Why and how decarbonization became a megatrend

Rama Variankaval, global head of the carbon transition center at JP Morgan Securities LLC, speaks at the Aspen Ideas: Climate conference on Thursday, March 9, 2023, in Miami Beach, Florida, U.S. Aspen Ideas: Climate is a Solution – A targeted event for the public to interact with and learn from climate leaders whose ideas and actions are critical to solving our collective future.

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Rama Variankaval has been working for twenty years JPMorgan Chase and in late 2020, he moved from the bank’s corporate finance advisory division to lead the bank’s strategy for decarbonisation, which refers to the reduction or elimination of carbon dioxide emissions from a system or process.

He believes that decarbonization is a megatrend for global financial markets, as has digitization over the past few decades.

“There are certain megatrends that affect more than a narrow segment of the economy at any given time,” Variankaval said in a video interview with CNBC in early August. In his career at JPMorgan, Variankaval’s mission has been to identify and review what those megatrends are and then “direct our energy, our efforts, our balance sheets to align with those megatrends.”

He believes that decarbonization is a megatrend because global regulations to reduce greenhouse gas emissions will touch every business around the world.

“Whether you’re an energy customer, a consumer products customer or a retail customer, there’s something about this megatrend that’s going to affect your business model, your business,” Variankaval told CNBC.

JPMorgan wants to be a big lender in this sector. The bank said it aims to finance more than $2.5 trillion over the next decade to achieve climate and sustainable development goals.

The megatrend started around 2020

Variankaval told CNBC that the topic of ESG investing, which refers to environmental, social and corporate governance and describes an investment strategy that incorporates non-financial responsibilities, started to come up “very often” in 2018. The focus on ESG was a harbinger of the coming and increasingly intense focus on climate.

Climate change has been an issue for longer than decarbonisation has been a global financial megatrend, but a number of factors have made decarbonisation a business imperative.

Variankaval said the Paris Climate Agreement, adopted by 196 parties at the UN Climate Change Conference in Paris in 2015, was a “pretty massive catalyst”.

Variankaval says that by 2020, large asset holders, such as pension funds and sovereign wealth funds, will begin to prioritize decarbonisation “with greater intensity”.

As the largest asset holders began to prioritize decarbonisation, their influence declined and influenced the behavior of other financial gatekeepers. Asset managers have begun asking their investees to begin decarbonizing resources and operations. For publicly traded companies, that pressure came in the form of votes on decarbonization issues.

In 2020, JPMorgan officially announced the Carbon Transition Center, which is responsible for designing and implementing JPMorgan’s strategy around climate and sustainability as it relates to its client-facing businesses, and also has a responsibility to engage with those companies about that strategy “because we felt everyone was thinking about these issues,” Variankaval told CNBC.

President Joe Biden signs the Inflation Relief Act with (left to right) Sen. Joe Manchin, D-WV; Senate Majority Leader Chuck Schumer, D-NY; House Majority Whip James Clyburn, D-SC; Rep. Frank Pallone, D-NJ; and Rep. Kathy Catsor, D-FL, at the White House on August 16, 2022.

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The Biden administration’s landmark climate bill, the Inflation Reduction Act, signed into law in August 2022 created a further megatrend, accelerating the flow of capital toward decarbonization and solar, wind, green hydrogen, sustainable aviation fuel, carbon capture, and low-carbon technologies. other areas.

According to Variankaval, the IRA lowered the net cost of capital for these decarbonization technology companies by 5% (500 basis points) because it made it cheaper for decarbonization companies to put together capital stacks or finance deals. Deals that are usually done with a combination of debt and equity have added a third source of capital to the mix: Tax credits and related tax equity.

The IRA occurred as the broader economy slowed as the Federal Reserve lowered interest rates to combat rising inflation. Higher interest rates in the broader economy have offset some of the IRA’s incentives, but even amid a softening broader economy, the IRA has already turbocharged the sector. Variankaval says JPMorgan estimates that more than $100 billion in investments have been announced in the past year alone with direct IRA connections.

There’s also about $50 billion a year coming to climate tech companies through private equity and venture capital funding streams, Variankaval says.

“We see a lot of capital formation happening around climate or decarbonization, and we absolutely want to be the leading bank in helping our clients, whether they’re small clients or large clients,” Variankaval told CNBC.

Variankaval says that while the IRA is unique to the United States, companies and governments around the world are reassessing their industrial policies to focus more on sustainability than ever before.

“I think we’ve gone into a 15-, 20-, 30-year period where efficiency was the number one guiding principle for how you organize yourself,” Variankaval told CNBC. The thinking: “Let’s find the cheapest place to do every part of our supply chain and bring it all together,” Variankaval said.

But now the sustainability of a company’s supply chain is prioritized as much as efficiency. Sustainability is the cornerstone of sustainability.

Along with the heightened global focus on decarbonisation, the Covid-19 pandemic has drawn particular attention to the importance of supply chains, their vulnerability and the need to focus on resilience in supply chain management.

“All of this is coming together in what I think is going to be at least the biggest change in capital flows that I’ve seen in my lifetime,” Variankaval told CNBC.

It’s too early to pick winners and losers

In addition to helping its clients adapt to a decarbonizing economy, JPMorgan also sees an opportunity to bank on the emerging and potentially high-growth sector of climate technology companies.

“We want to be with them at the ground level and then grow these companies with us. We want to be their bank of choice,” Variankaval said.

Right now, Variankaval says, it’s too early to know exactly which climate tech companies are going to be winners and losers.

“In the more traditional way of bringing about change, a lot of research is done in academic labs and government labs, and then people take it out and test it commercially and figure out what works and what doesn’t work,” Variankaval told CNBC.

It took two decades from the invention of the Internet to widespread business adoption, but “when it comes to climate technology, we don’t have the luxury of time to go through a long process,” Variankaval said.

In some segments of climate technology, there are debates about which solutions are better than others that have received near-religious fervor. In his opinion, this is not particularly useful.

“Some may not actually work as promised, and the use cases may not be what we think of today. But some may surprise. Some may be faster, some may take action. It may take longer to take action. So you can see in terms of technologies, but also you have to diversify across time horizons,” Variankaval told CNBC.

“You can’t really pick winners and losers right now. We’re very early. And at least that’s how we think about it.”

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