Energy Transition, ESG, and their effect on the Commodities Market

Ali Curi: Hi everyone and welcome to Commodities Conversation, I’m Ali Curi.

Ali Curi: On today’s episode, we’re discussing a couple of topics. We’ll take a look at how energy transitions and the adoption of renewable fuels, can have significant impacts on capital markets. There is an industry-wide transition towards cleaner energy. It is happening fast, creating opportunities, and pitfalls, which begs the question: Is today’s commodities market equipped for the pressures of energy transition?

Ali Curi: We’ll also discuss how ESG affects the traditional commodities business. ESG stands for environmental, Social, and Governance. It refers to a set of criteria that investors and other stakeholders use to evaluate a company’s performance in these three areas.

Ali Curi: And to help us unpack how energy transition is impacting the commodities industry, is our guest Andre Jaeger from ION Commodities’ product management team.

Ali Curi: Andre Jaeger welcome to the podcast!

Andre Jaeger: Thank you Ali.

Ali Curi: Andre, before we get to our conversation, let’s learn a little bit more about you. Tell us about your background prior to what you’re doing now at ION.

Andre Jaeger: Actually, I was born and raised in Berlin, Germany so you might hear a slight German accent. I moved a little bit around for some time. I’m back in Berlin now, but living here actually with my wife and two boys.

Andre Jaeger: I studied industrial engineering. It’s a mix between kind of finance risk management. I was always interested in technology and trading was a focus on commodities and on the other side, kind of focused on mechanical engineering side, going deeper into energy technology. And actually back in the days, my thesis was around kind of the starting EU carbon markets and related trading. So it’s almost like full circle.

Andre Jaeger: Did my masters in the US. And actually fun fact, back in the days I always wanted to work for Enron, it was the big name in commodity trading that actually busted before I was on the market for a job, so somewhat lucky.

Ali Curi: Share with us, what are you doing now at ION, your different roles, locations.

Andre Jaeger: I actually started 2004 working for OpenLink. This is one of the companies that ION acquired quite a long time with the organization, but I actually had the chance to kind of work various roles and locations over the years. Nowadays, I’m still in product management running a cross product SME team that we call industry solution.

Andre Jaeger: So the idea is that we are representing kind of the market of our commodity business. That means we work very closely with our clients, working on our product positioning, strategic roadmap, kind of monitor our market developments, look into partnerships, and then, of course, providing also sales support from an SME perspective.

Ali Curi: Great, well thank you for sharing. Andre let’s start with some background on energy transition. Can you explain to us what is it and why is it important to the commodities market?

Andre Jaeger: Energy transition refers to the energy sector or almost kind of all of society to shift from fossil fuel based energy systems, so including oil, natural gas and coal to renewable energy sources like wind and solar. And yeah, the idea, or you try to combine that with kind of sustainability and decarbonization, which is a key topic to kind of protect biodiversity, limiting climate change. Those are prominent topics worldwide at the moment.

Ali Curi: What commodities and commodity markets are in focus on energy transition right now?

Andre Jaeger: I think you really can include all commodity markets in almost all regions where we have kind of a large percentage of the population, uh, with access to kind of power and transportation.

Andre Jaeger: Unfortunately, there’s still kind of different places in the world where you have different issues than energy transition. In general, if you look at the commodities specifically, you have kind of a little bit the good and the bad. So you have the dark side, which is kind of fossil fuels, like coal, crude oil, and related refined products, which are gasoline, diesel, jet fuels.

Andre Jaeger: Then you have the ones that are kind of considered a little bit better, or kind of transition commodity like natural gas. LNG for transportation purposes. LNG is just a liquified version of natural gas, and this is viewed as transition commodity due to the lower carbon intensity in comparison to coal and crude.

Andre Jaeger: Then you have the good side or the green side, and some people we use around kind of wind, solar, hydrogen, if it’s produced with a low carbon footprint, biofuels, and then you have a couple of ones that kind of sit somewhere in between or depending on who you talk to. For example, nuclear. Is it sustainable, is it not? That really depends on who you would talk to in this context.

Ali Curi: From a global perspective, which countries are leading the way in the energy transition efforts?

Andre Jaeger: I would say there’s a couple of regions we can highlight. Also in the EU or Europe, you definitely have kind of the Nordic regions where you have kind of strong renewable usage based on wind, based on hydrogen is, anyway, a big topic in the EU, especially now that kind of cheap Russian energy is not kind of an option anymore.

Andre Jaeger: Then definitely China on one hand, one of the largest carbon emitters, but on the other hand, they’re adding probably the largest amount of renewable energy production capacity per year, and then the US, especially recently, was the Inflation Reduction Act, which included kind of billions of dollars to spur financing and development of new clean energy projects.

Andre Jaeger: You have to across the board and especially a few kind of think about what’s happening in the US. That was last week on a conference. That was actually a big topic. Talking about kind of that Inflation Reduction Act on the US side and that the UK and EU need to kind of respond with a similar program to kind of even a little bit the playing field.

Andre Jaeger: So, based on kind of what you see on the US side, I expect even more happening also now on the European side.

Ali Curi: In the last couple of years, COVID and more recently, the war in Ukraine, have disrupted, uh, a lot of the distribution, many supplies and services. But now that COVID has receded, has the war alone continued to affect, uh, energy transition efforts?

Andre Jaeger: Since the COVID days energy demand has kind of significantly increased. I think we’re close to, or maybe above pre- covid levels. We probably remember that during COVID times, demand was so low that we saw the first time ever WTI oil drop to a negative price, uh, was the first time in history. Now we’re further away. We’re currently between $70 and $80 for a barrel, especially on the European side, we see kind of an additional focus on energy transition, and this is a little bit related to kind of getting a higher degree of energy independence and to kind of achieve that with utilizing more renewable energy production.

Andre Jaeger: In the short term, it’s on one end, energy savings and then potentially LNG deliveries is coming from the US or Middle East, but in the long term our immediate term has clearly replaced some of the Russian gas with renewables and we have seen that.

Andre Jaeger: I’ve read recently a statistic from the International Energy Agency, which kind of estimated that the yearly growth was since 2020 around 12% for clean energy investments. So it was already big focus and now based on some of these changes that we are seeing, higher demand as well as kind of replacing some of the, the Russian gas, it will be even a bigger focus.

Ali Curi: So because of this accelerated growth that you mentioned, the big question is, how equipped is a commodities market to respond to this kind of swell of interest and demand? What, uh, infrastructure challenges should they be prepared to resolve?

Andre Jaeger: So I have a little bit there ION perspective because I work very closely with our existing client base. And especially on the commodity trading side, I believe our clients are very well equipped to kind of be successful in that green business areas.

Andre Jaeger: A lot of our clients embrace the related opportunities. It’s close to what they do today, and there’s synergies to combine some of the kind of dark side with the green side that I talked earlier about when we kind of classify some of these commodities because there’s a lot of synergies and similarities between the commodity, but all of them, as I said, um, see kind of value in diversification into renewable. So the two infrastructure that come to mind, the first of all, you have to understand kind of how power works at the moment as an electrification, as part of renewable adoption as a key topic. But you have to kind of understand that demand and supply needs to be in sync at any point in time.

Andre Jaeger: So at the moment, we don’t have any large scale storing possibility of power. You have maybe some batteries, some pump storage on the hydro side, but this is not meaningful in the context of supply and demand. And this is very different to some of the other commodities like oil where you can store and based on the lack or limited amount of storage you see much more frequently, kind of the power side run into kind of negative price.

Andre Jaeger: On the other end, we’re kind of switching from that traditional power where we kind of had previously the full dependency. You kind of were burning gas or coal, which now becomes more expensive because carbon has an associated cost or an associated value, uh, via carbon trading but you basically had an optimization problem yet to decide when is it favorable to produce power.

Andre Jaeger: Of course, you had some technical dependency, how fast you can ramp up your power plan, but at the end you were optimizing kind of the fuel costs. You are up and down REM times, and then kind of what is the market value on power.

Andre Jaeger: Now in the renewable power world is a little bit different because we have a dependency on wind and sun, and when the wind is not blowing or the sun is not shining, no energy is produced and you need to be able to fill in when that’s not the case. So it’s comes on one hand, it’s a forecasting problem, not necessarily an optimization problem because you can forecast when it will be produced, but you cannot optimize it yourself. And based on that, we’ll be also a much bigger focus on solving that storage problem. Doesn’t matter if it’s battery technology or hydrogen.

Andre Jaeger: The second one I would want to quickly highlight on the power side as kind of the network aspect. So we talked about previously you had kind of fossil fuels producing the power and you basically kind of decided where to build the power plant. Now we have kind of more decentralized generation. It says different requirements from a network perspective.

Andre Jaeger: So you need to connect an offshore wind part because the wind is much better on the ocean versus somewhere on land. So you need to kind of connect the network. Or you need to kind of export solar power from where the sun is shining. So in Europe you have always that discussion. How do you collaborate or utilize kind of North Africa, build some wind and solar park somewhere in the Sahara, but then still you have to connect the network.

Andre Jaeger: And network is usually also that component that’s regulated because you don’t want to build multiple networks and parallels. So you have kind of that natural monopoly that needs to be kind of, uh, managed. You need to regulate access and then ensure that you have competition on the production as well as on the customer service side.

Andre Jaeger: So this is two infrastructures challenges to always keep in mind when you think about the electrification and how you can solve that in combination with energy transition.

Ali Curi: Well it’s clear that energy transition is driving many of these key challenges for the commodity markets. But what tools or solutions are the commodity markets asking for in order to effectively navigate this energy transition effort?

Andre Jaeger: Again, I will try to take a little bit the ION perspective. So why are our clients kind of getting into the energy transition? Although first of all, decarbonization ESG objectives that they set for themselves in some cases might be mandatory participations. If I’m a refiner or a electricity producer, I have to kind of have certain amounts of renewable fuels or carbon or, I think the biggest power clients is the opportunity in green business because there’s a lot of demand. Everybody wants to be sustainable. So it’s about kind of supporting demand. Who are our clients on the, on the commodity side? A lot of utilities, power marketers, commodity traders, producers, integrated oil companies. And the three focus areas that I would kind of highlight, and some of our clients are in all three, but some, depending on where the businesses are focused on those.

Andre Jaeger: So the first areas around biofuels and then related, uh, renewable fuel certificates. The second area is renewable power and green power certificates, and the third one is carbon mark. And what are the problems that they try to solve? It’s on one hand kind of managing the trade life cycle of those related commodities.

Andre Jaeger: So it’s on one hand the certificates for the different markets, but as I said, the underlying commodities. This is then kind of end-to-end coverage of what they do from a trade life cycle, capturing traits, doesn’t matter if it’s OTC or future. Then kind of evaluating market risk, credit risk, and kind of managing all the back office activity from confirmation to settlement to kind of ensure that you get paid.

Andre Jaeger: The other part to highlight is kind of manage the commodity supply chain of the related fuels. You have to kind of monitor your inventories. You want to kind of manage the blending activity between kind of traditional hydrocarbons and renewable fuels. And as part of that, you manage different modes of transports like truck, rail movement, vessels.

Andre Jaeger: And then of course you have that in combination with the related certificates that kind of certify the greenness and the renewable component of your fuels, and you need to reconcile that certificates and related IDs, et cetera. And both in combination enables them to kind of have the level of transparency that’s kind of key to kind of monitor what’s happening on the business side.

Andre Jaeger: You want to avoid that people might run into some type of greenwashing activity, so something that’s not considered as really green and is just about making money and you want your organization to kind of avoid such a PR nightmare. So it’s all about kind of ensuring transparency and some control of what’s happening on that green business area.

Andre Jaeger: And on the other hand, as a not just a control but also enabling decision support and optimize the business. That’s at the end, kind of what we bring for our clients

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Ali Curi: I think that you’ve shared with us some, some great points as to where the transition market is headed. Overall, where do you see the energy transition market headed in the near future?

Andre Jaeger: So first as it would be great, but I don’t believe we have kind of a silver bullet for decarbonization. So sometimes, or very often, you hear nuclear fusion technology as something that kind of might be that silver bullet, but I don’t believe the, the situation or the technology is there to kind of solve that problem in the near term.

Andre Jaeger: So I expect the continuation of what we are seeing today. I definitely see that carbon will become more expensive even. And it’ll become more and more difficult to finance traditional fossil fuel business. Based on that, I expect that we see higher prices combined with higher volatility because it will be, or in the kind of near term or medium term, we still, we will see a decent demand on fossil fuel itself.

Ali Curi: Now, earlier you talked about ESG. Let’s unpack that for a minute. Let’s start with defining what is ESG?

Andre Jaeger: ESG stands for Environmental, Social, and Corporate Governance, and refers to a set of standards for company’s behavior at the end. So based on my background, I actually really focus on that E or environmental component of ESG, and E stands for me in this context for kind of a sustainable and carbon neutral business model at the end.

Ali Curi: Why are these ESG considerations becoming increasingly important, especially in the commodities market?

Andre Jaeger: I actually read an interesting statistic from a KPMG Market Insight, and we actually used that as an kind of audience engagement question for presentation we gave last week. And the question was, what percentage of UK private equity firms have stepped away from a deal due to ESG concerns?

Andre Jaeger: And the answer was actually 70%. And this is quite significantly, and I don’t believe that just private equity is doing that. It’s also kind of the public is looking for investments that are meeting ESG standards. And I think at the same time you always read about kind of increased profitability and performance of sustainable business models.

Andre Jaeger: And I think on the other hand, every person would like to kind of, of course, if he or she invests the money, wants to make some money, on the other hand, they want to have a good conscience about, okay, here’s some sustainable business that is not kind of creating climate change or some other kind of issues on the environmental side at least, or same for social or other government standard.

Ali Curi: Now that’s some insight from the investor point of view. What are some benefits for companies to adopt ESG practices?

Andre Jaeger: So I see two areas. One is kind of employer differentiation. So sustainability as part of kind of the business model feels good to work for a company that kind of wants to make a difference for equality and environmental sustainability.

Andre Jaeger: And then I think on the service or on the product side, it’s kind of a differentiation for the consumer. As mentioned, not just on the investment side, the consumer is getting more conscious on what products and services to buy and looking for, kind of something that has that sustainable label, and where they are kind of somewhere sure that it’s meeting those particular standards.

Ali Curi: Now, there are some companies and industry groups that may oppose ESG. They see it as an additional regulatory burden or a threat to their profitability. What, what can you tell us about this kind of push back?

Andre Jaeger: I don’t see too many people that openly pushing back ESG, but if we talk about regulation in general, I think there’s two things that I would wanna highlight in the context of energy transition.

Andre Jaeger: So for the energy sectors, I think what the companies are looking for is kind of some type of regulation that kind of has some long terms in mind and provides the necessary security to support larger investment and avoid kind of moving goal posts or kind of changes in regulation too frequently because it’s bigger investments that are required to kind of move the energy transition forward and they want to have some security to make those investments.

Andre Jaeger: The other thing around regulation I thought was very interesting on the same conference I talked earlier about, was interesting to see how many companies that were kind of speaking on the various panels asked for additional government responses in relation to that US inflation act I talked earlier about. They would like to see something similar on the UK or EU side to kind of level out the playing field. So it’s not that all regulation is bad. They want to see kind of some measures that support the energy transition.

Ali Curi: So overall, what do you see, uh, ESG becoming? Do you see ESG becoming increasingly mainstream, or will it continue to be a “nice to do” versus a “must do” initiative for companies?

Andre Jaeger: I think it will become a must do to attract investors, employees, and consumers. So think for almost all companies will be important to have a sound story around kind of ESG.

Ali Curi: Andre, earlier we briefly touched on different types of energies that the commodities markets are focusing on. Solar and wind being the most widely known sources of renewable energy, can you further explain these different types of energies? Biofuels, hydrogen, biogas, and geothermal.

Andre Jaeger: So let’s start with biofuel. Biofuel is at the end, the fuel that’s produced over a short time span compared to kind of the millions of years where natural gas and crude was formed. So it’s kind of similar, uh, created from biomass, usually based on fermentation of sugars or starches, but it’s happening in a much shorter time compared to kind of the fossil fuels.

Andre Jaeger: And the output is usually some like ethanol, biodiesel, or what is actually very big focus on the sustainable aviation fuels. The complication you have on the biofuel side is always that discussion, food versus fuel, because you need to kind of, from an agriculture perspective, need to decide what I’m growing or what do I produce out of that component.

Andre Jaeger: Is it a food for somebody to eat, or is it fuel? In this context which depending on how to think about it, might be complicated if people are still starving, to kind of put that into context. The second one you asked about was hydrogen. Hydrogen is at the end a chemical element is the lightest. It’s not new. It’s already widely used for industry processes. It’s combustible. The only advantage or the advantage is that output is only water if you burn hydrogen, so no CO2 in combination with electrolysis and renewable kind of power production. You can produce low carbon hydrogen, which a lot of the hydrogens that are used today is actually produced out of natural gas. And as part of that, you actually generate co2. So the key is to get to a low carbon hydrogen as part of energy transition.

Andre Jaeger: The other thing was interesting to kind of understand, you see in, in the world of hydrogen, At the moment, a lot of color. It’s actually, I think in reality it’s colorless, but the industry distinguished different types of colors based on how the hydrogen was produced.

Andre Jaeger: So you have gray hydrogen, for example. You utilize steam reforming from natural gas, which is I think the kind of most common production of hydrogen. And you have blue hydrogen. Again, you use natural gas steam reforming, but this time you combine it with carbon capture and you have green hydrogen where you use electrolysis with renewable energy. You have also pink and there has various other colors. So there’s interesting commodity at the moment, very colorful.

Andre Jaeger: Next area is biogas. It’s usually a mixture of gases. Primarily consistent of methane is produced from agriculture, waste, uh, manure or waste water. And the advantage is that you capture the methane that’s kind of usually emitted and you make it usable for kind of energy production.

Andre Jaeger: Could be for heating purposes or for power generation, and that’s actually great because methane has a much higher warming power compared to carbon dioxide, I think around 80 times or something like that. So it’s great that you kind of capture that methane and then also make it usable from kind of energy production perspective. So this is biogas.

Andre Jaeger: And I think the last one you asked about is geothermal energy. Geothermal is also a type of renewable energy. Uh, you basically take heat from the earth’s core. It is very similar from a power plant perspective to a traditional power plant, but instead of burning a fuel, you get the heat out of the ground, and then you have a very similar turbine steam cycle to generate power using geothermal activity.

Andre Jaeger: Yeah, unfortunately it’s not everywhere possible. You need to have reasonable heat levels as it needs to be hot to generate steam at the end, and it needs to be happening at the reasonable depths at the end. So Iceland is, for example, a great example where I think 95% of the energy need comes out of geothermal energy at the end.

Ali Curi: How would commodities trading affect the different types of energies? Because they have very complicated processes behind them, uh, and they pose some very unique management challenges. How would the trading affect the different types of energies?

Andre Jaeger: Trading for me is a very effective mechanic. It ensures optimization towards the most cost, effective profitable technology. And, uh, key in the energy transition is to kind of have a view on or put a value or cost on carbon intensity. And at the end, I think the complication is less important in this context. If there is a more complicated process that gives the amount of energy as combined with very kind of low carbon intensity, it will be adopted because you have a differentiation or an advantage in comparison to other process.

Ali Curi: Andre, before we close out, what advice do you have for anyone entering Financial Technology or thinking about switching to Commodities?

Andre Jaeger: The first thing I would highlight that’s for sure interesting times in commodities at the moment. Big changes are happening in the industry, exciting times to help decarbonization.

Andre Jaeger: Uh, it will take some time, but it’s very important to move that forward. And as part of that, I think we will see new markets are being created, new business models are established. And it’s a race kind of for implementing a sustainable energy industry, and it’ll be always about optimizing three areas it’s about energy security. You still want to keep it affordable. And then key is to come to something that’s more sustainable with a lower carbon footprint and based on some of these changes, we will see a little decent amount or a lot volatility depending on who you talk to on the commodity prices.

Andre Jaeger: And this on the other hand, I think is exciting times from a risk management perspective. We see a lot of demand around kind of related analytics, decision support, and capabilities to optimize that business doing the energy transition. So you have kind of everything stays kind of nice and fresh is changing. And then you have kind of some interesting risk management problems that need to be solved in this context.

Ali Curi: What is some advice that you wish you had heard earlier in your career?

Andre Jaeger: Maybe not really in the context I’ve heard early in my career, but definitely would want to reiterate how important it’s to focus your business career on something that you’re kind of interested, excited about. As I was always excited about the mix of kind of technology, commodities and trading risk management. So I still enjoy what I’m doing. And especially in a combination with energy transition and kind of that acceleration, it’s even more interesting.

Andre Jaeger: So that is the key advice from my side. Do something that you like. You spend a lot of time at work, so find the right combination for yourself.

Ali Curi: Now, like many people, you’re a busy person, you’re juggling multiple responsibilities. Can you share with us what is your go-to productivity hack?

Andre Jaeger: Key thing in, in my world was always to develop a good internal and external network. My experience is that if you help people, that they will help you. So it’s very key that kind of as part of building that network that you treat people like you wanna be treated yourself, and that doesn’t matter if they’re above or below kind of the hierarchy.

Andre Jaeger: And such a network will provide significant productivity advantages when you’re in need to, to move something forward because people will treat you very similar like you treated them before.

Ali Curi: Andre Jaeger, thank you for joining us today. It’s been a pleasure having you on the podcast. I hope you come back and visit us again.

Andre Jaeger: Thank you for inviting me. It was a pleasure chatting with you.

Ali Curi: And that’s our episode for today. You can follow ION Commodities on Twitter and LinkedIn. Thank you for joining us. Until next time.