Blackstone’s $5bn energy fund targets European LPs with Article 8 compliance

The firm seeks to draw climate-friendly investors in Europe after committing BEP IV to EU sustainability regulations.

Blackstone’s latest energy fund will adhere to European ESG regulations to attract new investors, according to sources familiar with the firm’s strategy, affiliate title New Private Markets reported.

Blackstone Energy Partners IV will be invested in compliance with the EU’s Sustainable Finance Disclosure Regulation as an Article 8 fund, the New York-based firm said in a document seen by New Private Markets which outlined the fund’s strategy. Blackstone’s energy group will report ESG and climate-related data, including carbon emissions, from BEP IV investments, the document said.

Sources confirmed that the move by Blackstone is to secure commitments from climate-friendly European investors. BEP IV, which launched in December targeting over $5 billion, is on pace to hold first close by the end of the second quarter, the sources said.

Last March, the EU enacted its SFDR framework, which increases ESG reporting requirements for public and private fund managers. The new regulations force asset managers based overseas to comply with European ESG standards or risk losing a well-funded investor base.

While a second round of regulations is scheduled to be released in July, current SFDR rules describe Article 8 funds as investment vehicles that “promote” the environmental and social benefits of companies with “good governance practices”. The SFDR also established Article 9 rules for funds sold as designated ESG strategies with “sustainable investment as its objective”

In a July 2021 analysis of 81.6 percent of funds sold in the EU, Morningstar, a financial data provider, found that 21.8 percent of investment vehicles were Article 8 compliant while 2.8 percent were so for Article 9.

For over two decades, Blackstone, which manages around $881 billion in assets, has raised over $11 billion to invest in the global energy sector. The firm’s investments range from oil and natural gas drilling and pipelines to power transmission lines, offshore wind farms, and battery storage projects.

But in recent years, amid commodity price volatility and growing pressure to account for climate change, Blackstone has seen returns from oil and gas production investments sink, and it has sought to reduce its exposure to the sector. The firm’s last investment in fossil fuel production was in 2017, when Blackstone partnered with Sanchez Energy Corporation to buy a 155,000-acre fossil-fuel plot in Texas for $2.3 billion.

BEP III, Blackstone’s most recent energy fund which closed on $4.25 billion in 2020, has focused investments on clean energy assets including the solar company Array Technologies and Aypa, a battery storage developer. Since 2019, Blackstone said it has committed $13 billion to investments the firm views as “consistent with the broader energy transition”.

According to Blackstone’s most recent regulatory filing, BEP III, which is still in its investment period, is generating a total net internal rate of return (including unrealised investments) of 64 percent, while BEP II, a fund closed in 2015, has returned 4 percent.

Blackstone has formally excluded oil and gas production investments for BEP IV, the fund strategy document said. The decision was made to support the fund’s strategy to “accelerate the transition to cleaner energy”, the document said. Blackstone’s investment ban for oil and gas production was first reported last month in a Bloomberg article.

Blackstone declined to comment on the fundraise, but David Foley, global head of Blackstone Energy Partners, told New Private Markets that excluding oil and gas production investments from the energy group’s strategy “will remove an impediment for certain groups of investors that otherwise find the strategy and returns attractive”.

“Growing global population and economic growth are driving increases in energy consumption and CO2 emissions, increasing the importance of accelerating the transition to cleaner forms of energy and improving energy efficiency,” Foley said. He added that the firm still believes it’s “essential” to continue investing in midstream energy assets such as oil pipelines, storage facilities and liquified natural gas terminals.

Starting next year, the firm’s energy group has committed to measuring carbon emissions from BEP IV investments in which Blackstone takes a majority stake, according to the fund document.

Blackstone’s energy group also said it will meet recent ESG commitments for new majority acquisitions set for the entire firm, including the goal to reduce emissions by 15 percent within the first three years of ownership and achieving one-third diverse representation on portfolio company boards of directors.

Over the past year, Blackstone has expanded the number and reach of ESG professionals across the firm.

In November, Blackstone named Jean Rogers, founder of the Sustainability Accounting Standards Board, as its new head of ESG. In July, the firm appointed Devin Glenn as global head of diversity, equity and inclusion, while also announcing in April four new ESG-related hires, including chief sustainability officer James Mandel.