PESP to SEC on Climate Risk Disclosures: Private Equity Must Report Risks and Impacts
June 16, 2021
PESP to SEC on Climate Risk Disclosures: Private Equity Must Report Risks and Impacts
In light of the accelerating climate crisis, the damage from corporate actors is coming under increasing scrutiny. The Securities and Exchange Commission (SEC) opened an opportunity for regulatory action when it requested public input on climate change disclosure, and dozens of climate advocates weighed in (for example Public Citizen/Americans for Financial Reform, Amazon Watch and Sierra Club).
The Private Equity Stakeholder Project (PESP) submitted comment particularly as it relates to private funds managers like private equity.
Private Equity’s Impacts
Private equity firms’ portfolios are both contributing to climate change through energy use and fossil fuel investments, as well as being exposed to risks from climate change. The risks range from weather-related threats to physical assets, harm to frontline communities’ air quality or water sources from fossil fuel operations, the risks to conventional fuel-related assets from the transition to clean energy, and the opportunities and risks of investing in renewable energy sources.
The private funds sector has continued its two-decade growth spurt, reaching $7.4 trillion in global assets under management in 2020. Much of private equity’s capital is drawn from institutional investors with fiduciary obligations to public and private pension funds, all of which need fuller disclosure to understand the risks.
PESP urged the SEC to prioritize private equity’s billions invested in energy,across the fossil fuel industry, including pipelines, LNG export terminals, coal plants, power-generation plants, fracking and drilling. PESP strongly recommended the SEC to act now to protect investors by requiring disclosures by private equity firms of their exposure to fossil fuels and the leverage their funds assume, in order for investors to have adequate information to assess the risks of participating in comingled funds.
Regulatory Parity for Listed and Unlisted Firms
Several of the largest private equity firms are publicly traded, including The Blackstone Group, Apollo, KKR, the Carlyle Group. At the same time, there are large firms that remain privately held such as Warburg Pincus, TPG and Bain Capital. Hundreds of other firms are private with a wide range of assets under management.
For the publicly traded firms, current climate disclosures are inconsistent and vague and do not provide detail either on individual portfolio companies’ or sector-wide exposures to climate risk. At the same time, firms are not disclosing the contributions to climate change from portfolio companies’ direct and indirect emissions (scopes 1, 2 and 3).
PESP urged the SEC to establish disclosure standards across both listed and unlisted firms, to ensure that private market players are subject to equivalent disclosure requirements. Failing to do so would inadvertently further incentivize companies to avoid becoming publicly listed, meaning fewer companies would be subject to disclosures and therefore the publicly available information would be limited – impeding progress on providing investors with adequate information to evaluate climate-related risks.
Private Equity Continues to Invest Billions in Fossil Fuels
In 2020 and 2019, private equity firms expanded their exposure to energy, investing at least $100 billion more, according to the American Investment Council,[1] even with the challenging conditions of the pandemic in 2020 that depressed energy demand.
Over the past decade, energy investments have largely underperformed, posting low or negative returns on investors’ capital, illustrating the combined financial and climate risks of conventional energy investments.[2] Investors’ capital faces acute risk in private equity because the strategies rely on debt, which increases risks and amplifies losses when investments are unsuccessful or market conditions change. Instead, PESP argued, it is necessary for private equity firms to recalibrate their approach to fossil fuels, accounting for the impacts of current holdings and aligning undeployed capital with the IEA’s assertion that, “There is no need for investment in new fossil fuel supply in our net zero pathway.”[3]
ESG Integration is a Myth
PESP warned that to date, private equity’s claims of integrating Environmental, Social and Governance (ESG) factors into investment decisions have been inadequate and investors have insufficient information to distinguish between greenwashing and genuine, meaningful integration of ESG.
PESP also highlighted how climate change’s impacts are uneven, with communities of color and the global poor already experiencing disproportionate harm. Continued reliance on fossil fuel energy will deepen racial disparities because communities of color have long shouldered the burdens of disparate health impacts of poor air quality or water contamination due to proximity to power generation facilities, refineries and oil extraction operations.
For investors to evaluate the risks, asset managers must disclose how portfolio companies have contributed to environmental injustice and their efforts to mitigate and repair the disparities. Simultaneously, private equity firms employ thousands of workers in conventional energy investments, who should participate in a just and equitable transition.
SEC Should Mandate Comprehensive Disclosures
Therefore PESP recommended to the SEC that disclosures should cover:
- Climate risks and impacts for the private equity firm overall
- Sectoral exposure that has climate impacts or risks, particularly to energy and fossil fuels
- Fund-level exposures to energy and fossil fuels, including comingled funds
- Individual portfolio companies’ risks, leverage and contributions to climate change
For each of the above, disclosures should include:
- Disclosures of direct and indirect emissions (Scope 1, 2, and 3) as well as other climate impacts, spills, accidents, explosions, citations for environmental violations
- Plans and timeline with benchmarks to transition to a pollution free portfolio
- Plans to ensure a just transition both for the workforce of and for communities impacted by current fossil fuel holdings
- Political spending and how it aligns with the UN PRI’s Investor Expectations on Corporate Climate Lobbying including:
- Corporate and executive political spending – lobbying and campaign contributions
- Political spending by portfolio companies and their executives
- Membership in trade associations and how those trade associations’ lobbying positions align with the goals of the Paris Agreement
- A qualitative discussion of risk management and a firm’s business model and strategy under various climate-related scenarios, including a 1.5 degree warming scenario consistent with science-based emissions targets, as well as scenarios above 1.5 degrees
Consistent, meaningful disclosure rules for private equity firms would ensure that investors and the public have information to adequately assess the impacts these firms’ investments have in contributing to climate change, and how they are managing the risks and the transition to clean energy.
[1] American Investment Council, 2020-Q3 Private Equity Industry Investment Report
[2] Private Equity Stakeholder Project, “Private Equity Energy Bets Burn Investors,” April 2021, https://pestakeholder.org/wp-content/uploads/2021/04/PESP_Report_PrivateEnergy_March2021-v4-2.pdf
[3] International Energy Agency, “Net Zero By 2050,” May 17, 2021 https://www.iea.org/reports/net-zero-by-2050
