Emissions house of the year: Element Markets

Energy Risk Awards 2021: Veteran environmental trader positioned for soaring carbon demand

Randy Lack, Element Markets

Last year proved to be a pivotal one for environmental markets veteran Element Markets. It began the year facing extreme demand destruction caused by Covid-19, only to end it looking forward to a new, greener US administration that, alongside the wider groundswell of rising environmental concern, set the company firmly on course for the next stage of its growth.

“It was the best of times and it was the worst of times,” quips co-president Randy Lack, who co-founded the Houston-based environmental firm in 2005. The firm is active across the range of North American environmental markets, including compliance and voluntary carbon, emissions programmes, renewable natural gas, renewable energy certificates and low-carbon fuel credits. Pretty much all of them tanked last year as the global economy went into lockdown.

That slump was, fortunately, short-lived, beginning to turn around from the middle of 2020. “We’ve had a really nice recovery in the compliance markets, which are now trading higher than pre-Covid in almost all cases,” says Lack. “And we’ve just seen an explosion in [environmental, social and governance] ESG and demand around voluntary carbon to meet corporate commitments.”

That demand is different both in volume and type from that in the past, he says. First, it has spread from sectors such as tech and higher education, with high sustainability credentials and relatively low emissions, to large emitters such as oil and gas. Part of that is due to pressure from shareholders, such as BlackRock, and increasingly activist pension funds, he says, and part of it from broader societal pressure.

Either way, demand for carbon is set to explode as a result. “We are massively undersupplied long term,” he says, suggesting that projected demand is more than 20 times current supply by 2030, and closer to 50+ times by 2050.

He adds this demand is rooted in a fundamental change in corporate behaviour. “Some of the largest emitters in the world are working to pivot their entire business model towards decarbonisation,” he says.

This makes environmental markets less sensitive to changes in the political weather – although the election of Joe Biden in November did dramatically improve the forecast. “The word that comes to mind is confidence,” says Lack. “We have confidence that environmental markets will not only be supported, but expanded.”

That expansion may not come through federal legislation, given how finely balanced Congress remains, but “we believe we are going to have tremendous regulatory support” for environmental action, he says. For example, in March the Environmental Protection Agency tightened the Cross-State Air Pollution Rule, multiplying prices of nitrogen oxide allowances some eight times in two months. Similarly, prices for Renewable Identification Numbers – which are used by gasoline and diesel refiners or importers to demonstrate compliance with the Renewable Fuel Standard – have more than doubled over the past 12 months.

Meanwhile, the election had direct consequences for Element Markets. Prior to the November 3 vote, the firm had been approached by the Rise Fund, TPG’s $5 billion global impact investing platform, which invests in businesses that are delivering measurable social and environmental impact.

“A sale wasn’t something we were pursuing,” says Lack, “but what became apparent was the alignment between the Rise Fund and Element Markets.” The election proved to be catalytic, reversing, as it did, the previous administration’s opposition to environmental regulation. By the end of the year, the deal – for which terms were not disclosed – went through.

Lack says the Rise Fund plans to inject capital into the business to support its growth, including by acquisition. But, as well as hopefully generating attractive returns in its own right, part of the value that Element brings, Lack believes, lies in helping the Rise Fund identify and realise new opportunities from environmental commodities that are embedded in its portfolio and in potential acquisitions. “They see us as a partner to understanding complex environmental markets, which will open up new investment ideas and the ability to extract the underlying value of environmental commodities.”

“Carbon is a new currency,” he continues. “There’s essentially a wealth transfer under way from the largest emitters to carbon sinks … it’s happening across the economy and it’s not going away. We want to be active at every point where that currency transacts. That’s one of the things that makes us unique compared to our peers – it’s our breadth.”