Like most big problems, climate change will require big solutions. Governments and business will have to make massive investment in clean energy–$45 trillion between now and 2025, says the International Energy Agency. This could make some people very rich. Wall Street, are you listening?
Deutsche Bank is. No financial institution has done more to promote investment in climate change solutions than Deutsche Bank. In 2007, it started a unit called DB Climate Change Advisors that has produced path-breaking research and developed products for institutional investors. The bank has also said—loudly and often—that climate change is a crisis that needs to be addressed. That huge digital billboard (left) by Madison Square Garden in midtown Manhattan proclaims that “Climate Change Affects Everyone” and keeps a running tally of the greenhouse gases in the atmosphere.
This week, I met with Kevin Parker, the global head of asset management for Deutsche Bank and the driver of the bank’s climate change commitment. Parker was a managing director at Morgan Stanley before joining DB in 1997, where he now oversees a group that has about $727 billion under management. Of that,about $7 billion, or 1%, is invested in products with a climate-change focus. That number, he says, really should be much higher.
“Climate change is not merely an investment sector that may hold future promise,” he wrote recently, in the introduction to a detailed report called Investing in Climate Change 2010. [PDF, download here.] “It is a sector that has already delivered and is continuing to deliver.”
More about that claim in a moment, but first a word or two about Kevin. For him, it turns out, the climate change issue is both personal and business. Parker, who is 50, told me that he became interested in environmental issues after he bought “a little piece of a small vineyard in France in 1995” and converted it to biodynamic farming, which restores the soil with compost and avoids chemicals and pesticides. (Yes, the rich are different from you and me. Lots more here about Chateau Maris, and its commitment to natural cultivation.) “We don’t know why live soils produce a better crop, but you can taste it and smell it,” Parker says. He got interested in water issues and climate changed and realized that “what we’re doing to the planet is just not sustainable.”
Over the last year or so, he has watched as the concentration of CO2 in the atmosphere rise — see DB’s Climate Counter, below — while, at the same time, the U.S. Congress has been unable to reach agreement on policy to deal with climate change. “As the father of a nine-year-old and a seven-year-old, that is deeply troubling to me,” he says.
Still, even as policy in the U.S. lags, other countries are leaping forward. That’s the topic of one of DB Climate Advisors’ most recent reports, called The Green Economy: The Race Is On. “The U.S. is falling behind,” the researchers write. “This can be seen through renewable energy capacity growth and capital investment relative to the economy.” Successful government policy needs TLC, the report says–meaning Transparency, Longevity and Certainty. China and Germany are both outpacing the U.S. in that regard and in 2009, China and Brazil clean energy investment was about three times greater than that in the U.S. as a percentage of GDP.
“The regulatory momentum outside of this country is robust,” Parker told me, “and it’s not well understood…The level of investment in clean energy in China is off the charts, compared to the U.S.”
While this could put the U.S. at a competitive disadvantage as the clean energy industry grows, it’s not a serious obstacle for investors who take a global view. Parker argues that better policy will translate into
massive differences in the amount of investment capital countries attract and the jobs they create in renewable energy and other climate change industries. Investment capital will find the best returns, wherever they are. Countries that fail to provide them will get left behind.
So where are the investment opportunities? And when will they arise? Maybe the most interesting claim in the DB research is that companies positioned to deal with climate change are already outperforming the market as a whole. In his introduce to the Investing in Climate Change 2010 report, Parker says that a simulated investment portfolio with a 6% allocation to climate change would have outperformed a benchmark portfolio by “an extremely respectable 0.7%” over the last three to five years. The simulated portfolio overweights four sectors–clean energy, energy efficiency, water and agribusiness.
Most recently, the best performer of those four sectors is energy efficiency, for obvious reasons. It’s not only climate-friendly but recession-friendly and, as McKinsey and others have shown, provides rapid payback of upfront investments in the form of lower energy costs. Here’s a DB chart comparing a basket of energy efficiency stocks to the S&P 500.
Investors in a Deutsche Bank mutual fund for retail investors in the U.S., called DWS Climate Change A, haven’t fared as well. Since the fund went on sale in the U.S. in 2007, it’s down by about 41%. By comparison, the S&P 500 has fallen by 25% during that period. Here’s a link to a Google Finance chart comparing the two. Major holdings in the fund include the East Japan Railway Co. Quanta Services, Inc., Vestas Wind Systems A/S, Calgon Carbon Corporation, Itron Inc., General Electric, SolarWorld AG, Cooper Industries PLC, Gamesa Corporacion Tecnologica, S.A and Tianneng Power International Ltd.
These short-term results — whether positive (in the case of the energy efficiency index) or negative (in the case of the climate change mutual fund) — don’t prove a lot. Because DB asset management serves mostly institutional clients, such as pension funds, with long-term horizons, its focus is on big trends that will drive investment returns for decades to come.
“There’s a real alpha in having exposure to a clean energy future,” Parker says. “The computer revolution produced the richest man in the world. The clean energy revolution will probably produce the next richest man in the world. There’s an enormous business opportunity for those who get in the game early.”
I think he’s right about the clean energy revolution to come, and the wealth it will create. And if he’s wrong? Well, we’ll all have a lot more to worry about than the health of our investment portfolio.