The transaction is valued at a record $45 billion, which by itself makes it significant. But what’s really interesting about the TXU/KKR deal is its implications for global warming policy in the U.S. and what it says about the influence that capital markets now have on environmental decision making. The deal has been called a leveraged environmental buyout.
TXU had been moving ahead with plans to build 11 new coal plants in Texas, which would have resulted in an additional 78 million tons of CO2 emissions (MtCO2) per year. To put that in perspective, Texas’ utility sector currently emits 223 MtCO2, more than any other state. The new TXU plants would have raised those emissions by 35%.
But the investment community also had a huge role in the TXU deal. Goldman Sachs, Lehman Brothers, Morgan Stanley, and Citigroup are likely equity partners in the deal (Lehman Brothers is also a USCAP member).
It’s no revelation that capital markets play a major role in modern economies, and that capital investments influence and reflect the business models that will be successful. And financial markets are now factoring the impacts of climate change into their investment portfolios. The effect is that companies are experiencing powerful incentives to improve their environmental performance, account for climate change in their business plans, and reduce risks from climate change for investors and stockholders. Ultimately, this new paradigm facilitates capital allocation towards companies with sound climate strategies.
As the TXU deal shows, capital markets now assume a “carbon constrained economy” in the not too distant future, and are factoring climate change into investment decisions. And the TXU buyout demonstrates that climate change is not only an environmental issue; it affects the bottom line.