“Private Equity Is Standing in the Shadows”

As pension fund investments in private equity have grown over the past decade, cases like this one — where workers’ retirement savings go into funds that are buying up fossil fuel assets and squeezing them for profit in their final breaths — are increasingly common.

While Avenue’s investment in fossil fuel assets is public knowledge, that isn’t always true, since private equity firms are subject to few disclosure requirements that would shed light on their fossil fuel investments.

Private equity firms have scooped up $1.1 trillion in fossil fuel assets since 2010, according to a recent report by the Private Equity Stakeholder Project, propping up the industry even as the divestment movement has pressured public companies and lenders to stop financing coal, oil, and gas.

“Private equity is standing in the shadows, buying up assets that those other entities are trying to shed,” Alyssa Giachino, author of the report, told the Daily Poster.

These financial moves are being increasingly funded by US workers, since public pension funds have become the most important investors for private equity firms. In the United States, public pension funds manage $4 trillion worth of capital — about 20 percent of the country’s annual GDP — and in 2020, these funds had an average of 9 percent of their capital invested in private equity.

This arrangement poses a huge risk to workers and their retirement savings. Fossil fuel assets are increasingly volatile, as political pressure encourages investors to shed them and governments commit to cutting emissions. Furthermore, climate change poses an existential risk — including to the workers who may be inadvertently funding the fossil fuel industry’s ongoing destruction.

“While the world urgently needs to decarbonize, labor’s retirement capital is still propping up private equity’s fossil fuel industry at the expense of severe ecological devastation and marginalized communities who will be disproportionately impacted,” said Riddhi Mehta-Neugebauer, research director for the University of Washington’s Harry Bridges Center for Labor Studies.

Divestment’s Unintended Consequences

The most effective tool that governments have to limit carbon emissions is to make it more difficult to finance fossil fuel development, and instead fund green energy projects. And while it’s happening much too slowly, the investors, regulators, and climate activists behind the divestment movement are starting to notch major victories.

These efforts have been successful in making it more expensive for fossil fuel companies to finance new drilling operations or infrastructure. One fossil fuel industry trade group recently told federal regulators that the divestment movement’s victories have “negatively affected the industry’s access to capital over the last few years.”

However, those wins are also driving investments to private equity firms, which aren’t required to publish standardized disclosure reports.

One of the reasons that pension managers aren’t doing much to stop their funds from inadvertently funding fossil fuel interests is because many of them are delegating their management duties to those who have a stake in private equity.

“A lot of these pension fund trustees are teachers, government sector workers, or firefighters,” explained Mehta-Neugebauer. “There’s a big learning curve to go from being a government worker or schoolteacher to go into an investment space and suddenly be expected to understand private equity returns. So they tend to defer to the industry experts.”

These private equity interests have undertaken massive campaigns to sell their products to pension funds, touting high returns that looked appealing after the Great Recession left pension funds struggling to make up shortfalls.

“If you just look at the returns, you might miss the fact that your fund is invested in a pipeline or export terminal that’s causing all sorts of community harm and environmental harm,” Mehta-Neugebauer added.

Such private equity funds are also structured in a way that exposes pensioners to disproportionate risk. Private equity is already highly leveraged, meaning that when a firm purchases an asset it is doing so with a large amount of debt, rather than a lot of equity. Much of the equity that is put forward comes from institutional investors, such as pension funds, rather than from the firms themselves.

So if these fossil fuel assets end up losing money, the losses hit the investors with the biggest equity stakes, which in many cases are pensions.

It is also often challenging for pension funds to divest from private equity once they invest in the sector, because they commit their capital to the firms on fixed time scales, usually of at least a few years.

The Power of Pensions

But if pension funds are increasingly tied to oil, gas, and coal through private equity investments, that means these funds also have a chance to shape these fossil fuel investments.

“Pension funds are uniquely positioned to influence the private equity industry, because they are a substantial source of capital,” said Giachino.

Pension fund managers are supposed to make investment decisions based on their fiduciary duty to maximize returns and minimize risks. Increasingly, pension funds are recognizing that fulfilling this duty involves divesting from fossil fuels, both because those assets are underperforming and because fiduciaries recognize that climate change will harm the workers invested in the funds. Pension funds in Maine, New York City, New York state, and Rhode Island, as well as Quebec and the Netherlands, have begun divesting from fossil fuels in the past few years.

While fossil fuel interests and corporate politicians claim fossil fuel divestment will hurt workers’ savings, such assertions have been repeatedly disproven. A report by BlackRock surveying institutions that had divested from fossil fuels, including ten public pension funds, found: “Of investors measuring the impact of fossil fuel divestment (4 of 13 respondents), no investors found negative performance from divestment; rather, [they saw] neutral to slightly positive results.”

According to a recent report by Mehta-Neugebauer, pension funds should also be requiring the private equity funds where they are invested to disclose their fossil fuel assets.

“Labor’s retirement capital has failed to adequately hold their private equity managers accountable for the damage they have already caused the planet, and they continue to enable the industry’s greenwashing by refusing to publicly disclose all portfolio company-level indirect and direct emissions, comprehensive energy transition plans, and executive lobbying,” Mehta-Neugebauer told the Daily Poster.

Such disclosures could be useful, since private equity firms are increasingly “rebranding [themselves] as the next big thing in green and socially minded money management,” according to a recent story by Bloomberg Businessweek. Requiring private equity firms to disclose their fossil fuel investments could help combat such greenwashing.

Gary Gensler, President Joe Biden’s chair of the Securities and Exchange Commission, the federal agency that regulates public and private companies, has also signaled that the agency will move to require more disclosure from private equity.

“Every pension fund investing in private funds would benefit if there were greater transparency and competition,” he told the Financial Times in October.

In the meantime, some pension managers are already taking steps to require such disclosures. Brad Lander, the newly elected comptroller of New York City, has suggested that he won’t follow in the footsteps of his predecessor Scott Stringer, who massively increased private equity investments while simultaneously divesting from fossil fuel stocks. Instead, Lander has pledged to also pursue divestment from the fossil fuel investments of private equity and hedge funds.