David Lebovitz: Welcome to the Center for Investment Excellence, a production of J.P. Morgan Asset Management. The Center for Investment Excellence is an audio podcast that provides educational insights across asset classes and investment themes.

Today's episode is on climate technology and has been recorded for institutional and professional investors. I'm David Lebovitz, Global Market Strategist and host of the Center for Investment Excellence.

With me today is Tanya Barnes, Co-Managing partner of Sustainable Growth Private Equity for J.P. Morgan Private Capital. Welcome to the Center for Investment Excellence.

Tanya Barnes: Thanks for having me.

David Lebovitz: My pleasure. It's good to have you here today Tanya. Before we get going, I thought I would start by just talking a little bit about what's been going on in the world.

Obviously capital markets very much remain under pressure; lots of questions about the risk of recession both if and when. Treasury yields can't seem to figure out where they'd like to settle.

And I think the reality is that the market is in the process of digesting a significant amount of information and importantly, a lot of new information and information that is multiple standard deviations away from the numbers we've seen over the better part of the past couple of business cycles.

And so we recognize that recession risk has risen. We do not believe that we were already in the midst of a recession. I find it very difficult to believe that an economy in recession is also capable of generating almost 400,000 jobs in a single month.

But we do recognize that as we move closer to the end of the year, that recession risk in the United States as well as in places like Europe will, in fact, begin to rise. Obviously, the source of the recession is a little bit different.

The big risk here in the United States is the Fed. The big risk in Europe has to do more with energy prices and specifically natural gas prices, but we're just going to continue to digest the information as it comes through the door, much like policymakers will and make investment decisions accordingly.

And so maybe shifting gears here and talking a little bit about something that was very much front and center in conversations over the past couple of years, feels like it's taken a little bit of a back seat to the risk of recession and what's been going on with rates and equity, so on and so forth.

But obviously, sustainable investing is still a structural opportunity when we think about what needs to be in portfolios held by long-term investors, and so I was hoping we could just start with the 20,000-foot view of things.

As I mentioned volatility, inflation, rates very much dominating the discussion today, but sustainable investing in climate change are still very much a part of the conversation. And so can you talk a little bit about your framework for investing in climate change as well as the energy transition?

Tanya Barnes: Sure. You know, I'm a private market investor so as a private market investor, we have the benefit of being able to take a longer-term view and to look at making investments that really benefit from these long-term secular or structural shifts as you mentioned.

And when we look at climate change we see it as a huge investment theme. It's really one of the biggest things impacting the economy, financial markets, business and really everyday life.

Some estimates suggest that over $1 trillion or to $2 trillion is expected to be spent annually to combat climate change. Those capital flows translate into large market opportunities for the right companies.

And so for our framework, it's really about investing in companies that really establish three key things. First, they have to be commercially driven; second, measurable outcomes; and the third is really science-based solutions.

But the lead-in to your question David is really important. You can't ignore the backdrop and that's why the first part of our framework is so important, that commercially-driven piece.

And so we made a recent investment in a company as an example where consumers can save 10% on their energy bill when they connect to renewable energy sources.

That 10% savings in an inflationary environment where some parts of the country are experiencing double-digit growth in energy costs and gas costs - that makes that company service more important today than it was a year ago, and that's showing up in that company's growth results where they're beating their budget.

David Lebovitz: Very interesting. Can you expand a little bit more and talk about some of the macro-level opportunities? Obviously, they are the individual companies where you're spending the majority of your time thinking about what they're doing and the economics of those businesses. But if you were to segment things more from a 20,000-foot level, how do you think about the different verticals in your investment universe?

Tanya Barnes: Yes. So we're seeing the most significant opportunities in the parts of the market that actually have been slow or toughest to decarbonize. Those are the traditional industries, the heavy ones like industrials, real estate, food and agriculture.

Those industries contribute significantly to global greenhouse gas emissions but more importantly, there's tremendous financial motivation to keep pace with growing corporate sustainability commitments and increasing social and regulatory pressures, right.

So, for example, the real estate industry where in cities sometimes buildings alone can account for as much as 60% of carbon emissions - we're seeing technologies that can really change the operational footprint of an entire sector.

David Lebovitz: Excellent. Obviously, the conversation around investing in climate change and sustainable resources and energy has been part of the investment conversation for as long as I can remember.

But it feels like the opportunity set has continued to evolve, and so how do you think about the traditional ways that people have approached things like sustainable investing, and link that in with some of the newer ways that people are approaching the opportunities in this asset class?

Tanya Barnes: Yes. So we think about it really in two waves where the first wave of sustainable or climate investing was really about building out new renewable energy supplies.

So when you look at wind or solar that started as science experiments really several decades ago, today they've graduated to infrastructure investment where there's a very established technology, and now it's about building out capacity.

And those projects tend to generate lower returns but really are very low-risk for investors. Today we're starting to experience the second wave of climate investing, which is about reducing demand for energy and natural resources across all these traditional industries that I talked about, and getting to the parts of the economy that are tough to decarbonize.

And the other piece of it that's really interesting for us is that there's a significant amount of capital that we see that's been deployed in earlier stage climate tech companies when you think about pre-seed, seed and Series A.

And so now there's a much larger ecosystem of private growth companies that are looking to scale to that next level of growth.

David Lebovitz: So let's double-click on that and talk a little bit more about from a client technology standpoint how will technology make goods and services more sustainable over time and importantly, with growing access to things like big data, so on and so forth? How do you think about incorporating some of these alternative datasets into your investment approach?

Tanya Barnes: Yes. So technology and data-driven innovation really has proven to us time and time again the big capacity to transform lives, businesses and the economy, right.

You think about Amazon and what it's done to consumer purchasing behavior over the last several decades. The same is true for climate change. The stakes and opportunity size are just frankly larger, so it's about how data is going to change how goods and services work across the economy.

So an example of this would be electric vehicles. Think about the data required to manage an electrical vehicle charging map, or energy prices and regulated and unregulated utilities across the United States all have different systems.

Having companies that really can harness that data and drive ecosystems of innovation is really where we see the biggest opportunities.

David Lebovitz: And so I want to take this one step further. I promise it's the last time I'll press on this issue. But in the background is this idea of achieving net-zero carbon emissions.

We hear corporate America talk about it. We hear corporations in Europe talk about it. It's something that arguably is not only the right thing to be focusing on, but something that businesses are taking increasingly seriously particularly over the past couple of years.

And so with all of these organizations committed to reaching net-zero emissions, when you think about technology in this goal where do you start to focus? How do you think about aligning those two things within the context of your investment strategy?

Tanya Barnes: Corporate sustainability commitments are really interesting, right, because they're a significant leading indicator on what's happening in the market. The number of commitments has tripled in the last two years, and that's what really gives us the most conviction around this theme.

And so for us, it's really about going back to that three-part framework I mentioned where focusing on the companies that have commercially-driven solutions, measurable outcomes and that they're science-based really is the secret sauce of bringing it all together.

And the good news is there's a lot of companies out there that are not only committing to the R&D required, but they're actually looking for opportunities in the market and there's a lot of private companies that are responding to that demand.

David Lebovitz: Excellent. This has been great. One final question to just kind of top things off here. We hear a lot about the growth in sustainable energy and the growth in ESG, and then you hear terms like greenwashing get thrown around.

This is arguably one of the more tenuous to base within the capital markets today. And so when you think about an area that's experiencing the type of growth that your investment universe is experiencing, and you go through and you're reviewing all of these different technologies, the solutions, the companies themselves, what are some things that you think are important to keep in mind not only when it comes to identifying successful and interesting opportunities, but also avoiding some of those pitfalls, which come hand in hand with the industry that's experiencing this type of growth?

Tanya Barnes: Yes. It's really about keeping the most traditional sets of underwriting opportunities with also the macro backdrop at the heart of what we do and again, this three-part framework I mentioned is really critical for us.

So companies that really have a commercially-driven solution where companies can either save money or generate ROI with their solutions is important for adoption.

But it's also connected to the idea that those measurable outcomes for the climate are real. They're science-based and they can actually have a big impact that really drives it together.

David Lebovitz: Well, this has been a great conversation. Thank you so much for joining us. We'll have to have you back soon to continue our dialogue, but thanks again for joining us today.

Tanya Barnes: Wonderful. Thanks for having me.

David Lebovitz: Thank you for joining us today on JPMorgan's Center for Investment Excellence. If you found our insights useful, you can find more episodes anywhere you listen to podcasts and on our Web site. Thank you. Recorded on July 15, 2022.

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