Private equity firms and money managers are increasing their direct oversight of renewable energy startups that have been left struggling thanks to soaring demand for fossil fuels, slower-than-expected technological development and supply-chain shortages of materials and equipment. Pooja Goyal, CIO at the infrastructure subsidiary of multinational private equity, alternative asset management firm Carlyle Group, has revealed that his company has been negotiating key components on behalf of its portfolio companies.
"No matter how much procurement you're doing (at the portfolio company level), you're going to be pretty much irrelevant to the suppliers," Goyal said at the CERAWeek by S&P Global conference in Houston.
But these money managers are going beyond the procurement side of things, with more firms leveraging their networks for collaboration and offering management advice.
"Beyond capital, companies and founders are looking for investors like TPG that can deliver the full private equity toolkit," Steven Mandel, business unit partner at TPG Rise Climate, said in an interview.
"Managing geopolitical risk, navigating how to leverage AI, scaling technologies, and ensuring you have a fully-funded business plan" are all things which cleantech CEOs are seeking help with,'' Gabriel Caillaux, head of climate at equity investor General Atlantic, has told Reuters.
Renewable Energy and ESG Struggling
The renewable energy sector is going through a rough patch thanks to high-interest rates and relatively high fossil fuel prices. The iShares Global Clean Energy ETF (NASDAQ:ICLN) has declined -12.4% in the year-to-date and -27.4% over the past 12 months, a sharp contrast to the +9.6% and +31.4% gains by the S&P 500 over the timeframes.
However, the clean energy sector is one of the biggest beneficiaries of the trillion-dollar Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). Last week, Bloomberg reported that the Biden administration will award ~$6.3B through dozens of grants that will go into hard-to-decarbonize industries in a bid to cut emissions. The funding is aimed at industries that account for close to 25% of U.S. emissions, but are challenging and expensive to shift to lower-carbon technologies. Nearly $5.5B of that money will come from the Inflation Reduction Act. Related: Brent Crude Tops $87 as Geopolitics Threatens Tight Supply
Companies that have applied to the Department of Energy for the grants include Cleveland-Cliffs (NYSE:CLF) and Century Aluminum (NASDAQ:CENX). CLF is proposing to make steel using hydrogen, as well as expand steel production for electrical transformers and electric vehicle motors at its Butler Works plant near Pittsburgh while Century Aluminum has proposed the construction of the first primary aluminum smelter in the U.S. in decades.
Meanwhile, the environmental, social and governance aka ESG investing and financing boom of a few years ago is dead. After spiking in 2020 and 2021 amid the COVID-19 pandemic with low oil prices driving more investments beyond fossil fuels, ESG funds only managed to pull $68 billion in net new deposits in 2023, a sharp drop from $158 billion in 2022 and $558 billion in 2021.
Red states, led by Texas have gone full anti-ESG. Three years ago, Texas passed two laws that restrict the state from doing business with companies that are deemed to be hostile to fossil fuels and firearm industries. The Republican-leaning state has now banned Wall Street titans BlackRock Inc., Citigroup Inc. Barclays Plc as well as members of Net Zero Banking Alliance that have committed to "financing ambitious climate action to transition the real economy to net zero greenhouse gas emissions by 2050."
Interestingly, the anti-ESG pressure is being felt amongst government circles.
The Securities and Exchange Commission (SEC) recently approved new requirements that public companies disclose their greenhouse gas emissions without a key provision that was strongly opposed by business groups. Finalized in a 3-2 vote, the new rule would require companies to report on their Scope 1 and Scope 2 emissions i.e. emissions from sources a company owns directly and indirectly from the source of energy it purchases and uses. The original proposal, which was vehemently opposed by the business community, included requirements to report Scope 3 emissions i.e. emissions produced up and down the supply chain. Companies pointed out that reporting Scope 3 emissions would be too expensive, complex and burdensome.
In the new SEC rule, companies with at least $700M in shares outstanding are required to, ''…disclose material climate-related risks starting for FY 2025 and material Scope 1 and Scope 2 emissions beginning in FY 2026; climate risk disclosures will take effect a year later for companies with at least $75M of shares outstanding, and must begin disclosing material emissions data in FY 2028.''
By Alex Kimani for Oilprice.com
Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More