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Episode 195: The Carbon Transition with J.P. Morgan's Rama Variankaval
Today's guest is Rama Variankaval, Managing Director & Global Head of Center for Carbon Transition and Corporate Finance Advisory at J.P. Morgan. We cover various topics, including the Center for Carbon Transition's mandate, Rama's stake in addressing climate change, and how ESG ties into decarbonization. We also discuss how externalities should be prices, our dependency on fossil fuels, and trusting corporate climate commitments.
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For starters, just talk a bit about the Center for Carbon Transition (CCT) and what it does and a little bit of color on how it came about as well.
That's right. We love acronyms at banks by the way. So the other group I actually run under the group, which is called Corporate Finance Advisory or CFA for short. Anyway, the CCT itself is only about 18 months or so old. And it was the culmination in some ways of a lot of work the firm was doing kind of in 2019, 2020 about figuring out our own strategy when it came to ESG broadly, sustainability or carbon transition, however, you want to view it. We continue to have a number of experts in other parts of the bank. In our corporate sustainability group, in our risk management group, in you know, other parts of the bank who are subject matter experts when it comes to these issues.
But we felt we needed a group that was within a line of business where we could house a lot of the relevant content market intelligence. All the other things that we normally provide to our clients, house it within the line of business, within the investment bank in my case, and to make it part of the DNA of our sales so that when our sales force, whether it's investment bankers or commercial bankers or marketers of products, et cetera, when they go talk to their clients, you know, they have full access to all developed content on this topic. So that was kind of in the thought process.
We in 2020 made a bunch of commitments that we think are pretty material for JPMorgan. One was to Paris align our financing book. The second was to either finance or facilitate $2.5 trillion of, you know, green or sustainable projects or companies over the next decade. We wanted to house these commitments and the accountability for these commitments within the business, as opposed to in a corporate function where it might seem like it's somebody else's problem.
So we wanted in many ways, make it the problem of the people who are, you know, accountable to go sell the products of the firm to our clients. So those are kind of a couple of important considerations if you will, that we decided to create the CCT. And the mandate is very much a function of the catalyst. So our mandate is twofold. One is we implement the existing commitments we've already made, think about how we would implement them, and then constantly think about what are the commitments would actually make sense for our firm to put out there. What's reasonable, what's important, what's ambitious.
So that's one part of it. I think of that as doing the housework. And then there is the client engagement piece because at the end of the day. If you look at our credentials on a carbon footprint perspective, a very tiny fraction of it is kind of in a direct carbon footprint of JPMorgan Chase. That's pretty minuscule piece. It's really the attributed carbon footprint of the clients that we engage with. So it's our scope three if you will.
And we want to engage with our clients. So the only way we can achieve our targets. And fulfill our commitments is if our clients make progress on their own journey. So that's kind of, you know, the dual mandate we have, you know, do the work for the house and then engage with clients, help them with whatever financial services we can provide to help them transition their business to a more sustainable place or a lower carbon footprint place and in turn, help us achieve our own commitments.
That there's kind of this short clock and that no matter what we do, things are gonna continue to get worse over the next, you know, years and decades to come. But in the longer term, we still have an opportunity to ultimately lead on a path back to, you know, to harmony and to the thriving of life on this planet. So I'll stop there. And I'm curious, you know, whether with your personal hat on or with your JPMorgan hat on, would you agree with that existential risk? Are you aligned in terms of the timelines and the magnitude? Like how worried are you with your Rama hat on and how worried are you as a firm?
I would say that everything you said was just factual. I don't think of that as necessarily subjective. And that's by the way, as an individual and as a firm. So clearly it's an urgent issue, clearly, it's an important issue. And the way we think about it is, you know, we as a firm have a role to play. We have, as an industry, have a role to play, right? Unlike maybe other big changes. In the world, historical changes, you know, different revolutions. Economic revolutions. This one especially seems highly capital intensive.
It depends on whose estimate you want to look at, but it's pretty clear that the world will need a lot of capital to actually end up avoiding some of the, you know, catastrophes that you were pointing to which puts, I think an incremental responsibility on the financial sector. 'Cause you know, clearly we are, as a firm, for example, we are a provider of capital.
The largest fund of fossil fuel projects, correct?
By some definition, yes. We are also the largest financer of many other sectors because we have a very big balance sheet. If you do the math, based on public numbers, about 4% of our wholesale lending is to oil and gas, but there are lots of other economic sectors where that number is over 10%. But factually true. If you simply compare absolute numbers, we are the largest.
Yeah. So it might be 4% of your total, but it's larger than anyone else.
Correct. As is our balance sheet, which is larger than anyone else's. So science matters, math also matters. [Laughs]. So the role we have, as I was saying is, you know, we can direct capital to the right places, our own capital obviously. But also we have a pretty good map of, you know, what other capital providers, risk preferences are and reward anticipations are. So I think our role is kind of to figure out the best mapping, if you will, between the capital seekers.
We're trying to decarbonize the world and the capital providers. Again, some of it will come from us. Clearly not all of it can come from us, but we can kind of create the map and then do the best possible matching of those. So those are the kinds of things that I spent a lot of my time thinking about and as a firm we spent a lot of time thinking about.
Can we get some more context on CCT? So what is the mandate of the group? How big is the group? What kind of skill sets you have on the team and what types of services are you providing and to whom?
The group is growing fast, call it about 15 bankers globally at this moment in time. It was like 3 about 12 months back. And I'm pretty sure we will continue to grow. The way we think about it people and balance sheets are kind of the two most valuable assets and we are deploying both, right? So again, I think of this as a pretty multidisciplinary problem that we are tackling. So we need experts from the capital market side.? People who understand how the markets work and how to again, act as financially intermediaries in the most efficient way.
We need people who understand climate science. We need people who understand the shareholder engagement and stakeholder engagement aspects of the search so we are kind of trying to build a pretty multidisciplinary team. Again, not all of them will be housed within the CCT umbrella. We have climate scientists in our asset management practice and we have folks who come from an environmental advocacy practice within our corporate sustainability group, et cetera. So we are trying to bring into the firm all kinds of relevant expertise that will be needed to solve the problem.
And what is the mandate of the group?
Part of it is to make sure that we can implement the commitments that we have put out as a firm. So for example, our Paris commitment, we are in the process of implementing it. And the second is to engage with clients. I think of our clients as largely falling into camps, right? One is those clients, many of our legacy clients whose business model has a liability, embedded liability. An ESG liability, a climate liability, however you want to think about it.
And most of them recognize that they have the liability, most of them recognize the need to transition away from the liability. 'Cause that makes sense for them. And so for that group of clients, we want to engage with them and provide again, you know, the financial tool kit we have for their benefit to help them transition. That's one group of clients that we engage with. The second group of clients is maybe newer companies, largely speaking, not all of them who have a business model that's actually part of the solution where the climate is not a liability, but it's an asset. And so we want to engage with them.
One, we want to provide banking services to them. We want to be their bank of choice. Two, we also think that these solutions that these folks are providing can be for developing can be pretty useful to those legacy clients who are in need of these solutions, again, playing the role of matchmaker. Which again, we do as a normal course of business. So those are the types of activities that the groups mandate to do and that's what we are doing I would say on a daily basis.
Why now? Because people have to talk about climate since, I mean for decades, right? Exxon knew, the old scientists knew, and lots of people knew. The symptoms are getting more visible relative to how they're gonna be, you know, in a decade or two decades, they are peanuts. So what is the compelling reason now or the forcing function, if you will, to establish this group and formalize the efforts?
Look, it's a good question. Again, the issue of climate or, you know, the broader environmental issues or social issues or governance issues, are clearly not new to JPMorgan. We have had many functions with, you know, which have focused on the issue. What is new is to start thinking of it as so core to the business that we want to create, again, a group within the line of business and try to again, make this part of our DNA.
Regardless of what our other banking product I'm selling to have this topic embedded as part of that sales effort, that's new thinking for sure in the last couple years. What's led to it again, I would say it's a confluence of factors. You know, we are participants in the financial markets. So to us, a lot of the signals cut from the financial markets, right? As I was alluding to at the beginning, we have been seeing now, at least for the last handful of years, a lot of capital flows in the markets are being defined by these factors.
Investors are increasingly thinking about it as a relevant factor if not a primary factor in their investment decision. Our clients, the issuing clients on the other hand are increasingly thinking of this is part of business strategy. It used to be that maybe a few years back people thought of as sustainability strategy as to the side or independent of business strategy. Now, increasingly those things are merging. And so it just felt very natural for us that for our own business, we need to start merging those two things. What's our kind of, you know, sustainability strategy and what's our business strategy, They seem to have merged.
You talk about the Paris commitments and the commitments that JPMorgan's made as a firm and then you talk about client engagements and helping them navigate their own plans to reach their commitments. But you mentioned earlier in the discussion that you came at this through ESG first. Can you talk a bit about how ESG fits relative to climate change, net-zero, decarbonization? Is it separate and distinct? Are they intertwined? Like how- how do they interrelate if at all, and how did you find your way from ESG into CCT? I just wanna understand how that threading interrelates.
Candidly, my answer to that is different depending on the day of the week. There are days when I feel like this acronym of ESG is much like an acronym that was popular maybe a few years back called BRICS, Brazil, Russia, India, China, South Africa, and somehow became a little bit of a buzzword in emerging market investing. The reality if you kind of paid attention was each of these countries and economies is quite different.
Yes, there are some commonalities, but they're quite different. And I don't think anybody with, you know, serious capital to deploy was thinking of these things as just one thing. If you're serious, you went and did your work on any of those individual countries’ economies. I think ESG, to some extent, I feel suffers from that same issue, right? I think each of these factors is quite important by themselves. Maybe if you roll the clock back, you know, a decade or so, none of them were rising to the level of importance that they deserved and hence someone thought that maybe if we club them all together, collectively, maybe you'll get the attention it deserves. I don't know, I'm just speculating here.
But I do feel like we are at a point where maybe the acronym has served its purpose. When we go talk to other issuing clients or investing clients, folks who are very serious are thinking of it as quite distinct. And thinking about if I'm on the investor side, if I go talk to investors who have spent enough time and resources thinking about it, they're not relying on ESG as a factor, they're relying on. I have done the work, to me climate matters, and here's how I think about climate as a factor impacting different business models, et cetera.
So I am increasingly again, by no means suggesting that social issues are not important. In fact, quite the opposite, they're quite important and we are doing it a disservice by clubbing all of these together. A lot of these assessment providers give like, you know, hey, here's my assessment on an organization's ESG credentials. I can see that increasingly it's becoming more and more difficult. How do you balance these various issues? And is it okay to be average on each of these factors or is it better to be really good on one but not- not great on the other?
Like how do you think about these issues and they're so distinct. I think it's a problem with the acronym, I worry. So again, pretty long-winded way of saying, I think the more I think about it, the more I feel we need to major in kind of the E part of ESG if you will. And even within the E to be very frank, we are majoring on the climate part of it. Obviously, there are other issues. That doesn't mean though the other issues are not important, it's just that we need to go deep on each as opposed to just kind of stay superficial with just a broad umbrella ESG.
This is more of a philosophical question. But one issue I have with ESG is it's almost like, oh, there's this set of funds over here and that's like capital with a conscience let's say. But it's kinda off to the side and it's a small percentage of the total capital and the rest of the capital can just chase the almighty dollar and do whatever it wants. I mean, do you share that worry? And how do you think about our overall financial system and the system of capitalism and how conscience does or should fit into it?
I worry about that, but I also am pretty optimistic that it's a transient phase. Because it's very, in my mind, maybe this is too simplistic, but these are not unrelated issues. If there is a business that is creating negative externalities. Again, we're not pricing explicitly today, but if you can see that, you have to realize that soon enough there will be a price on that. And they'll degrade the business model and that'll impact your investment if you're thinking of investing in the business model.
To me, it's just a question of time horizons. If you're thinking of, "Oh, maybe I can kind of make a quick buck in the next three months before others realize there is a problem". But there are lots of other issues with short-termism in the financial markets. And this is not the only area. But if you have a long enough time horizon, then it's almost impossible to not think of these things as really fundamental drivers of asset valuations and to take that viewpoint.
One point I'm having trouble understanding is if essentially there's no price on the externalities and the atmosphere is a trash dump for this pollution and you can dump as much of it as you want. And it's as if it doesn't exist, but it does have these second and third-order effects that you don't necessarily care about in your own self-interest because when you put it up there, that'll be for some future generation to worry about it or some developing country, or not me in my penthouse, in Manhattan, right? And so what incentive does the market have to price it in if it doesn't have a price? Like why will it be priced in without regulation?
The anticipation of regulation. The anticipation of consumer preferences changing, right? I could keep building a product. Which has negative externalities, but I take the risk that either I'll be regulated away or consumer preferences will change such that my product isn't attractive anymore. So those are pretty strong incentives or disincentives as you want to think about. And again, asset valuations, asset prices today are just a function of what the future possibilities are. And you kind of discount that back today.
So again, our own Paris commitment and others have similar commitments. That is a way. That is a market mechanism of doing exactly that. When we say that we have a Paris commitment, we are measuring the carbon footprint of our clients. And then we are put a 2030 target on where that carbon footprint of the JPMorgan client portfolio needs to be. That's a way of the market. Think of JPMorgan as a market participant putting a price on carbon, implicitly.
Because if I have to take my portfolio-level carbon footprint and reduce it over time, then I am going to price my services with a view to the carbon footprint of the counterpart or the client. That's just a market mechanism. And that mechanism will percolate. Other banks have come up with, you know, similar ambition. Some have started publishing methodologies. We have started implementing these methodologies a few months back. So for us today, it's already part of the decision-making.
I think others are following suit from what I can tell, other capital providers whoever they are every one of them are on this journey in some way to start baking in a price of these externalities, right? It just happened. And so I'm pretty optimistic. Again, I'm by no means advocating that zero need for a regulation, the market will figure this all out by itself, I'm not. All I'm saying is the market can be a pretty powerful force and a pretty powerful incentive mechanism.
I love the saying, “slowly and then all at once”. I feel like a lot of times that's how this type of change plays out. And given where you sit, you have a closer view to this than arguably anybody 'cause on the one hand, you know, I think these huge moneymakers, these big empires that power the industrial revolution and everything like they're gonna kind of hang onto their nest egg as long as they can. And they're playing an important role, but directionally at some point like things change slowly and then all at once. And I'm very confident that when they change, they're gonna change fast. But I guess my question for you is what will it take to flip and how far away are we from that flip occurring and what are the key blockers that are preventing us from getting there sooner?
Again, maybe I'm being actually optimistic, but I think the change has already started. And again, look, we spend, I spend all my day obviously talking to our clients and we are JPMorgan Chase obviously has not just the visibility into corporate behavior but also retail behavior as a large retail bank. I see behavior change again across the board. And I feel pretty optimistic. Again, what people do worry about and complain about is the pace, and is the pace fast enough to what might be really required? You could definitely say maybe it's not.
But I see an acceleration that every day I talk to a client, I'm quite amazed how much time our clients are spending thinking about this, thinking about how to retool their own business strategy to make sure that they are, again, you could say it's a value-based decision, maybe it is, maybe it's not, but it's a valuation based decision. They understand or they fear that if they do not pivot fast enough there will be an impact on valuation. So again, I see in my job every day, I see the cost for optimism. And by the way, it's not just in the energy complex, it's in our transportation infrastructure, it's in our food and ag infrastructure, it's across the board.
Do you think we're moving fast enough to decarbonize?
I think we can do more. I think we need to go faster. As again, as a global macroeconomic matter, we need to do more. Should you look at these charts regularly, look at where we were in 15 and where we thought we needed to go and you look at, we take a mark to market today, clearly we haven't done enough. So I think the evidence is we haven't moved fast enough in recent years even though we knew this is an important issue. So yeah, we need to go faster, no doubt about that.
If you could wave your magic wand and change one thing that would help accelerate that progress, what would you change and how would you change it?
Look, again, policy stuff, creating the right incentives I think is a big part of it. I think that can always be a very, very important tool. So carbon tax would be top of the list clearly. More consensus among capital providers on how to value some of these externalities. I don't know whether it's, again, the regulation that drives that or the development of the markets. Is there going to be a more robust market price on carbon, et cetera? I don't know what the catalyst is, but again, creating better mechanisms for capital to flow to the right areas. So market infrastructure improvements would be fantastic, and obviously, we have a role to play. It's not something that we have no control on. And I think we are trying to play a role in that. So those are the things that come to mind.
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