In the race to be green, companies are offering to a growing class of powerful, socially conscious investors who are investing trillions of dollars in companies that can promote their environmental, social, and good governance credibility. ESG investments in 2020 were up more than 140 percent year over year and now account for at least a third of all retirement, mutual fund, and other managed accounts, according to Moody’s Investor Service.
But as the Engie Riverstone deal shows, greening a company’s balance sheet is not synonymous with greening the planet.
Regulators, investors and climate advocates fear that utilities, oil producers and others are simply relocating facilities, pipelines and other polluting assets to less accountable private companies to meet the demands of investors and society.
“The climate impacts are the same,” said Alyssa Giachino, climate director at the Private Equity Stakeholder Project, a monitoring group that tracks fossil fuel investments. “The climate crisis does not care about your company structure.”
The practice is under scrutiny by US regulators as the Biden administration is considering reporting the financial risks of climate change. Earlier this month Acting chairman of the Securities and Exchange Commission, Allison Lee, asked the public Seeking ways to close the “significant gap” in disclosure requirements between public and private companies.
BlackRock, the world’s largest wealth manager, is also sounding the alarm.
“If a company sells the filthiest stuff to a private company somewhere in the world and that private company is exactly, or worse, environmental harm, how do you define that?” Larry Fink, CEO of BlackRock, said at a recent Brookings Institution event. “The company looks better. You don’t do greenwashing. They look better by all standards. But the world is probably doing worse. “
At Engie, a multinational utility valued at $ 29 billion, the goal is to take down coal-fired power plants or convert them to gas or sustainable biomass that have a smaller carbon footprint. If these options are not feasible, Engie sells the plants, company spokeswoman Andrea Petolicchio said. The utility still has coal-fired power plants in Portugal, Chile, Peru, Brazil and Morocco, but plans to leave the sector by 2027.
Renewable energies make up 31 percent of Engie’s energy mix, a proportion that the company intends to almost double by 2030.
While transactions like Engie’s are taking place, it is difficult to determine if they are widespread. And the decision to sell a facility or pipeline is usually not based solely on pressure from ESG, said Travis Wofford, who heads the division at Houston law firm Baker Botts.
“There is no invisible hand or market-wide collective decision-making process to make disposals just to hide assets from BlackRock,” said Wofford. “Operating companies are thinking of a long-term time horizon.”
This horizon is getting closer. Riverstone’s European energy company Onyx has to shut down its former Engie plant in the Netherlands by 2030 as part of a Dutch plan to phase out coal. Onyx applied for a $ 280 million grant to help meet this deadline. according to the consulting firm Enerdata. The three former Engie factories that Onyx owns in Germany will have to cease operations by 2038.
Riverstone said in December it had assessed its carbon footprint and developed a strategy to offset emissions. Daniel Yunger, an attorney representing Riverstone, did not answer questions about the firm’s coal-fired power plants.
Private equity firms have been investing in fossil fuels for years and fueled the American shale boom. Buyouts typically follow the oil and gas downturn, and 2021 is expected to be another volatile year for the industry. Given increasing environmental, social and governance pressures More and more utilities are considering disposing of their dirtier assets.
In 2020 The Blackstone Group acquired Tallgrass Energy, a US oil pipeline operator, privately valued at $ 6.3 billion. The year before Canadian energy company Emera promotes its commitment to decarbonization, sold three natural gas plants in New England to an arm of the Carlyle Group for $ 590 million. The same year The publicly traded Macquarie Infrastructure Corp. announced that she would sell 19 US and Canadian storage terminals to Riverstone for nearly $ 2.7 billion.
Representatives from Tallgrass, Emera and Macquarie Infrastructure said environmental considerations were not a factor in their divestment decisions. Emera said it has cut emissions 39 percent since 2005, excluding the divestment.
“As a private company, Tallgrass continues to rely on ESG efforts,” said spokeswoman Phyllis Hammond, and the company continues to provide ESG reports to investors.
Private equity funds defend their activities and claim to provide capital for renewable energies. While companies are not required to disclose their holdings or risks to regulators, they do respond to their wealthy and institutional investors. And all companies, regardless of their legal structure, must comply with environmental laws.
According to the American Investment Council, a trading group, private equity has invested around $ 41 billion in renewable energy since 2010. During the same period, the companies spent nearly $ 154 billion on oil, gas, and coal. In 2020, investments in renewable energy slightly outperformed fossil fuels, totaling nearly $ 17 billion each, according to the council.
The information such funds make available to their investors is subjective and not available to the public, said Giachino, whose group is funded by foundations and labor rights groups.
“There is a broader public interest and the need to understand all contributions to climate change in public and private markets,” said Giachino. Private equity firms manage $ 4.5 trillion worldwide and are expected to grow significantlyand “Creating a glossy report tells you nothing.”
She pointed to one of these Report from Blackstone This oil exploration and production accounted for less than 3 percent of the value of the company’s portfolio. The company announced that its renewable energy investments are expected to displace 3.6 million tons of carbon per year.
The report didn’t mention that only one of its operations, the Gavin coal-fired power plant in Ohio, emits more than three times that amount of pollution, or 13.5 million tons of carbon after EPA data from 2020. The report also failed to mention midstream assets like Tallgrass, which routes oil from Wyoming, Colorado and Kansas to a storage center on the Gulf Coast and is building an export terminal in Louisiana.
Blackstone has announced that it will move away from coal, focus on natural gas and invest more in renewable energies. In an annual letter from last year, the company said it had made no new investments in oil sands and coal.
“Blackstone has devoted significant resources to reducing energy consumption and investing in large renewable energy projects over the past decade, which is having a massive positive impact on the communities in which we operate,” a company spokesperson said in a written statement.
Carlyle’s 2020 Sustainability Report Highlighted U.S. and Europe holdings that cut emissions but didn’t mention the 2019 acquisition of the three New England natural gas plants that totaled 1.35 million tonnes of carbon emitted from EPA over the past two years.
A Carlyle spokesman declined to comment.
If anything, private equity firms can be more agile than their public counterparts in responding to climate change because they are able to raise capital quickly and cheaply, said Jay Davis, general manager of Macquarie Infrastructure.
The sale of Macquarie to Riverstone was part of a long-term asset sale plan and was not associated with the sale Macquarie Group’s commitment in December achieve net zero emissions by 2040, he said.
“One of the advantages of a private equity or private company is that you don’t have to deal with disclosure requirements. They’re burdensome and costly, ”said Dave Brown, partner at Alston & Bird law firm. Investors “are already holding these discussions with private equity managers because ESG is integrated into their investment strategy.”
Still, an uneven regulatory playing field could accelerate the current trend towards privatization, said Lee Reiners, executive director of Duke University’s Global Financial Markets Center and a former regulator at the Federal Reserve Bank of New York.
Between 2000 and 2017 The number of listed companies fell from around 6,900 to 4,300While private companies have increased nearly five-fold to over 7,600, according to research by the University of Florida.
“If you create additional ESG disclosure requirements for public companies and do nothing else, you would continue to burden public companies and create incentives to stay private longer,” said Reiners. “We need a way to give private markets some accountability so they don’t get away with it.”