[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..]
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THE HIDDEN SIDE OF FOSSIL FUEL INVESTMENTS: PRIVATE EQUITY  
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Michael McCann & Riddhi Mehta-Neugebauer
November 1, 2021
Yes!
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_ 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.. _

An abandoned beach in Southern California after an oil spill in
October 2021., Bill Boch/Getty Images

 

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
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are calling for the rapid reduction of fossil fuel production
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and institutions as disparate as Harvard University
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and the state of Maine are selling off their holdings
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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
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fossil fuel investments are not subject to most public disclosure
rules.

Environmental activists, shareholders
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and even the SEC
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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
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firms—thereby shifting pipelines and other polluting assets to a
shadowy industry that is less accountable and negating any progress on
mitigating climate change.

From a new Private Equity Stakeholder Project report, documenting 10
of the largest private equity buyout firms’ energy holdings
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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
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increased regulatory pressure
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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
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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
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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
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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
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over the past decade. Over a similar period, renewable energy stocks
beat a fossil fuel-focused strategy
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by more than threefold. Yet total investment in renewable energy
assets is still lagging
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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.

 

Riddhi Mehta-Neugebauer
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former research director of the Harry Bridges Center for Labor Studies
at the University of Washington.

 

Michael McCann [[link removed]] 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.

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