Despite a long history of investments in fossil fuels, global private equity firm Warburg Pincus is showing signs of cleaning up its image with a recent investment in ClimeCO, a decarbonization advisory firm specializing in carbon offsets, and a $320 million equity commitment in Viridi Energy, a renewable natural gas (RNG) company.
While at first glance these investments appear to be a move into clean energy for Warburg Pincus, carbon credits and RNG are inherently false solutions. The offsets (or carbon credits) market is largely unregulated and faces criticism from a range of stakeholders. In addition, so-called “renewable” natural gas is a costly, high carbon intensity, and relatively scarce “low-carbon” fuel.
Warburg Pincus announced in mid-2020 that it would cease investing in fossil-fuel-related companies in its upcoming flagship fund but then proceeded to acquire two new upstream fossil fuel assets late last year. The private equity firm has since continued to add on more drilling assets in 2022. Warburg Pincus has a long history of investing in dirty fossil fuel assets; as of 2021, the firm held around 30 energy companies, nearly 70 percent of which are upstream drilling and exploration assets.
Without disclosing metrics or details on emissions, Warburg Pincus’ 2021 ESG Report states 74 percent of its scope 1 and scope 2 portfolio emissions are from investments in the energy sector.
Private equity industry pledges on climate lack detail and provide no clear transition plan. Like Warburg Pincus, private equity firm Apollo made a similar announcement to move away from fossil fuels, and the Blackstone Group said it would avoid upstream investments. The Carlyle Group announced a Net Zero 2050 target but has also committed to maintaining investments in oil and gas.
The buying and selling of carbon credits are utilized as a financial tool, but the environmental benefits are dubious. In fact,research shows carbon credits result in significant accounting, environmental, and community problems. Along with the issues associated with the undeveloped and underregulated offsets market, numerous studies show that most offset credits do not result in real emissions reductions.
Leading academic experts have concluded that if companies are to invest in offsets as a market tool towards decarbonization, it should be done only after cutting emissions as much as possible throughout the entirety of their business operations. Then, companies should only invest in offsets that focus on long-duration carbon removal rather than emissions avoidance.
Renewable Natural Gas
“Renewable” natural gas projects have seen a steady increase in the past ten years with investment firms and large energy companies investing as a way to decarbonize their operations and as a strategy to achieve net-zero goals.
RNG has a mixed environmental record. It is a product of organic matter and is therefore considered biogas, which is interchangeable with conventional natural gas as a fuel. RNG is traditionally sourced from landfills, sewage plants, or livestock operations. Currently, many facilities have systems in place to capture these organic methane emissions and use them to power onsite operations. However, capturing the emissions to sell to a broader market raises a slew of concerns.
Creating markets for livestock operations’ emissions could create a perverse incentive to continue generating emissions rather than a focus on cutting emissions. Sequestering methane from livestock and selling for offsite use means pumping the gas through the same hazardous and leaky pipelines as conventional natural gas.
RNG is typically made of 90 percent methane gas, a high carbon intensity fuel that when burned in engines or stoves, still emits extremely harmful chemicals into communities and the land. While replacing some conventional natural gas with RNG could reduce net methane emissions, RNG does not provide a path to a net zero emissions energy system, as it doesn’t compare to limiting the use of high carbon intensity emitting fuels and transitioning to sustainable clean energy.
Private equity must transition
Warburg Pincus and other private equity firms have work to do in order to align with science-based climate targets and limit global warming to the 1.5 degree Celsius scenario. These firms must disclose their full portfolio and associated emissions; cease oil and gas expansion; disclose emissions reductions targets and progress; decommission oil and gas operations; and develop, execute, and report a clear and just portfolio-wide transition.