Private equity has been slow to go green, but that may be changing

Private equity may be starting to play a bigger role in the global transition to a low-carbon economy, says Fitch Ratings.

In a new report, the rating agency noted that private equity investors have traditionally devoted much less capital to renewable energy than they have to developing and exploiting fossil fuel assets — but there are “signs this could be beginning to shift,” Fitch said.

Until recently, private equity investors haven’t had the same incentives to pay attention to environmental, social and governance (ESG) considerations, the report noted. As a result, they’ve invested heavily in fossil fuel assets that have been shunned by increasingly environmentally sensitive public companies and financial institutions.

“Private equity firms have increasingly been buying fossil fuel assets as others have looked to divest. Some firms have looked to [capitalize] on the falling value of fossil fuel assets in search of attractive returns, despite the risks posed by tightening climate regulations and other pressures on energy prices,” Fitch said, noting that strong demand from regions such as Asia-Pacific has supported the profitability of these assets.

However, the incentives are starting to shift.

For instance, Fitch said that institutional investors, such as pension funds, are increasingly demanding greater integration of ESG principles in their private equity investments. For example, over 80% of European assets are affected by these policies.

“Pressure from limited partners and other investors to integrate [ESG] factors is growing,” the rating agency said.

At the same time, investments in renewables are generating more attractive returns.

“Private equity deals in solar and wind projects are growing in scale, with investors increasingly attracted to the higher returns offered in new project developments over established ones,” the report said. “This is supported by increasing technology and market maturity, economies of scale and policy support.”

The extent to which private equity becomes more ESG sensitive could have a large impact on the transition to a lower-carbon economy, the report said, “given [the] volume of assets under management and ability to raise and deploy capital rapidly.”

“We expect global private equity assets under management to more than double by 2025, so the pace of adoption of climate considerations by the sector could have wider repercussions for low-carbon transition,” Fitch said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.