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JPMorgan official says ESG risks are becoming a cloud over US energy sector

While climate change and broader environmental, social and governance risks are getting priced into stocks and energy-related investment decisions in Europe, the U.S. energy sector is just beginning to understand how ESG issues can affect capital allocation, an official with JPMorgan Chase & Co. told a room of energy lawyers Oct. 16.

Speaking at an Energy Bar Association conference in Washington, JPMorgan Managing Director David Maccarrone said "ESG risks and climate risks, they are real and they are getting priced into stocks [in Europe] in a meaningful way" largely as a result of pressure from investors.

"What's happening, frankly, is JPMorgan's investors and our would-be investors are asking questions about these issues. So if we don't have an analytically rigorous process to analyze climate change risks and other social and governance risks, we're not going to get their money or they're going to take their money away from us. So this is something that is very important to us," said Maccarrone.

As a result, Maccarrone said the bank is "focusing a lot of time" on measuring and evaluating companies' initiatives related to greenhouse gas emissions and water management to understand "just how serious they're taking this issue." For example, "are they pricing carbon as they make these investments?"

Maccarrone also said the bank is watching how energy companies, including pipelines, calculate the economic life of their projects. "My view is ... if you're a cost of service business, you should be pushing for an accelerated recovery of capital because the useful life of many of these assets is at risk at the tail end," he said.

The U.S. is just beginning to see how ESG risks and climate change are going to impact capital allocation, said Maccarrone. "But what I see broadly for energy, less pipeline specific, is that it is becoming a cloud, it's an overhang, on the entire energy sector." He suggested demand for gasoline has peaked in the US and that oil demand could peak too, which would be "a game-changer for the sector, so investors are going to price that accordingly."

But Tom Abrams, vice president and principal content manager at energy data and analytics company FactSet, asserted that the risk to the energy sector may not be quite so high on an international scale. While demand for oil might plateau in the U.S. within the next 10 years, Abrams said international demand for oil will likely continue to climb.

"If we go out 15 years in the present value model, or even just investor psychology, [climate change risk is a] soft negative, it's a cloud over the stock," Abrams said. "But in a valuation sense, it has a very distant meaning."