Poor performance on an NGO-produced energy transition scorecard shows fossil fuels remain attractive for many investors in search of higher returns.
US private equity firms have invested more than $1tn in energy since 2010, with the lion’s share in fossil fuels and public service workers’ retirement savings making up a large chunk of this finance, according to new research.
A scorecard developed by the Private Equity Stakeholder Project and Americans for Financial Reform Education Fund, two US NGOs, details how eight of the world’s largest private equity firms perform on bringing their portfolios in line with the energy transition. None of the firms, which oversee a combined $3.6tn in assets, are doing a great job of ditching fossil fuel projects in favour of support for clean energies such as wind and solar power, suggests the scorecard.
TPG Capital comes out top with a ‘B’ rating. TPG oversees $127bn in assets under management and has the smallest energy portfolio of the firms analysed. Its portfolio includes eight energy companies, with only two of them in fossil fuels as of October 2021. The firm has less than $1.3bn invested in fossil fuels, concludes the NGOs, which criticise TPG for failing to make a public commitment to transition away from fossil fuels in future funds.
At the other end of the scale is the Carlyle Group and its subsidiary NGP Energy Capital, awarded a rating of ‘F’. Carlyle has $376bn in assets under management, with its private equity portfolio in fossil fuels estimated at around $24bn. “Carlyle’s 2022 second quarter earnings report indicates that nearly 20 per cent of the firm’s revenue and nearly 61 per cent of its profit for the first half of the year came from NGP Energy Capital, which focuses almost exclusively on fossil fuel assets,” says the report.
The other companies analysed are Warburg Pincus, KKR, Brookfield, Ares, Apollo, and Blackstone Group. All earned ‘Ds’ for high levels of fossil fuel investment, their failure to align portfolios with a 1.5C pathway and their lack of full disclosure and transparency around their exposure to fossil fuels.
Compared with other financial institutions, private equity companies “are hardly regulated and exempt from most financial disclosures leaving regulators with more blind spots concerning the risks buyout firms might pose”, says the NGO report.
Dennis Wamsted, an analyst with the Institute for Energy Economics and Financial Analysis, described private equity as a “black box” at the think-tank’s annual meeting in New York last week.
The report also highlights that much of the money being invested comes from public institutions looking for higher returns for their pension funds. “Private equity used to be considered risky,” said Seth Feaster, another IEEFA analyst. In an attempt to boost returns, public pension funds were “going to the risky end of investments”, he said, with “private equity the perfect solution”.
Wamstead said there were some signs of change, with TPG announcing in April it had secured investor commitments on its Rise Climate fund with $3.7bn targeted for green energy and Brookfield securing commitments on a $15bn fund dedicated to the transition away from fossil fuels. Likewise, Blackstone has pledged to stop investing in oil and gas exploration and production, he added. The devil would be in the detail, however, said Wamstead, confirming he would be “following the announcements closely”.