A Call to Private Equity to Increase Climate Commitments

A new scorecard by the Private Equity Stakeholder Project and Americans for Financial Reform Education Fund calls on several of the largest private equity firms to align their portfolios with the science-based targets to limit global warming.

The report found that despite its importance to climate action, major private equity firms continue to invest heavily in fossil fuels. Private equity firms have the potential to be leaders in the financing of clean energy and the transition away from fossil fuel energy. Yet many of the largest firms not only still have major investments in fossil fuels, but they also lack public transparency about the climate impacts of their portfolios. And for those private equity firms that see themselves as change agents from within, it is crucial that they demonstrate this through strong climate commitments, energy transition plans and commitments to climate equity and justice for themselves and for the companies in their portfolio.

Further, the continued investment in the fossil fuel industry needs a holistic approach for us to see a strong shift to clean energy. Private investment in fossil fuels is, in part, facilitated by the continuation of public subsidies to the oil and gas industry that reduce investment risk, making what on its own is a risky investment more attractive for private equity. It shows the importance of eliminating public subsidies to the oil and gas industry in order to level the playing field for clean energy, estimated at $20.5 billion annually.  The report also shows the importance of transparency when it comes to the political spending and climate lobbying of these firms.

Of the eight major private equity firms analyzed, none received top marks.  Not only are they still heavily invested in fossil fuels, but none of the firms surveyed have fully aligned their portfolios with science-based targets to limit global warming to 1.5 degrees, although five  (Blackstone, Ares, Apollo, TPG, and Warburg Pincus) had partially aligned their portfolios with this target. 

This failure on climate action continues despite last year’s International Energy Agency declaration that to meet world targets to limit global warming, the expansion of new fossil fuel infrastructure must cease immediately.  The Private Equity Stakeholder Project estimates that the industry has invested at least $1.1 trillion in the energy sector since 2010 and, as of October 2021,  ten of the largest of these firms invested at least 80 percent of their portfolio in fossil fuels.  As public market disclosure of climate risks and disinvestment from fossil fuel increases, private equity investment in climate pollution will likely increase, veiled by a lack of public transparency. 

This investment in polluting infrastructure also poses significant risk to taxpayers.  Banks and publicly held companies are increasingly accounting for the climate risks of their portfolios.  Without a similar recalibration by private equity, the sector’s balance sheets may not reflect the highly leveraged nature of polluting assets.   These outdated calculations increase the risk of bankruptcies that will leave the cost of well cleanup at the public’s door. 

The good news is that the short-term nature of private equity investments (an average investment is five years) means that firms can take the immediate action necessary to stave off the worst impacts of global warming.  To take advantage of this opportunity, the report recommends that private equity firms: 

• Align with science-based climate targets to limit global warming to 1.5⁰C
• 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

Such action will not only enlist the private equity industry as an ally in the fight against climate change, it will also reflect the climate commitments and concerns of its investors.  Barring voluntary change, policymakers should evaluate their role in requiring accelerated action, as further delay is no longer an option for the planet or its people.