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Risks and Opportunities for the World's Economy When 'Carbon Bubble' Bursts Berlin, Germany
A week after the G7 Summit and in advance of COP21 (the UN Climate Change Conference in Paris in late 2015), renowned experts met at the first-ever Berlin Investment Forum. Organized by Der Tagesspiegel newspaper and Wermuth Asset Management around the theme of "Climate Change and Global Asset Allocation ", 150 delegates discussed the impacts of climate change as well as financial opportunities and risks posed by the worldwide energy transition.
Speakers included leading scientists Prof. Hans Joachim Schellnhuber and Prof. Klaus Topfer as well as Rainer Baake, Undersecretary at the German Ministry for Economic Affairs and Energy. The global investor community was represented by impact investors from the Rockefeller Brothers Fund, Willows Investments and Wermuth Asset Management, among others. Partners include the European Climate Foundation, ResponsAbility and Germanwatch.
"When the carbon bubble bursts, it will negatively impact the global financial system and the world economy," said Jochen Wermuth, founder and CIO of Wermuth Asset Management, a family office. The term 'carbon bubble' means that only about 20 percent of the world's known fossil-fuel reserves such as coal, oil, and natural gas (and as reported in balance sheets) may be exploited in order to meet the climate-policy targets reaffirmed at the G7 Summit. The remaining 80 percent of fossil fuels cannot be used and are thus worthless in the balance sheets of oil, natural-gas, and coal companies. Even if no agreement is reached at COP21 in Paris, tremendous adjustments in value will be necessary.
"Renewable energies are increasingly competitive even without subsidies. They also drastically reduce demand for fossil fuels. It is therefore truly essential that investors make these risks transparent, adjust their balance sheets, and divest themselves of fossil fuels if at all possible," Mr. Wermuth explained. He added that most market participants are considerably underestimating the balance-sheet risks.
"Investment banks, insurers, and pension funds should commit to establishing higher reserves for investments jeopardized by the carbon bubble," Mr. Wermuth urged. This applies to not only investments in producers of oil, natural gas, and coal, but also their debt.
In addition, countries dependent on exports of oil, natural gas, and coal also need to make appropriate adjustments. Wermuth believes that investment banks and other brokers should be required to regularly disclose to their customers their net positions in fossil fuels. Regulation to enforce this reporting requirement will be required.
The Berlin Investment Forum also focused on business opportunities and investment strategies that play a crucial role in making the energy transition a success. "Critics claim that the energy transition is too expensive or that it will wreck Germany's economy. Yet precisely the opposite is true," Mr. Wermuth argued. "Once Germany transitions from fossil fuels to renewable energies, it will be home to the world's most competitive economy. We can then export our know-how worldwide."
Renewable energies already satisfy 75 percent of Germany's demand for electricity in the summer. "If we increased our supply of electricity by just two percent, then all cars on German roads could be electric, saving some $70bn in fossil fuel imports per annum," Mr. Wermuth said. By 2020, Germany could rely exclusively on electricity generated via renewable sources of energy, although certain conditions would have to be met including: using batteries in electric cars to store energy; increasing the share of solar power from five percent today to 25 percent; establishing a capacity market for gas-fired power plants; relying on block-type thermal power stations; and retrofitting existing wind turbines with larger rotors for higher base loads.
"Investing in resource-efficient companies such as renewable energy providers not only helps reduce CO2 emissions. It also results in attractive returns," Mr. Wermuth said. Wermuth reminded the delegates that solar power produced independently in Germany is available - without subsidies - for 0.09 EUR per kilowatt hour. At the same time, investors enjoy returns of 7 percent a year. The price of oil in Texas would have to plummet below 10 USD per barrel to compete with solar power selling for 0.05 EUR per kilowatt hour.
Wermuth Asset Management (WAM) was founded in 1999 by Jochen Wermuth. The Family Office and investment advisory firm specialises in Impact Investments in resource-efficient companies with returns of 20% per annum. Wermuth is dedicated to and follows the UN Principles of Responsible Investing (PRI). WAM seeds and advises alternative investment vehicles in private equity, infrastructure, listed and real assets.
Jochen Wermuth is a Steering Committee member of Europeans for Divest-Invest (an association of investors) and a member of the Young President's Organization (an investment network). In 2012-2013, Mr. Wermuth was an Advisory Board member of the Community of Global Growth Companies at the World Economic Forum in Davos.