What Makes Green Energy Finance Green?

A financier discusses the challenge of managing clean energy investment risk.

The transition to a clean U.S. energy system, including carbon-free electricity by the middle of the next decade, will be fueled by massive investment from government and industry and through the provision of green finance from banks and investors.

Brian Lehman, the Head of Green Economy Banking at JP Morgan Chase, discusses the challenge of defining clean and sustainable investment in an age where uniform sustainability standards don’t yet exist. He also looks at how government policy might accelerate clean energy finance, and at the types of energy projects and technologies that are attracting attention from green financiers.

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone.

The United States has set ambitious carbon dioxide reduction targets in the fight against climate change. These targets include cutting economy-wide carbon emissions in half by the end of this decade and the goal of powering the country with carbon-free electricity by the year 2035. Many challenges lie ahead in meeting these targets, including the need to accelerate the deployment of renewable energy and a host of supporting technologies and infrastructures, from battery storage to energy efficiency solutions. What’s clear is that the transition to a clean energy system and broader economy will be fueled by massive investment from government and industry and through the provision of green finance from banks and investors.

On today’s podcast, we’re going to take a look at how one major bank views the opportunities presented by the transition to the low-carbon economy. My guest is Brian Lehman, the Head of Green Economy Banking at JPMorgan Chase. Brian will talk about the challenge of defining clean and sustainable investment in an age where uniform sustainability standards don’t yet exist. We’ll discuss how government policy might accelerate climate finance and look at the types of energy products and technologies that are attracting one banker’s attention. Brian, welcome to the podcast.

Brian Lehman: Thank you for having me, Andy.

Stone: Now Brian, to get us started, I wonder if you could, for the benefit of all of us who aren’t bankers, give a brief introduction to what your green economy banking group does and explain the role that the group plays for companies in the clean energy and sustainability space?

Lehman: Sure, I’m happy to, and maybe what I could do is also put the green economy strategy for JPMorgan in the context of the broader JPMorgan climate initiative. It started about October of 2020, where JPMorgan made some broad, sweeping announcements, first aligning ourselves with the Paris agreement, secondly establishing what’s called the Center for Carbon Transition, run by a good and close partner of mine, Rama Variankaval, where the responsibility of Rama and his team is really to transition the bank and our lending practices to a lower carbon future and do so in a transparent, observable, trackable way.

And to follow through with that, early last year we made bold commitments. In fact, 2-1/2 trillion dollars towards sustainable initiatives, and within those 2-1/2 trillion dollars over the course of the next ten years, we committed a trillion dollars towards green initiatives, and that’s where the green economy comes in. Our mission is to commit, raise capital on behalf of our clients, and really how that translates in simplistic terms is to lend money and to serve our clients in raising capital in the capital markets, whether that’s raising debt or equity in the public or private markets.

And really, that’s the goal of the green economy. Specifically, what is the green economy? It’s a banking team with industry specialization, product specialization, focused on five verticals, where the common thread is to help decarbonize the globe by promoting those technologies. So the first is renewable energy. Renewable energy is a broad industry, and the way we characterize it, it’s incredibly broad, where it’s not just the producers of clean energy or clean technologies, it’s the manufacturers of the equipment that would go into producing clean energy.

It’s also sustainable finance, which is the second vertical. And really what that means is anybody who is putting money to work within the green economy — it could be permanent capital vehicles; it could be solar finance companies; it could be venture capital late-stage growth, private equity — that sort. And so we want to make sure that we have deep-seated relationships with those who are incented to place their bets in the technologies that are completely necessary to decarbonize the world.

The third is food tech and ag tech, and so think for food tech, it would be alternative proteins, even insect protein. For ag tech, it may be robotics, vertical farming. This is a critical part to really bringing our food system into the information age and doing so in a very efficient way.

So moving on, it’s also efficiency technology. Efficiency technology is a term that basically is focused on technologies within the industrial complex, where these technologies will help reduce the carbon footprint. Think technologies that might ultimately help reduce carbon emissions from the creation of cement or steel, the production of it.

And lastly, clean energy mobility. So really that’s transportation electrified, whether it’s boats, barges, vans, vehicles for consumer or commercial use. And so it’s a broad-sweeping coverage effort but with very much a focus on those industries and all the companies within it.

Stone: That’s a broad swath of industries that you described right there, and I guess those would all be opportunities within the green economy, as they’d be defined. From the perspective of financial institutions and you as a bank, what is your role, then — or of financial institutions generally in your view — in fighting climate change?

Lehman: There are so many ways to answer that question. What is our role? I think JPMorgan has a specific role and a responsibility, being a bank with nearly 3 trillion dollars of assets, touching every industry in every corner of the globe. We have a responsibility to focus on our shareholders, our communities in such a way that is wildly differentiated, at least in my view, versus other institutions that might be banks or non-bank financial institutions.

And so it all ties together, and this is bringing forth the initiatives that my partner, Marisa Buchanan, who is the Head of Sustainability at JPMorgan — she sets the course for the strategy of JPMorgan and how it touches each part of global and national policy. And so, having a seat at the table as a policy matter, I think is incredibly important as it relates to JPMorgan. Then, reverting back to Rama Variankaval and the Center for Carbon Transition, the responsibility that JPMorgan has is to commit to shareholders and to clients that we have a game plan for moving our clients. And as a result, given that we’re a client-focused institution and we lend money to clients, where those loans sit on JPMorgan’s balance sheet, and us making a commitment to our constituents — whether it’s regulators or investors — that we are going to change the way we’re doing business by being focused on migrating our lending practices to a lower carbon future. That’s a responsibility that JPMorgan has.

But then tying in the green economy, our responsibility is to accelerate those technologies by attracting capital to the best ideas and to make sure that we can act as advisor in delivering the firm to those clients, wherever they are in the United States, North America, and the globe.

Stone: Now you’re with the largest U.S. bank, and obviously you see a lot of opportunities for transactions that come across your desk. What types of green opportunities excite you most from a banker’s perspective?

Lehman: The ones that carry the greatest impact. And it’s almost like being a father to five children, right? There aren’t any particular favorites between those five verticals that I mentioned to you, and I do have a background in financial services, in covering banks and non-bank financials. And so companies that can help be the fuel, sort of every pun intended, in accelerating the path towards a carbon-neutral future — those things really, really excite me.

But even the companies that are creating new technologies that would help do that, it’s just hard to separate one from the other in terms of which one is most exciting to me. And what I would probably share with you, though, is that each of these verticals has their own story to tell. They are at different stages of their respective life cycles. And what I mean by that is, let’s take renewables. Even as one of the five industries, there are so many sub-verticals or ecosystems within that renewable sleeve where you might have more traditional technologies, if you will, in say, solar. Whether it’s residential or commercial, solar panels have been around for quite some time. Business models have been around for some time, and that is a reliable technology that can be more predictable from a cash flow perspective, from the production of energy from those solar panels. It’s far more predictable. And you can contrast that to some of the more progressive technologies that we focus on within renewables. It could end up being hydrogen. It could be storage technologies. It could be direct air capture, right? Taking carbon out of the air, right?

There are technologies that, even including nuclear fusion, where there are companies out there that are putting billions of dollars to work in these technologies that still require a long lead time to commercialization. So a long-winded way of saying it, Andy, they all excite me, and it doesn’t make that much of a difference between business models that might focus on more traditional technologies or the more progressive ones.

Stone: As I was preparing for this episode, I did a quick Google search of the term ESG, environmental, social, and governance, and I found that it really has many definitions. They are related, but they’re not precisely the same. And I think this really reflects a larger current reality, and that is that there is no real hard and fast definition for what counts as ESG-positive and what qualifies as an ESG risk.

So my question is: Are there policies that you at JPMorgan have in place to ensure quality control here — in other words, to ensure that companies and projects you may be financing are, indeed, sustainable? I’m really interested in hearing about that.

Lehman: One of the hallmarks of JPMorgan is the rigor that we apply to situations you’re just articulating. And the responsibility we have to our shareholders, our constituents, our regulators to when we do things, that we do them right. And I’ll tell you, there is a team, an army really of risk-minded professionals, both from the front office like me, to the middle office, and the back office, making sure that what JPMorgan has represented in the public domain is observable, it’s relied-upon, and that it’s accurate.

And so what I would tell you is we are, with the commitments that we’ve made around how we’re migrating what JPMorgan looks like today to a lower-carbon future, that level of disclosure, there’s an amazing amount of rigor as to how we go about tracking that. So it’s inventory of all the products that JPMorgan might ultimately execute providing a green loan, raising capital on behalf of a client. We need to make sure that there’s a risk control environment in place to make sure all of that gets tabulated appropriately, so what we represent to the public is relied upon.

Stone: What would be the green economy banking team’s monitoring process for borrowers, and over what time horizon are you measuring sustainability performance?

Lehman: There are third party advisors, consultants, that might evaluate a business, for example, or its activities along some metric for sustainability. And so JPMorgan’s role is not necessarily that as much as it is saying, “Let’s take a more local view.” We have a framework that basically says, “What falls into the green economy is a framework that relies on whatever products or services that company produces, that it’s more green than not.” You have this preponderance test.

And so if it is majority green, what they do — again, let’s go back to the very simplistic example of a wind turbine manufacturer. Their sole purpose in life is to produce the equipment that would go into producing clean energy by virtue of the turbines that spin around when wind blows and produce energy. That is what we believe. If, for example, we were to lend to an entity like that, or to raise capital for that entity, that would qualify as green. And so whatever the notional amount, whatever the dollar amount of that capital raise or that loan commitment, that gets tabulated. And we do that at the client level, roll it up to the portfolio level, to the line of business level, to the firm level to produce those results.

Stone: Much has been said about the link between environmental risk and material credit risk, in other words, the extent to which environmental risk raises the likelihood of default. I’d like to give a little bit of a different spin to this question, and because we are an energy policy podcast, ask you how interlinked is policy risk to material credit risk, particularly over the coming decade? We have so much uncertainty, for example, in Washington about climate and clean energy policies going forward, particularly at this junction, right? So how do you figure an unpredictable energy and climate policy landscape into your lending decisions?

Lehman: We try to anticipate as a lender what is sort of the base case, the bear case, and sort of the bull case. Less of an emphasis there is on the bull case because for lenders, you effectively provide the loan with the hopes that you get the money back. That is the principal focus. And so on that basis, policy certainly is a risk factor, and then really it’s a function of what that policy is, how long-standing it is, what we can glean in terms of where we anticipate those changes, if any, taking place. And we can provide — there are a number of examples, but the investment tax credit that residential solar folks get when they elect to put solar on their rooftops. That is a savings that accrues to the benefit of any consumer who puts solar on the rooftop, to the extent that that goes away or changes or is phased out, of course it’s going to have an impact as it relates to the adoption of residential solar on rooftops. And it may ultimately have an impact, for example, on those who are originating or installing those pieces of equipment on the rooftop. So that’s one prime example of what we might look at as a risk factor.

Now as the market matures and as the company matures, hopefully there would be more diversity, more predictability of cash flows such that if and when those investment tax credits or those policy decisions that would have a direct impact on economics — if those things get phased out, these companies can stand on their own from a credit standpoint and are credit-worthy. While, yes, the risk factors have ultimately changed, there still is a strong body of work that would suggest JPMorgan should extend a loan with the anticipation of getting paid back.

Stone: A little bit more honing in on this one: To what extent is this a make-or-break for some of your decisions, the policy aspect?

Lehman: We tend not to hang our hat on, as a source of repayment, a single policy decision. It is a factor but not the single factor to an underwrite or a decision to lend. So there are credits — it’s not just investment tax credits, but there are credits for lower carbon fuel standards for renewable natural gas, as an example. And that could ultimately translate those credits into currency, actual cash that would help the credit profile of any particular loan arrangement to the extent that policy changes the value of those credits. It might go for a lender. It might go against a lender. We take that into account, but we tend not to build our thesis solely on the basis of, say, the cash flow that’s simply generated from those credits on a stand-alone basis.

Stone: You know, loan covenants are contract terms that I guess define the activities that a borrower is allowed or not allowed to engage in. I wonder if you could give me an example of a sustainability-linked loan covenant that you think is particularly effective in ensuring that projects are and remain sustainable. And this gets back to the question I asked you about five minutes ago, but I really want to understand a little bit more how this is baked into the covenants themselves.

Lehman: Yes, sure. At this point in time, thinking about sustainability-linked loans, there are features that can be incorporated into the loan document that would say, “Okay, Andy, if you’re going to borrow from me at a spread of a hundred basis points over a reference rate,” if you can achieve certain milestones around let’s just call it a “missions avoidance,” we can be particular, we would be particular in those loan documents as to what those milestones are.

Stone: Those would be metrics, is that right?

Lehman: Those are metrics, correct. And we can go through the process as to how those metrics are determined, how they’re verified. There are consultants, third parties that come in to evaluate sort of the arrangement and the feasibility of that, in terms of the ability to track it objectively, where it’s not the company saying, “Hey, I did that. Trust me.” Or the bank, which may not have the wherewithal the way a third party would to verify that data. Having an outside, objective party saying, “This makes sense.” This is observed or not, and as a result, Andy, your original 100 basis point spread — if you meet these avoidance metrics — goes down by 5 basis points, instead of borrowing at a 100 basis point spread. You’re borrowing at 95 basis points. So there are some savings for the positive observance of these metrics, in terms of emissions avoidance. That’s an example.

Stone: It’s really interesting, because as a banker, you are the potential enforcer of sustainability, it sounds like. So these savings that you just spoke about, that is the enforcement mechanism. That’s the carrot and the stick all at once, it sounds like.

Lehman: It is, and there’s an alignment there. JPMorgan and other banks would be willing to take a lower return for the capital provided to that client in support of these ESG metrics. And so that’s what I love about this. Now, what is even more interesting in my mind is not the few basis points that could be saved in a credit context that I’ve articulated, where I would say at least as interesting as that it, how the capital markets over time have responded to green bonds. And so just taking a cohort of green bonds, where the proceeds from the issuance of those bonds would be earmarked towards green initiatives broadly.

And again, you have these consultants, these third parties that go and verify what those are, so folks can ultimately trust that they are, in fact, green bonds. The proceeds are going in for green initiatives, whether it’s to build the next wind farm or solar project or anything else that investors can trust in these green bonds actually being green. The market has, over time, rewarded the issuers for those green bonds in a more material way. And so what started out as just a qualitative benefit, where there really wasn’t much of a distinction in pricing benefit to issuers with that green bond rider, if you will. Now it’s far more material, where there’s just this investor appetite that is rewarding issuers for taking the proceeds of any debt issuance and plowing it into these environmentally friendly practices. That’s exciting.

Stone: You know, ESG is about environmental performance, but it’s also very much about social equity. So I want to ask you: To what extent are social, and I guess, energy equity concerns a guide in your evaluation of potential funding opportunities?

Lehman: I would just say that’s a huge deal. We can focus on maybe two areas. Actually, let’s focus on three of those verticals. The first is renewables. What we really are focused on is how access to renewable energy can impact the communities at large. It is harder, ultimately, to underwrite away from what are called “prime borrowers,” and the prime borrowers are the folks with the higher FICO scores that they, of course, need to lower their bills as it related to converting from traditional utilities to solar, but that cost savings is going to make that much more of a difference to someone who may not have the same prime borrowing characteristics, as in higher income, more discretionary cash. It’s so much better to provide solar, as an example, and those associated cost savings to folks who aren’t in the affluent category.

And so we pay particular attention to originators, installers of those residential solar panels, or maybe it’s community solar panels or arrangements that would accrue to the benefit of more than just simply the affluent and the credit-worthy, or most credit-worthy, as it were. So I would say that’s one example within the renewable sleeve. But let’s also focus on food security, food tech and ag tech. If we can really put our eggs in the basket of vertical farming or indoor farming, where it’s a focus on delivering healthy food more reliably. You strip out the seasonality of farming. You have a controlled environment internally that’s closer to urban centers.

Having that food security and having that food access is incredibly important, and I love, JPMorgan loves these stories that really support and promote food security and provide folks who might not otherwise have access to healthy food alternatives that access.

Stone: Are there specific programs that the bank has or your group has to accommodate these groups? You talked about urban solar. You’re talking about the food challenges here. I’m curious: Are there programs for those?

Lehman: We have a team of folks who are focused on affordable housing, focused on the social elements to banking, and those associated communities, even minority depository institutions. We’ve made investments, equity investments, in those institutions, and the green economy is part of that community impact group. And so what we’ve created is a team of folks who have the ability to bring all of that together.

And so the answer is a lot of those activities are specifically in the works. As a prime example, JPMorgan is planning community-based initiatives at the grassroots level because in the United States, we have a vast community presence. And that’s what’s really exciting and brings back the notion of — the first word that comes to mind for me is it’s a privilege to work at JPMorgan, to have that foresight and have that impact, not just on the global scale but within specific communities.

Stone: JPMorgan has a very substantial book of loans to companies in the fossil fuel industry. I want to ask you how you think about transitionary companies, such as oil and gas companies that are getting into, for example, enhanced oil recovery or blue hydrogen production or more broadly, industrial companies that need to decarbonize? How do you think about ESG risks in underwriting criteria for these transitioning companies?

Lehman: My focus, Andy, is really on the companies on the most progressive ends of the energy transition. We do have bankers focused on companies that are at different points of their energy transition, and I would only say that JPMorgan, with the broad reach that we have, touching every industry in every part of the globe, has historically supported companies in the fossil fuel industry and will continue to.

And then the natural question is: Well, does that have an impact to Brian Lehman and all of our green economy compatriots? My response to that is JPMorgan, with the level of thoughtfulness that we have around this migration, encouraging companies wherever they are in the energy transition to get to a better place, JPMorgan has the responsibility to support the clients so long as those clients are incented the way we are to make a difference.

And so we will advise. We will support companies along that transition wherever they are. I’m excited by that. I’m also sober about it. It’s not as if we’re going to flip a switch in 2030, and then a hundred percent of the world is going to operate on solar and wind. It’s not just feasibly possible. And so fossil fuels will very much be a part of the energy future. We need to make sure, though, that there are technologies that will help with abatement and reduction, if not elimination of the emissions that come from those activities.

Stone: You know, I’d like to hone in on some of the policy catalysts again here for green finance. From your perspective, what key action or actions might regulators, legislators take at this point to catalyze investment in climate-positive technologies? Is there a hurdle, a policy hurdle that you would like to see overcome or removed?

Lehman: The hard part, Andy, is then if I put too fine a point on that question, then it’s potentially pitting me against the actual policy-makers and also front-running JPMorgan’s position. What I will share is that there’s not any single policy that is a make or break. Yes, of course, the Build Back Better bill. Is that significant? Of course it is. And would those in a seat like mine be incented to see in large part that bill get put into law? Yes, it would be helpful. It would be helpful to our clients. It would be helpful for the broad, sweeping level of support that we see at the grassroots level for all the work that we’re doing.

My position, however, is that it takes that and more, right? And so there is a level of activism that has taken place at the state level, at the national level, at the global level. And it’s ultimately undeniable, and so I don’t simply rely on a single piece of policy to really impact the outcome of what I believe is going to take place, which is a decarbonized future. And maybe I’m naive in that, but it’s so darned important, and there’s so much support that I see for what we’re doing and what others are doing around decarbonizing the globe that it’s going to happen.

And here’s the other piece, Andy, what I think is really important. Capitalism needs to be the voice in support of policy. And in some cases, the voice needs to be louder than policy. Policy helps, but it can’t be the single reason why there is a success story to decarbonization. It really needs to be — this is why I believe my role is so darned important at JPMorgan. It really needs to be success stories. Who is the next Elon Musk? How do we get these technologies commercialized at scale so that investors are happy because they’re making money, so that consumers are happy because they’re using that technology. It’s making their lives easier. It’s saving them money. That’s what we’re in it for.

And so if I in my seat can promote that form of capitalism, to really have that network effect, we may all rely less on policy decisions to change the outcome of our future.

Stone: Let me ask you one final question here, Brian, if I may. What breakthrough technologies in your view need the most help right now?

Lehman: I go back to you asking the question around what are the companies that are most exciting? The technologies that need the greatest care are the ones that could have the greatest impact against the climate change issue. So I think specifically a few technologies: Direct air capture, right? If we think about whatever the actual figure is, but it’s in excess of 50 billion tons of emissions into the atmosphere every single year, that’s a problem. And I worry also because of the mix of energy, as we’ve talked about — fossil fuels being a part of the energy future going forward.

If we can find a way to land the plane on a technology, scale that technology, like direct air capture, and have plants that specifically remove carbon directly from the air and store it underground — there are companies that do that right now and are scaling, attracting capital to scale even further. It will help ameliorate the issues that we’ve identified and ideally reverse the impact of climate change on this Earth. So that’s one.

The other is nuclear fusion. When you’re thinking about ways to produce electricity without the associated emissions impact, that’s a technology that really can make a massive difference at scale. Now the challenge with these progressive technologies is it requires a level of patience on the part of investors. It requires vision on the part of investors. The carrot is that it is one of the most attractive, largest addressable markets that an investor could ever dream of. And then it’s ultimately about executing, taking the capital, investing it wisely into technologies that can ultimately scale. And scale means generating revenue. Scale means generating profit. And many of those progressive technologies will take time, or operations will take time before they do so.

Stone: Brian, thanks very much for talking

Lehman: Andy, thanks so much for having me. I love what you do. Keep up the good work.

Stone: Today’s guest has been Brian Lehman, Head of Green Economy Banking at JPMorgan Chase. Thanks for listening to the Energy Policy Now podcast from the Kleinman Center for Energy Policy. Before we finish up, I’d like to send special thanks to our editorial assistant, Nick Rolander, for his help in producing today’s episode.

And if you enjoyed today’s conversation, I’d like to ask if you would rate and review us on Apple podcasts. Your reviews help us get word out about the podcasts, and we appreciate the help. Thank you very much for listening to Energy Policy Now, and have a great day.

Brian Lehman

Head of Green Economy Banking, JP Morgan
Brian Lehman serves as the Head of the Green Economy Banking group at JPMorgan Chase. His team focuses on providing tailored solutions to companies that produce environmentally friendly goods and services or conserve natural resources.

Andy Stone

Energy Policy Now Host and Producer
Andy Stone is producer and host of Energy Policy Now, the Kleinman Center’s podcast series. He previously worked in business planning with PJM Interconnection and was a senior energy reporter at Forbes Magazine.