SUSTAINABLE INSIGHT

Shifting Ownership Patterns of Fossil Fuel Assets and Decarbonisation

Tue 25 May, 2021 - 12:29 PM ET

Fossil Fuel Deals Dwarf Renewable Financing – but There Are Signs of a Shift Private equity energy investments have focused heavily over the past decade on fossil fuel assets, such as thermal coal or oil and gas infrastructure. There have been significant losses on many of these investments in recent years due to the downturn in the oil and gas sector, particularly US shale, to which many private equity firms have significant exposure.Investments in the fossil fuels sector have dwarfed investments in solar and wind energy, but there are signs that this is beginning to shift as returns on renewable project development become increasingly attractive and project risk eases through policy support and market intervention by governments.Trend Towards Privatisation Heightens the Importance of DecarbonisationPrivate equity firms have increasingly been buying fossil fuel assets as others have looked to divest. Some firms have looked to capitalise 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. Robust demand in such key regions as Asia-Pacific supports profitability of these assets. Despite some pressure from institutional investors, there are only limited mechanisms to drive private equity firms towards emissions reductions.Increased shareholder and investor activism in recent years has put pressure on companies and financial institutions to divest fossil fuel assets. Private companies and private equity firms are less exposed to these trends but are not fully insulated, and many limited partner institutional investors are pushing for deeper adoption of ESG principles into investment practices. Where this aligns with potentially strong expected financial returns – such as with solar and wind project development financing – this could create a supportive environment for low-carbon financing activities.

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