Private equity lags on fossil fuel policies

Why pursue decarbonization efforts when they are undermined by the actions of others? This is the question that is increasingly being asked by investors concerned that private equity firms are playing an increasing role in the fossil fuel industry. Reclaim Finance has carried out a first-of-its-kind assessment of the fossil fuel policies of 15 of the largest private equity firms in North America and Europe (1). Of the firms assessed, only two have a policy setting out rules for the coal sector, and only one has a policy covering the oil and gas industry. The assessment provides fresh evidence of the extent to which the private equity industry is lagging behind asset managers, operating mainly in public markets, on climate action (2).

It has taken a long time, but private equity firms are increasingly beginning to acknowledge their role in the climate crisis. Many are taking steps such as publishing environmental, social and governance (ESG) reports, measuring their greenhouse gas emissions, and creating sustainability funds. However, the experience of those financial institutions that began making similar commitments over a decade ago (3) shows that these efforts do little to contribute effectively to a 1.5°C trajectory. All the more so as these initiatives fail to address one of the main threats to the climate posed by the private equity industry: the acquisition and build-out of fossil fuel assets.

Between 2020 and 2021, private equity firms bought $60 billion of oil, gas, and coal assets from energy companies through 500 transactions –a third more than they invested in renewable energy (4). Not only do these investors play a major role in the problem of transferred emissions –polluting assets passing from one owner to another, reducing portfolio emissions for the seller but with no emissions reduction in the real world– (5), but they are also among the financiers “keeping coal alive” (6).

Our analysis of 15 of the largest North American and European private equity firms –representing 23% of private equity capital raised between January 2018 and March 2023 (7)– shows that private equity firms largely do not have systematic and public investment restrictions for the fossil fuel industry. Using the Coal Policy Tool and Oil and Gas Policy Tracker methodologies, we found that only two firms have a policy covering all assets under management and dedicated to the coal sector (Ardian and Eurazeo, both from France), and only one has a policy for the oil and gas industry (Eurazeo) (8). Eurazeo’s policy stands out because it contains all the elements needed to be solid, notably excluding companies involved in fossil fuel expansion and setting ambitious dates for phasing out fossil fuels (9).

This lack of policies contrasts with the dynamic observed among some asset managers operating mainly in public markets. Our recently published third annual assessment of the policies and practices of 30 major asset managers in Europe and the USA confirms that these players are increasingly adopting sectoral policies. Although these policies vary significantly in quality, 20 out of the 30 asset managers have policies on coal and 12 on oil and gas.

Although some other private equity firms have made sporadic commitments on fossil fuels, these cannot be considered genuine sector policies as they cover only a small portion of the assets under management. Indeed, most major private equity firms have diversified business strategies (asset classes) that include private equity direct investments, private debt, infrastructure, natural resources, funds of funds, and secondaries, among others (10). Since many different asset classes can support fossil fuels, sectoral policies must cover all asset classes, except for real estate and other asset classes intrinsically unrelated to fossil fuels. This is however rarely the case. Five of the private equity firms included in our research –Apollo Global Management, Ares Management, Blackstone, KKR, and Warburg Pincus– have all announced their intention to impose restrictions on fossil fuels but only for certain new funds for only one type of asset class (11).

In addition to immediately halting new investments in the fossil fuel industry, private equity firms have an important role to play in setting expectations for fossil fuel companies already in their portfolios through their engagement practices. Among financial institutions, private equity firms have a unique opportunity to directly influence the climate strategy of their portfolio companies, since they often hold a majority stake in these companies and are represented on their boards. Indeed, private equity firms are known to work hand-in-hand with the management of the companies they own on a wide range of issues, particularly to restructure companies to maximize profitability (12).

As with other types of investors, the credibility of any engagement strategy depends on the formulation of precise and powerful demands, backed by a solid, public framework. At the very least, private equity firms should demand their portfolio companies to halt fossil fuel expansion, exit the coal sector by 2030 in Europe and OECD countries, and by 2040 in the rest of the world, and adopt science-based targets for reducing oil and gas production by 2030 (13). Nevertheless, our research shows that, except for Eurazeo, none of the private equity firms in our research integrates these elements into their practices. Even Brookfield, a Canadian private equity firm that emphasizes its engagement efforts to support the transition of polluting companies, does not provide sufficient detail on how its engagement strategy works or any evidence of its effectiveness (14).

Investors who have raised concerns about the role of private equity in supporting fossil fuel activities have good reason to worry. Private equity firms do need to accelerate action and urgently adopt ambitious fossil fuel policies if they are to be serious in their climate efforts. Worried investors can also do something about the problem and indeed must do so to maintain their credibility, especially as many of them have their own fossil fuel policies. Given that many of these investors are involved in private equity firms as fund investors –mainly pension funds and insurance companies (15)– or as shareholders, they must use their influence to urge them to make a real move away from fossil fuels.