The buyout industry has long been a major backer of fossil-fuel deals. Now it’s rolling out new green asset funds at a record clip in a bid to lure the institutional money flocking to climate-friendly investments.
Today’s private equity shops—including the world’s largest alternative asset manager, Blackstone Group Inc.—are pouring capital into fast-growing sectors such as solar, carbon capture, and battery storage. Part of the attraction stems from the rapid adoption of wind and solar as public demand for climate accountability rises. It’s a shift in investment strategy that comes after years of fits and starts for the once struggling renewables space.
Especially over the last 18 months, environmental, social, and governance factors have also become a much stronger consideration for North American investors, said Kelly DePonte, a managing director at Probitas Partners, which helps raise money for private equity funds. Like their European counterparts, they’re beginning to prioritize so-called ESG factors in earnest. And where the money goes, so does private equity.
Investors in private equity, like pension funds, “are moving away from investing in oil and gas no matter the returns in pursuit of their carbon neutral goals,” DePonte said. “Though this is small right now, it is growing—and many of these first movers are large.”
Private Equity Going Green
The New York State Common Retirement Fund, the U.S.’s third-largest public pension fund, pledged in December to reach net-zero greenhouse gas emissions across its investments by 2040. The California State Teachers' Retirement System, the nation’s second-largest public pension, is planning to create a sustainable portfolio for private markets and invest between $1 billion to $2 billion over the next couple of years, while earlier this year the Ontario Teachers’ Pension Plan committed to reaching net-zero emissions across its investment portfolio within three decades.
Private equity funds that invest solely in renewable energy assets raised about $52 billion last year—a record, according to Preqin, a data provider. On top of that, the money garnered so far this year for such funds is outpacing fossil fuel asset fundraising by a factor of roughly 25.
“The move towards ESG-focused investing is starting to starve the supply of capital to the conventional energy space,” said Dave Lowery, head of research insights at Preqin. Renewable energy funds raised $258 billion in the decade through 2020, representing about a third of the overall energy sector, he said. But the share of funds going towards renewable energy has increased significantly since 2016, and stands at about 80% so far in 2021, Preqin data show.
Blackstone, which has longstanding stakes in fossil fuel firms, has been among those to make a push for deals that focus on the transition to cleaner energy in both its private equity and credit business. Notable investments include energy-infrastructure company Sabre Industries Inc., energy storage provider Aypa Power, solar companies Loanpal LLC and Altus Power America, and Therma Holdings, which provides energy-efficiency services.
Other private equity players—burned by the shale boom and bust and collapse in oil prices when Covid first hit—are making a similar push. Warburg Pincus is shifting away from fossil-fuel investments, which dragged on its portfolio; its next global buyout fund will instead invest in renewables and energy technology. Riverstone Holdings, one of the world’s biggest energy-focused private equity firms, is said to be increasing its exposure to more sustainable forms of energy, Bloomberg reported in March.
Fossil Fuels Fading
Likewise, investors have also cut back on their commitments to traditional oil and gas funds due to poor returns in the sector.
Fund managers now realize that investors want to see a shift to renewables, or at least a strategy for reducing emissions from dirty assets, said Will Jackson-Moore, head of Global Private Equity, Real Assets and Sovereign Investment Funds at PwC. “There is going to be significant amounts of money made and lost in the energy transition,” he said.
That shift forms part of a bigger story for a finance industry that’s steadily reassessing its investments in industries that contribute directly to climate change and other environmental and social problems. This year, for the first time, banks are on track to commit more financing to climate-friendly projects than oil, gas, and coal producers. U.S. President Joe Biden has attempted to put climate at the center of his agenda, as have lawmakers in Europe, where disclosure rules around ESG metrics are setting the global pace for change.