• Klaus Meitinger

Hot phase.

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Future investments. The unavoidable damage caused by climate change and the massive changes in the transition to a low-carbon world will significantly alter investment performance both in the short and long term. Investoren should act now.

Deb Clarke is not surprised that the effects of climate change can be felt everywhere. "After all, we are already one degree above the average temperature of the pre-industrial age. The last time it was so warm was 100,000 years ago. And it's been three to four million years since the CO2 concentration was as high as it is now," informs the Global Head of Investment Research at Mercer.

Humanity has embarked on an unprecedented expedition without a compass. "Even if we were to achieve the two-degree target, it would still mean that sea levels would rise around 50 Zentimeter, maximum temperatures would rise by 2.6 degrees and we would get 36 percent more extreme rainfall," Clarke lists. According to the analyst, to achieve this with a probability of 66 percent, the peak in greenhouse gas emissions would have to be reached at im Jahr 2020 and then halve in each of the following decades. "This shows what a strong and coordinated global policy response to climate change is needed to meet the two-degree scenario," concludes Clarke.

Is this realistic at all? "We'll see," meint Clarke. The next moment of truth could be 2020, when governments will have to present their progress towards meeting the national climate targets im Rahmen of the 2015 Paris Accord. Or by 2023 at the latest, when the first global inventory is scheduled.

"But the truth is that we've wasted 40 to 50 years since the facts about man-made climate change became known," writes Jeremy Grantham of the US investment boutique GMO in his analysis "The race of our lives," "and now we're moving so slowly that by the time the economy could be completely CO2-free, the world could be 2.5 to 3 degrees warmer - and much of the damage has probably already happened."

This is an extremely challenging environment for investors. Risks do not only arise from the expected physical damage, which will negatively affect many sectors, and the technological changes during the transition to a CO2-free world. The anticipation of political decisions is particularly tricky. The longer massive adaptation measures are delayed, the faster global greenhouse gas emissions will have to be reduced later in order to avoid a much greater rise in temperature. And the tougher the government regulations and burdens on the economy will be.

In order to provide investors with a kind of guard rail, Mercer has examined three scenarios - global warming by two, three or four degrees - and calculated the impact on the langfristigen Renditen of different asset classes. Important variables here are government expenditure, investment in the catalysts of transition, the costs of the transition itself, damage caused by natural disasters and the impact on the verfügbaren Ressourcen.

Not surprisingly, the net effects are negative in all scenarios. However, the yield losses are clearly higher the stronger the temperature rises. The representative of a leading insurance company even described a plus four degree world as "no longer insurable and no longer investable".

"Our conclusion is:  Das Two-degree scenario is a necessity and an opportunity for investors. This is necessary because significantly better investment results can be achieved compared to the other scenarios. And an opportunity, because in a world of low emissions there will be many remarkable investment opportunities - even if some established companies then suffer losses," explains Clarke and calls on investors: "Become a future maker. Take an active role to achieve this goal - by allocating your capital and your influence in discussions with managers and politicians".

An important key for the transition phase may also be der Preis for CO2. There are various platforms worldwide on which emission rights are traded. In principle, that's a good idea. In theory, this could lead to a market-based solution to the problem. If a maximum level of pollution rights acceptable in terms of climate policy were set worldwide, the price could reflect the scarcity of the good "environment" and provide an incentive to invest more in climate protection.However,  Noch does not work because certificates are allocated nationally and in excessive quantities. "The price of CO2 certificates is still too low to reflect the overall social costs of emissions and to send a meaningful signal to business", meint Clarke.

The German branch of the "Friday for Future" movement is therefore also demanding that all the costs of CO2 emissions that future generations will incur be offset. Die Scientists from the HTW Berlin and the Fraunhofer Institute for Energy Economics and Energy System Technology point out that according to calculations by the Federal Environment Agency, the price for a tonne of CO2 would have to be 180 euros in this case - and not 26 euros as is currently the case.

Der Emissionshandel also relentlessly reveals the fundamental problem of all efforts to get climate change under control. What benefits the climate harms the economy - at least in the short term. Already more than one year ago analysts of the Investmenthauses Schroders calculated zum Beispiel that with an increase of the issue price on 100 dollar nearly half of all quoted enterprises would have to count world-wide on losses of more than 20 per cent with the yield. "Wash my fur, but don't wet me," doesn't work on the climate issue.

Nevertheless, there is no alternative but to accept the economic difficulties now in order to avoid worse things later. There's not much time left. The hot phase has already begun. Investors who now become active not only protect their portfolios - they also protect our livelihood. ®


Investing in the age of climate change.

Investors have it in their hands to have a say in the future. According to Mercer's experts, investors should take three steps to become a future maker:

// 01. integration

Integrate sustainability criteria explicitly into the investment process.

// 02. responsibility

Get actively involved - through the use of voting rights at the Annual General Meeting and involvement in discussions with corporate leaders and politicians.

// 03. Investment

Invest more capital in sustainability issues, in Impact Investments and in new technologies that help solve the climate problem. Areas and companies that damage the climate are sorted out. Damit their capital costs rise. And this in turn creates pressure and change.

To illustrate how strong the impact of all the measures that will be necessary to achieve the two-degree target is, hat Mercer calculates the cumulative return of an investment in individual asset classes up to 2050. Coal says minus 100 percent. Oil and gas fell by 95.1 percent and electricity suppliers by 65.7 percent.

On the other side of the scale are renewable energies with a plus of 177.9 percent. Infrastructure with 39.4 percent and sustainable infrastructure topics with 67.1 percent. So it's worth differentiating. You can find more information at: https://www.mercer.de/

newsroom/climate change-institutional-investor-trade-study.html

// The Climate Change Depot

Jeremy Grantham of US investment firm GMO has outlined a climate change portfolio as an inspiration for other investors:

Clean energy (solar, wind, green electricity) 25.4

Batteries and energy storage 14.0

smart grid 6,2

Copper (most important raw material in electric cars) 8.4

energy efficiency

(transport, buildings, lighting, recycling) 16.8

Agriculture (equipment, wood, seeds and eco-chemicals) 7.7


fish farms5,9



You can find more information at: https://www.gmo.com

"The race of our lives revisited," by Jeremy Grantham.


The price for CO2 certificates - between politics and climate truth.

Investment idea reloaded. The prices for CO2 emission certificates have quadrupled in the last 18 months. Should investors take profits now? Or will prices continue to rise?

The European Emissions Trading Scheme is the central climate policy steering instrument in Europe. It aims to reduce greenhouse gas emissions from energy and industrial installations and aviation in a cost-effective manner. The state decides how many CO2 equivalents are awarded each year. Immer in April, the companies must then surrender one of their pollution rights for every tonne of CO2 actually emitted. If they blow more CO2 into the air than they have been allocated, they must acquire additional certificates on the market. CO2 emission gets a price like that.

Trading takes place at der European Climate Exchange. Es can be invested both in futures contracts and in certificates, which roughly reflect the price development of these contracts. In issue 04/2017 private wealth pointed out this interesting investment idea. The certificate cost 7.16 Euro at that time, but politicians wanted significantly higher prices. French President Emmanuel Macron, for example, advocated a minimum price of 25 to 30 euros. Andreas Speer, Senior Resources Analyst at Bayerische Landesbank, therefore concluded: "Anyone who sees this investment from a long-term perspective should do pretty well with it."

Now it went faster than I thought. Heute notes the certificate at around 26 euros - profit almost 300 percent. "But quite honestly," says analyst Lawson Steele of the Berenberg Bank, "even this significantly higher price of pollution rights has no effect at all. Europe will not achieve the emission targets it has set itself."

Estimates differ as to how much a tonne of CO2 would have to cost to meet both the European and the Paris climate summit targets. The World Bank, for example, quotes a range of 40 to 80 dollars for 2020. According to calculations by climate researcher Ottmar Edenhofer of the Potsdam Institute for Climate Impact Research, every tonne of CO2 emitted costs society around 150 dollars. And the Federal Environment Agency estimates the climate costs that future generations will incur as a result of climate change at 180 euros per tonne of CO2.

One thing seems clear in view of these figures: the current price is still far too low to use this instrument to tackle the climate problem. But that doesn't necessarily mean that an investment there is still a good idea. "We must not forget that this is a political market", erläutert Andreas Speer: "25 to 30 euros per tonne of CO2 is still acceptable for industry. If the price were to rise above this, the pressure from the economy on politicians would probably increase to such an extent that they would be allowed to intervene."

In addition, according to the analyst, there would be further imponderables. If Great Britain were to withdraw from the European emissions trading system in the course of its withdrawal from the European Union (EU), its certificates would probably come onto the market. "In addition, the economic outlook is currently uncertain. In the event of continued weak growth or a recession, demand for emission rights would also fall noticeably. Der Preis would probably go down again."

Speer also points out that an oversupply of around 1.6 billion certificates has built up in the past. "Many of these rights were issued free of charge. Even though we currently have a shortage of almost 400 million certificates a year, there is still this stock that would come onto the market if prices were to rise further."

However, this is the subject of controversial discussion among experts. "Although there is this surplus supply in the stock. Aber nevertheless we will see a drastic deficit with the trade with the certificates in the coming years ?, are convinced Berenberg analyst Lawson Steele. His argument: "For the utilities alone, 1.1 billion units are tied up as a kind of security. And industrial companies account for about half a billion of them. You know that in 2021 there will be a much tighter allocation of free authorisations. Auch they will therefore keep their existing stocks and not sell them."

If Steele is right and this surplus in stock does not come onto the market at all, simple arithmetic is enough to calculate how much demand will exceed supply in the coming years. "For 2019, the market is short of about 155 million pollution rights. This would correspond to around 16 percent of demand. And this shortage will continue to increase in the following years," Steele continues. For 2023, he expects demand to exceed supply by 574 million certificates - that would be 60 percent of the market and, according to the analyst, the point of maximum scarcity.

If demand permanently exceeds supply, the price would have to climb further. "Imagine a company that emits a million tons of carbon dioxide," explains the analyst. "Consequently, it must also prove a million pollution rights. If she doesn't have them, she has to buy them on the market. Otherwise it would have to pay a fine of 107 euros per tonne of carbon dioxide emitted for each missing certificate in Höhe".

And even that wouldn't put an end to it. In the following year, the company must provide evidence of this missing certificate. "If in the first year a right is missing and the penalty of 107 euros becomes due, it must still acquire the missing certificate in the coming year nevertheless. Diese costs will be added to the fine."

For this reason, the analyst is quite certain that the price of CO2 certificates will continue to rise. First of all up to 38 Euro per ton. "From this point, it becomes more lucrative for companies to buy energy from gas instead of coal." Until about six months ago, this break-even price was 45 euros per tonne. Since then, the price of gas has fallen more sharply than the price of coal. "Today, gas is comparatively cheap. So I don't think the break-even price will fall any further," says Steele.

His timetable is as follows. "First, the price of CO2 certificates rises to 36 euros per tonne. Demand will then decline, but there will still be a demand overhang on the market. By the end of this year, 45 euros should be reached, and by 2020 65 euros." In extreme cases, 100 Euro could also not be ruled out. "In view of the foreseeable shortage of supply in the future, companies will pay any price to avoid the penalty and the purchase at the auction the following year. That would then be more expensive than the 107 euros."

Conclusion for investors: A higher price for CO2 certificates and thus a higher value of the environment is basically desirable. Ultimately, however, the granting of new pollution rights - and thus the question of scarcity - remains a political matter. At some point politicians will be faced with the question of what is worth more - the environment or the economy. "In the past, in case of doubt, it has always opted for the economy and against the environment," makes Andreas Speer clear.

Anyone who followed the suggestion of private wealth in 2017 and invested in CO2 certificates could therefore pursue a two-pronged strategy. After almost 300 percent price gain, the sale of one third of the position would pose the investment risk auf null .

The remaining position can then be kept relaxed. And not only to generate returns, but also as a kind of insurance cover for the portfolio. If politicians - as we hope - finally take things seriously, economic growth will be slowed on balance and the prices of many shares will probably fall. Profits with the CO2 certificates create for it im Portfolio a compensation.


Authors: Gerd Hübner and Klaus Meitinger

Photo: iStock

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