As ESG is top of mind for companies and stakeholders, divesting from fossil fuel companies has become a common practice. But new research suggests that investing in these companies is more likely to yield “the greatest planetary benefits.”

The Carlyle Group’s new report, The Inclusive Approach to Energy Transition, debuted at The World Economic Forum’s 2022 meeting in Davos, Switzerland this week. Carlyle, one of the largest global investment firms, conducted the research to provide an empirical assessment of whether the “very well-intentioned” efforts of asset managers, and some owners of capital institutions, divestment from fossil fuels is actually effective, says Jason Thomas, the firm’s head of global research.

“The decision to decarbonize portfolios doesn’t necessarily lead to the decarbonization of underlying economic activity,” Thomas says. “In fact, in many cases, what we’ve seen is that by depressing the supply of energy, it’s increased its price. And the price increase, in many cases, has actually made these fossil fuel companies increase their free cash flow substantially.”

So, it may not matter to large oil and gas companies if they’re “starved of external sources of finance” because they’re generating so much cash flow internally to meet all of their capital spending, Thomas explains. 

“There’s a lot of ways this free cash flow can be used to decarbonize the real economy,” he says. “But those sorts of initiatives are hard to pursue if one has made the decision that you’re not going to invest in that space.”

The study points out that with all the divesting that has taken place, 80% of economic life is still powered by fossil fuels, which includes over 95% of all transportation. 

“We think the biggest decarbonization potential comes from the most carbon-intensive companies,” says Megan Starr, the global head of impact at Carlyle. “As a firm, we’re not focused on this binary of ‘good company, bad company’ or ‘green company, brown company,’” Starr explains. Carlyle’s CEO Kewsong Lee has been “very clear from the beginning that impact is a process, not a product,” she says. The firm is focused on “how we can change companies over our hold period,” Starr notes. Carlyle creates a growth plan for a company to help them “mature on the dimensions of sustainability,” Starr says. 

“We’ve been much more focused on what is that trajectory for individual companies and assets?” she says. “Versus looking at it at this portfolio level, which really doesn’t give you an accurate picture of that change over time thesis.”

Carlyle is planning to get to Net Zero by 2050. “That may sound too slow, but real and lasting change takes time and discipline,” Lee wrote in a recent Fortune opinion piece. Carlyle’s commitment “also sets near-term goals across our majority-owned power and energy portfolio companies,” Lee wrote. “75% of Carlyle’s portfolio companies’ Scopes 1 and 2 emissions will be covered by Paris-aligned climate goals by 2025. After 2025, all new majority-owned portfolio companies will set Paris-aligned climate goals within two years of ownership.”

But the U.S. Securities and Exchange Commission’s (SEC) pending rules for mandatory climate-risk disclosures by public companies may have an impact on a move from divestment to investment in fossil fuel companies. The SEC has extended the public comment period on the measures to June 17. In the comments, an anonymous CFO wrote a statement in disapproval of the proposal: “The SEC was formed to protect shareholders, but when I apply this rule to my business all it does is harm shareholders given the projected costs.”

However, in reaching climate change goals, the total shunning of investing in fossil fuels companies isn’t the answer, according to Starr. “If you want to decarbonize the global economy, you have to go to where the carbon is,” she says. 

Let me know your thoughts on this topic.

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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