- The ESG investment trend in private equity remains strong in 2022.
- PE Investors are concerned about the long term profitability of oil and gas portfolios.
- As oil and gas prices soared over the past year, so did investments in the industry, and they are still rising.
In February this year, The Guardian published exclusively a report by two non-profits that detailed the participation of the world’s largest private equity firms in the oil and gas, and coal industries.
Dubbed “private equity’s dirty dozen”, the report featured the names of giants such as KKR, the Carlyle Group, Blackstone, and others. It was an example of the new but quickly evolving naming and shaming trend that started on social media but clearly found fertile ground in traditional media, too.
Now, the Wall Street Journal reports, private equity companies are having to convince investors there is still money to be made in oil and gas. Some firms, the report notes, “have been sending articles, reports and presentations to investors highlighting the importance of oil and natural gas during the transition to renewables. The effort comes as investors continue putting less money into fossil fuels.”
The reason that investors are putting less money into fossil fuels comes down to the energy transition. With company after company—including PE majors and Big Oil—making net-zero commitments and with institutional investors declaring they would dump their oil and gas holdings, it isn’t hard to see why investors are getting wary of the fossil fuel industry.
Campaigning is strong, too. Recently, the chair of the Church of England Pensions Board was targeted for keeping shares in Shell, where he has worked in the past. The Church of England itself has been the target of criticism for not divesting its oil and gas holdings, unlike a couple of other churches in Britain.
Also recently, Reuters reported that an Australian pension fund had divested $133 million worth of investments in oil, gas, and coal. Of course, the biggest news was the Norwegian sovereign wealth fund saying a couple of years ago that it would divest oil and gas holdings, although many missed the small print: the fund was only going to divest from E&Ps, keeping the integrated oil and gas companies in its portfolio.
All in all, however, there has been a clear trend towards exiting oil and gas amid their fast-crumbling reputation as report after report blamed one single industry for all negative effects of human activity on the climate.
No wonder that in such an environment, investors would think twice about where to put their money. For some, it’s a question of being environmentally responsible—the ESG investment trend is not on paper only. For others, it’s a much more pragmatic question of whether oil and gas keep making money over the long term.
According to the new PE army of oil and gas defenders, they will, the WSJ reported this week. Arguments focus on renewables and the fact that they cannot be rolled out fast enough at a scale that will make oil and gas obsolete. A major aid in the argument is the current energy crisis gripping Europe, which has prompted the continent to significantly boost its fossil fuel consumption.
Some noticed that. They also noticed how fast—much faster than expected—oil demand recovered after the Covid lockdowns. They also noticed it returned to growth even though BP had predicted that demand had peaked in 2019. And then BlackRock said in May this year it would vote against climate resolution as they were becoming too extreme or prescriptive.
In Europe of all places, private equity investment in oil and gas is picking up, according to a recent op-ed in Energy Voice by Cleary Gottlieb partner Mike Preston. He reported that as oil and gas prices soared over the past year, so did investments in the industry, and they are still rising.
“Although committed to achieving net zero across its portfolio by 2050, Vanguard doubled down on investment in fossil fuel projects and refused to end support for coal, oil and gas production, citing its fiduciary duty to maximise investment returns,” Preston noted by way of an example.
In the U.S., however, private equity raised some $2.98 billion across seven oil and gas funds in the first half of the year, the WSJ reports. This was 40 percent lower than the amount raised in 12 oil and gas funds in the first half of 2021. Investors appear unconvinced oil and gas have a bright future ahead of them.
The latest news from the litigation department is unlikely to help change that. A federal appeals court ruled that lawsuits brought by states and cities against oil companies should be tried at the state level, not in federal courts. This means that plaintiffs theoretically have a much better chance to sue successfully and it means potential compensation expenses for oil companies.
Of course, the targets of these lawsuits are Big Oil majors, not independent E&Ps, but the fact that states and cities are going after the industry may be enough to discourage some investors. Perhaps private equity firms will need to put a greater effort into promoting their oil and gas funds to keep their often very lucrative affair with fossil fuels going.
