BlackRock CEO Larry Fink has often pointed out the risks of transferring polluting assets from public companies with decarbonization goals, to private and more opaque owners. Whilst public companies are not generally a stalwart of climate action, Fink is correct in highlighting the risks posed by private takeovers. Private equity (PE), a controversial and fast-growing industry with a reputation for looting companies, has invested over USD$1 trillion in energy companies since 2010. Because it wields such power, it is important to emphasise the role PE plays in worsening climate change, as well as its links with traditional financial players. On the other hand, this dubious industry also holds potential to take meaningful climate action.  

Simply put, PE refers to equity investments in companies that are not publicly traded. Due to regulations prioritizing disclosure of publicly listed companies, those held privately are less transparent and less regulated than other types of investments (1). While the size of the private equity industry (USD$6.3 trillion in assets under management) may seem modest compared to public equities (approximately USD$90 trillion in assets under management), the industry is collectively the largest owner of businesses in the world and one of the most profitable types of investment (2).

The six largest PE firms in the world according to Private Equity International:

Although PE firms conduct different types of ventures (3), one of its primary business models is to use debt to buy companies across all sectors (4),  restructure them to make them financially efficient, and then sell them a few years later for a profit. This business model is highly controversial, as its strong focus on maximizing returns for investors often comes at the expense of the PE-owned company’s long-term sustainability and its wider impact on society. For decades, this extractive model has been linked to declining wages, jobs and investment cuts, and higher risk of bankruptcy in PE-owned companies compared to publicly owned entities. These negative effects have been particularly prevalent in sectors such as health care and housing, as documented by various experts (5). Despite this, PE firms generally escape public scrutiny and are less legally and publicly accountable for their actions than their public counterparts.  

PE is also highly problematic when it comes to climate change. A study by the Private Equity Stakeholder Project (PESP) found that PE firms have invested about US$1.1 trillion in energy assets since 2010, with fossil fuels making up the dominant share. Indeed, the report reveals that ten of the world’s largest PE firms – such as Blackstone, KKR, and the Carlyle Group – collectively own more than 300 energy companies, 80% of which are reliant on oil, gas, and coal (6). The focus on fossil fuels is also reflected in the average size of the acquisition deals analysed in the report.  The authors found that fossil fuel deals were twice as large as renewable energy deals. Moreover, many of the fossil fuel companies held by these ten PE firms are active in controversial pipeline projects in the U.S. and Canada as well as in unconventional sectors such as oil sands, Arctic operations, and shale oil and gas.  

Specifically for utilities, another study found that 13% of total U.S. electric capacity is owned by PE firms. Of this, 80% of this capacity is fuelled by fossil gas, oil and coal, and accounts for 14% of CO2 emissions from U.S. power plants. 

Not only is there evidence that polluting assets are moving from public to private markets at a significant rate, but also that they tend to move from companies with more robust to less robust environmental commitments. According to an Environmental Defense Fund report that looked at upstream oil and gas M&A transactions over the last five years, the number of public-to-private transfers outnumbered private-to-public transfers by 64%, while USD$86.4 billion in assets moved away from companies publicly aligned with net-zero emissions goals.

One example is French utility Engie, that sold four coal power plants in Germany and the Netherlands to PE firm Riverstone Holdings in 2019 as part of its coal exit strategy. While Engie could claim to have reduced its portfolio greenhouse gas emissions by 9%, these plants are still operational, emitting approximately 5.1 million tons of carbon into the atmosphere each year. Another case in point is the Umuechem oil field in Nigeria, which was sold by Shell, TotalEnergies, and Eni to Trans-Niger Oil & Gas (TNOG) – a PE-backed operator. In the seven years prior to the transaction, satellite data did not show routine fossil gas flaring in the field; however, since the transaction in January 2021, flaring has quadrupled (7).

More than demonstrating the ineffectiveness of divestment, these examples clearly illustrate the inability of the investment community to push the companies it invests in to decarbonize the real world, not just their books.

PE firms lag far behind publicly listed companies in their disclosure and in their efforts to address climate change. It is only recently that we are seeing some PE firms beginning to do some of the following: voluntarily publishing ESG reports; reporting on a small fraction of their greenhouse gas emissions; engaging in climate initiatives; creating sustainability funds; increasing their investments in renewable energy; and pursuing SBTi certification.  

But these timid steps will hardly contribute to a 1.5°C trajectory unless they are accompanied by strong measures allowing real GHG emissions reductions. One of them is straightforward: rather than buying existing fossil fuel assets, PE firms must stop contributing to the expansion of fossil fuels and start their phase-out (8). Endorsed by a coalition of 13 NGOs, the recently published Private Equity Climate Risks Scorecard (9) assesses the fossil fuel assets and climate practices of eight of the largest PE buyout firms with oil, gas and coal investments. Whilst four PE firms (Blackstone, Warburg Pincus, Apollo and Ares) have made varying statements about restricting some fossil fuels in some new funds (10), none of the eight assessed are doing enough to effectively contribute to a just energy transition.  

There is a certain irony that many of the voices warning of the risks posed by PE remain complicit in its expansion. While PE firms are not widely known by the public and therefore often go unnoticed, mainstream financial players support them through a variety of financial services. Institutional investors, such as insurers and pension funds, invest in their funds and are shareholders in publicly traded PE firms. For instance, among the top 30 shareholders (11) of Carlyle Group – the worst-rated PE firm in the Scorecard – are Vanguard, Morgan Stanley, BlackRock, Bank of America, Goldman Sachs, and Allianz. All of whom are members of the Glasgow Financial Alliance for Net Zero. 

Similarly, banks and financial services groups provide debt and financial advice for individual transactions. In the aforementioned acquisition of Engie’s coal-fired power plants, the UK-based Legal and General advised PE firm Riverstone Holdings on the transaction (12). And when Blackstone in conjunction with British and Korean pension funds Universities Superannuation Scheme and National Pension Service purchased the controversial oil pipeline company Tallgrass Energy (13), they were all advised by Citi, Credit Suisse, and Rothschild & Co (14).

As the PE industry is only expected to keep growing in the coming years, the risk that it will continue to burn fossil fuels while the rest of the world moves away from them grows exponentially. In order to combat climate change, PE firms must take their share of responsibility and stop all new financing and investment in fossil fuel companies and projects, while phasing-out their current fossil fuel activities. On the other hand, traditional financial institutions supporting PE firms should not simply deplore the risks that the private industry poses to climate objectives without doing anything. These banks and investors – especially those with net zero ambitions – should act at all levels and urge PE firms among their clients and investees to make a real transition away from fossil fuels.

Notes :

1. The financial landscape is composed of public and private markets. In the public markets, companies are listed on a stock exchange, which means they can sell their shares on a marketplace where any individual can invest and trade. Private companies, on the other hand, are not publicly traded and are only available to professional investors such as PE firms. Private companies are less regulated and have fewer disclosure requirements than public ones. For more information, please refer to this article.
2. According to Mckinsey, in 2021 PE reclaimed the spot as the highest performing private market asset class. In addition, PE continues to outperform relative to most public market equivalent measures.
3. In addition to buyouts, PE firms are also involved in real state, business lending and start-up investments.
4. It is important to note that this debt is normally not held by the PE firm but by the company being bought out, which limits the liability of the PE firm and induces it to participate in risky behavior.
5. See the work of the Private Equity Stakeholder Project and Americans for Financial Reform, as well as the books “Private Equity at Work: When Wall Street Manages Main Street” from Eileen Appelbaum and Rosemary Batt, and “Two and Twenty: How the Masters of Private Equity Always Win” from Sachin Khajuria.
6. The fossil fuel holdings analyzed by the PESP are “distributed across the supply chain, including upstream operations (drilling, exploration and related services), midstream operations (pipelines, storage and transportation), or downstream operations (power generation, processing, distribution)”.
7. Fossil gas flaring is the industry practice of burning residual associated gas, a byproduct of oil production. This practice contributes to climate change and impacts on the environmental and public health through the emission of CO2, black carbon, and other pollutants.
8. Limiting global warming to 1.5ºC and achieving carbon neutrality by 2050 will only be possible if (a) we stop coal expansion now and ensure a complete coal exit by 2030 in Europe and OECD countries and 2040 worldwide; and (b) immediately start reducing oil and gas production and not opening any new oil and gas fields.
9. The following organizations endorse the Private Equity Climate Scorecard and Climate Demands for Private Equity: The Action Center on Race & the Economy Institute, Americans for Financial Reform, Climate Finance Action, Food & Water Watch, Friend of the Earth United States, Greenpeace, LittleSis, The Natural Resources Defense Council, Sierra Club, Stand.earth, the Private Equity Stakeholder Project, Public Citizen, and the Sunrise Project.
10. Blackstone declared it would not pursue upstream exploration and production in its next energy or credit fund and Warburg Pincus announced its plans for a new buyout fund that would exclude fossil fuels (however since then its fossil fuel energy portfolio has expanded, according to the Private Equity Climate Risks Scorecard). Similarly, Apollo pledged not to invest in fossil fuels in its next buyout fund. Ares said it is excluding energy from its largest corporate private equity fund due to expected challenges in the sector and volatility.
11. Information retrieved from the Bloomberg Terminal on September 5, 2022.
12. Information retrieved from the Bloomberg Terminal on August 25, 2022.
13. Tallgrass Energy is developing a new oil export terminal in Louisiana that would emit more than 500,000 tons of greenhouse gases per year and be built on a historic burial ground of enslaved people, according to the PESP and the Times-Picayune.
14. Information retrieved from the Bloomberg Terminal on August 25, 2022.