source says. Firms eager to stay afloat during market volatility are not prepared to take investments off the table due to ESG commitments.

Brandon Zero