JPMorgan Strategy Shows US Climate Act’s Effect on Wall Street

(Bloomberg) -- Inside the asset management arm of JPMorgan Chase & Co., a private equity group is busy positioning itself for a seismic shift in government climate policies.

Formed at the start of last year, the team is now studying details of the Inflation Reduction Act to figure out which clean technologies are best placed to benefit from the huge US climate package. 

“It’s the level and duration of the incentives that are meaningful, and really expands the remit of what we’re doing,” said Tanya Barnes, co-lead of JPMorgan Asset Management’s new strategy. She and her co-workers are looking to invest an initial $150 million, though the ultimate commitment may be multiples of that. The firm declined to comment on the size of the investment strategy in 2023.

JPMorgan isn’t just responding to IRA, but to its ripple effects across the globe. Europe is now racing to match the US climate bill with its own measures. And China, which already boasts the world’s biggest installed capacity across most clean-energy value chains, is continuing to pump vast sums into the technology. For investors, the policy commitments represent a pivotal moment in history, and the race is now on to get a foothold ahead of the pack.

Barnes said her team is looking closely at technologies that have the potential to reduce energy demand, which is why the asset manager recently invested in a startup that helps cut the carbon intensity of copper mining. The IRA could also boost carbon capture, a technology yet to scale to a proven economic model, she said. Other sectors getting attention from Barnes’ team include so-called community solar companies that seek to expand renewable energy to places with barriers to access, such as low-income and indigenous communities.

Europe has long considered itself a global leader in green initiatives, but with IRA potentially on track to inject $500 billion over a decade into the US clean-energy landscape, it suddenly finds itself on the back foot. 

That’s led investors in Europe to review their portfolios. Impax Asset Management Group Plc, one of the world’s largest fund managers specializing in environmental, social and governance issues, said last month that it’s exploring sectors and stocks it once avoided, now that IRA has made such investments appealing.

Barnes, who joined JPMorgan last year after running Blackstone Inc.’s impact platform, said navigating Europe’s green policies means understanding that it “has a broader regulatory landscape” than the US. The European Union’s “climate-reporting transparency is a big thesis for us,” she said.

Hugh Gimber, a global market strategist at JPMorgan Asset Management, said IRA represents “the next level of pressure on EU policymakers to act.”

He estimates the US is now spending 1.5% of its GDP on climate, compared with a little more than 1% of GDP in the EU. The scale of green incentives in the US is “injecting urgency” in the EU, he said.

Europe’s funding mechanisms are set up to potentially unlock about $1 trillion in green spending in the decade through 2030. That said, US and EU figures aren’t strictly comparable because of the complexities of how the funding streams might unfold.

In Brussels, officials are now openly voicing concern over the risk that European companies will be tempted by clear-cut US tax credits. And there are already signs that European giants are looking across the Atlantic, with Siemens Energy AG, Volvo AB and Northvolt AB all signaling they’re willing to consider expanding in the US rather than in their home markets.

Europe has pushed for a green transition mainly by wielding sticks such as tough regulations, emissions disclosure requirements and carbon taxes. To avoid losing investment dollars to the US, “the EU now needs to complement those sticks with regulatory carrots,” Gimber said.

The EU is trying. Two weeks ago, it unveiled the Green Deal Industrial Plan, intended as a roadmap to keep clean industries competitive as the US and China beef up policies. All told, at least €400 billion ($427 billion) of EU grants and loans are currently available for low-carbon technologies and projects through 2030, according to an estimate by analysts at Jefferies. The structure of that funding, however, “is opaque and unclear,” Jefferies said.

Analysts at BloombergNEF describe Europe’s response to the IRA as “a hodgepodge of airy pledges, rejigging existing pots of money and auctions for hydrogen production.” In all, they wrote that Brussels’ efforts to match the IRA “will do little to usher in a new green industrial revolution in the EU.”

Despite such criticism, Europe has made clear it’s committed to transform its fossil-fuel-led economy into a cleaner, greener one. The bloc has set up a bedrock of emissions-reduction rules that are unrivaled in other jurisdictions. And it’s preparing a new package, the Net-Zero Industry Act, to simplify regulations, speed up permits and promote cross-border projects. The bloc’s proposed Critical Raw Material Act could improve its ability to extract, process and recycle materials vital to the green transition — everything from lithium, nickel and cobalt to rare earth materials.

“I’m encouraged by what I’m seeing,” Gimber said. “Europe’s political will is clear, but the risk is getting the implementation right.”

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