The energy transition is not just a giant existential challenge for us; it is a complicated one.
The destination is carbon neutrality – the more advanced private markets players have plotted a science-based pathway to get there – but for all investors, this journey will take time.
Where does that leave private markets firms, which have increasingly sought to burnish their images as leaders in responsible investment? We recently covered a controversial research paper that reported that 10 PE firms were the leading private equity backers of the fossil fuel industry over the last decade. So, we set out to discover not what the firms had done in the previous decade, but what they intend to do in the next decade.
Each firm that responded – four did not – was quick to explain how climate change factors into their due diligence process, and they provided numerous examples of increasing clean energy investments. None of the firms would comment on exactly how much capital they planned to deploy into fossil fuel-related investments into the future, and none said they would no longer finance fossil fuel assets.
Many firms are sending out mixed messages. For example, in June, KKR joined Crossover Energy Partners as the clean energy developer’s “exclusive energy transition partner”. That deal came three weeks after KKR announced a $5.7 billion merger to create a “diversified, well-capitalised upstream oil and gas business” targeting “low-decline, producing assets with meaningful reinvestment opportunities”, according to KKR statements.
On the same day in July that Brookfield reported raising $7 billion for a fund “focused on the global transition to a net-zero economy”, the firm received approval from the board of directors for Inter Pipeline to move forward with a $6.8 billion acquisition of the North American oil and gas transportation company.
Thus far, private investments into oil and gas have been subjected to less scrutiny than those made by publicly listed entities, a gap that BlackRock chief executive Larry Fink said needs to close at the Green Horizon Summit conference last week.
“We’re not going to have a decarbonised world unless we have long-term substantive conversations” between public energy companies and their private markets investors, Fink said.
“Let’s be clear: the hydrocarbon companies are part of the solution. They’re not the problem.”
Investing in “both sides” of the energy transition makes it tough to defend against accusations of what one veteran impact investor recently described as “Circque du Soleil-like moral flexibility“.
Indeed, John Hodges, a vice-president at the ESG consultancy BSR, warned that firms which have made decarbonisation commitments yet still invest in fossil fuel assets are setting themselves up for a “rude awakening” when commitment timelines expire and “their data does not match up”.
The reality is that fossil fuels will remain a major energy source for years to come. Private markets firms therefore have a choice: they either continue to participate in financing them or they can halt investing altogether.
Those that go down the first route need to be willing and able to show how their investments are part of the solution. Those that go down the second route can make a much more straightforward claim to be leading the transition.