Opinion Advocates for ideas and draws conclusions based on the author/producer’s interpretation of facts and data.
The Hidden Side of Fossil Fuel Investments: Private Equity
A massive oil spill on the California coast caused by a broken pipeline is shining a harsh light on the fossil fuel industry, just as the world prepares for another climate summit in November.
In recent years, the fossil fuel divestment movement has focused on companies that are publicly traded, like Chevron or Royal Dutch Shell. International energy experts are calling for the rapid reduction of fossil fuel production, and institutions as disparate as Harvard University and the state of Maine are selling off their holdings in fossil fuel companies.
There’s one major oversight, however: private equity. Private equity firms, like the Carlyle Group, Brookfield Asset Management, and KKR, buy companies using high levels of debt and charge investors high fees to generate returns.
Much evidence suggests that neither the general public nor government regulators fully understand the environmental and community impacts of private equity’s energy investments. The simple reason is that, unlike publicly traded fossil fuel companies, the multi-trillion-dollar private equity industry’s fossil fuel investments are not subject to most public disclosure rules.
Environmental activists, shareholders, and even the SEC have recently attempted to mandate greater climate risk investment disclosures. But the focus has largely been on public companies. Responding to this pressure, public companies are selling their fossil fuel assets, only to have them repeatedly scooped up by private equity firms—thereby shifting pipelines and other polluting assets to a shadowy industry that is less accountable and negating any progress on mitigating climate change.
Failing to hold private equity firms accountable exacerbates existing inequities.
From a new Private Equity Stakeholder Project report, documenting 10 of the largest private equity buyout firms’ energy holdings, we learn that 80% of their holdings are in fossil fuels. Over the last decade, private equity firms have heavily invested in exacerbating our climate crisis. And even with predictions of declining fossil fuel demand, increased regulatory pressure, and a growing list of climate-induced natural disasters, private equity firms continue banking on our extractive fossil fuels.
But all is not lost. Notably, public pension funds are among the largest investors in private equity. Although public pension fund trustees—many of whom are labor union members and state elected officials—have largely missed opportunities to demand greater climate-related disclosure and the urgent decarbonization of private equity energy portfolios, there are opportunities and mechanisms by which the private equity industry can be held accountable for its role in the climate crisis. The public needs to accurately understand the public health and climate risks associated with private equity’s ever-expanding fossil fuel footprint. Without such an understanding, investors risk making decisions based on inaccurate and incomplete information—a serious fiduciary concern.
In a step toward addressing this problem, the University of Washington Harry Bridges Center for Labor Studies recently released a report reflecting on solutions discussed at a May 2021 forum exploring labor’s private equity investment and the climate crisis. There, a consensus crystallized around practical solutions: Labor union trustees of pension funds and their allies must demand comprehensive climate risk disclosures from the private equity industry and urge transitions to carbon-free portfolios by 2030. The Private Equity Stakeholder Project, along with the Sierra Club and other climate organizations, have elaborated on these climate-risk disclosure demands.
Pension fund trustees need to stop letting private equity off the hook and demand stronger and more comprehensive climate-related disclosures.
Failing to comprehensively measure that climate risk means that it is not being mitigated. If it is not being mitigated, we know it is further contributing to additional climate-related disasters and human rights violations.
For instance, findings in the UW report highlight the Wet’suwet’en First Nation’s ongoing resistance to private equity firm KKR’s Coastal GasLink (CGL) Pipeline through their territory in British Columbia, Canada.
“[The CGL] project threatens our water, our livelihoods as Wet’suwet’en people, and the future for our Wet’suwet’en children,” said Wet’suwet’en leader Sleydo’ (Molly Wickham), during the forum. “We will never stand down and will continue to resist this project and others like it, that do not gain consent from our people. It is a bad investment that will never see the returns that pensioners deserve.”
As of late September 2021, members of the Wet’suwet’en First Nation and allies have occupied a CGL drill site to protect Wedzin Kwa, the sacred headwaters that nourish their community.
Extreme heat, rising seas, flooding, wildfires, drought and air pollution already have made the world more dangerous, particularly for those communities of racially and economically marginalized people. Failing to hold private equity firms accountable exacerbates existing inequities, further locks us all onto a path of no return for climate action, and puts the retirement futures for teachers, public safety officers, and other government sector workers at risk.
The last point is important, for private equity investment in fossil fuels has largely provided meager, even negative, financial returns over the past decade. Over a similar period, renewable energy stocks beat a fossil fuel-focused strategy by more than threefold. Yet total investment in renewable energy assets is still lagging.
Pension fund trustees need to stop letting private equity off the hook and demand stronger and more comprehensive climate-related disclosures that go well beyond the private equity firms’ glossy sustainability reports—all of which tout the firms’ commitments to a clean energy future, but fail to disclose the breadth of their fossil fuel assets or their climate risks. This is an evasive and misleading corporate practice often referred to as “greenwashing.” A better understanding of the climate risks associated with private equity investments can help not only to protect the environment, but also to secure higher investment returns—ensuring a more sustainable future for retirees as well as the planet.
As the world readies for the U.N. Climate Change Conference (COP 26) in November, there is warranted attention and pressure mounting on governments to make urgent changes. But ordinary individuals can also play a major role. Workers and retirees can demand greater climate-related disclosures from their pension funds as a condition for future investments in private equity. We all can provide comment at public pension fund meetings and demand that our elected representatives take bolder climate-related action. At the end of the day, we are all responsible for the future of the planet.
Michael McCann is the Gordon Hirabayashi Professor for the Advancement of Citizenship and the former director of the Harry Bridges Center for Labor Studies at the University of Washington.
Riddhi Mehta-Neugebauer is the former research director of the Harry Bridges Center for Labor Studies at the University of Washington.