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Private equity firms investing billions in fossil fuels

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A newly released report has identified eight private equity firms as being responsible for channelling billions of dollars into the oil and gas industry, despite their public climate commitments.

  • Financial watchdogs have released a report revealing billions of dollars in undisclosed fossil fuels holdings.
  • Weak disclosure regulation has allowed private equity firms to keep investors in the dark over where their money is being spent.
  • The report is likely to spark further debate on regulatory measures to improve the transparency of private equity.

The Private Equity Stakeholder Project (PESP) and Americans for Financial Reform Education Fund (AFREF) have released a report on the climate risk exposure of private equity firms. It includes a ‘Private Equity Climate Scorecard’, which identifies the eight worst offenders in terms of undisclosed investments in oil and gas.

The identified firms – Carlyle Group, Warburg Pincus, KKR, Brookfield Asset Management, Ares Management, Apollo Global Management, The Blackstone Group, and TPG – hold a combined $3.6 trillion in assets under management (AUM), including $216 billion in energy projects.

The findings of the Private Equity Climate Risks (PECR) report

The scorecard assesses each firm against eight separate indicators, three of which reflect the share of fossil fuels investments within their broader energy portfolio while the others concern their alignment with private equity demands, such as their integration of science-based climate targets and the transparency of their disclosure. These indicators are then normalised and aggregated to give an overall ranking.

The scorecard’s worst ranking went to the Carlyle Group, one of the world’s largest alternative asset managers with $376 billion in AUM.

According to the report, Carlyle’s downstream power plants emitted over 10.8 million metric tons of CO2 in 2020 alone, with 76% of its energy portfolio invested in 42 different fossil fuels companies.

Blackstone, which dwarfs Carlyle in size with $941 billion in AUM, accounted for 18.1 million metric tons in downstream CO2 emissions. The firm holds 11 fossil fuels companies within its broader energy portfolio, representing 52%.

Despite having the highest score in terms of downstream emissions, these figures indicate that Blackstone has also invested in clean energy companies to a similar extent. 

Lack of disclosure regulation limits transparency

Although the report says a lot about the activities of private equity firms, it is equally important to acknowledge what it cannot say. For example, the ranking system is only able to include downstream CO2 emissions, as data from upstream and midstream assets is not readily available.

This points to a far wider issue of transparency, stemming from a lack of standardised regulatory guidance on how private equity firms should disclose their energy holdings, rather than to a failing of the report’s methodology.

Companies that submit voluntary reports under the Taskforce for Climate Related-Financial Disclosure (TCFD) are not required to publicly disclose their fossil fuel holdings and associated emissions, nor do they have to make specific, portfolio-wide emissions reduction commitments. 

Such weak disclosure regulation has allowed private equity firms to contradict their climate commitments by continuing to invest in fossil fuels. 

KKR, for example, has published a TCFD-aligned Climate Action Strategy outlining its intentions to support the global energy transition “by ensuring that our portfolio companies are taking climate-related risks and opportunities into account and by investing in companies that address critical climate change challenges.

Despite this pledge, KKR launched a new platform in 2021 with the specific purpose of pursuing upstream oil and gas opportunities and has expanded its fracking footprint with additional drilling assets.

Embedded energy holdings not compatible with climate action

The energy sector has long been a staple in investment portfolios, and remains attractive as global energy prices continue to rise. Investment in oil and gas, however, cannot continue without severe consequences.

The Intergovernmental Panel on Climate Change has warned that we are currently on track to surpass the 1.5°C climate tipping point by the early 2030s. The International Energy Agency says that, to avoid such a scenario, there should be no more investment in new fossil fuels developments.

These warnings have clearly resonated with investors, as demonstrated by the recent ‘Global Investor Statement to Governments on the Climate Crisis’, which received signatures from 532 investors representing almost $39 trillion in AUM.

Calling for transparency in private equity

The PECR report, meanwhile, suggests that private equity firms are directly contradicting the desires of their investors by playing a “significant role in propelling the climate crisis”.

It outlines a series of demands to improve the transparency of private equity and demands that private equity firms should:

  •  Align with science-based climate targets to limit global warming to 1.5 degree C.
  •   Disclose fossil fuel exposure, emissions and impacts.
  •   Report portfolio-wide energy transition plan.
  •   Integrate climate and environmental justice.
  •   Provide transparency on political spending and climate lobbying.

The report says these demands will help investors ensure that their capital is spent in alignment with their values, while also giving them the information they need to assess their investment’s exposure to financial risks associated with fossil fuels assets.

It explains, as private equity continues to operate and expand fossil fuel capacity and infrastructure, the underlying assets are highly leveraged – leading to increased risks of bankruptcy, stranded assets, and financial contagion.

The fossil fuels industry is unlikely to disappear from private equity holdings anytime soon, but the introduction of mandatory disclosures would, at the very least, empower stakeholders to make fully informed decisions.

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