• Gerd Hübner, Klaus Meitinger

The hot twenties.

Lerbach zwanziger

Climate as an investment factor. The fight against climate change will dramatically change the way we do business in the future. This will widen the gap between winners and losers among companies. The Lerbacher Runde explains how investors should react to this.

"There is an interesting study," says Stephan Kemper, BNP Paribas WM Private Banking: "On behalf of the 'Financial Times', the impact of a CO 2 price of 100 euros was calculated for the 1000 largest listed companies - today the CO 2 price is just under 60 euros. The result: the top ten percent would gain 30 percent in market value, the bottom 50 percent would lose." Welcome to the net zero path. "Climate change is a driver of enormous upheaval," Axel Angermann, FERI Trust, is convinced: "This megatrend is strongly progressive and virtually irreversible. Investors need to adapt to it now." "The most important information is: there will be a dramatic spread between winners and losers," says Lutz Welge, Bank Julius Baer, and concludes: "For investors, this will create opportunities." Indeed, huge efforts are needed to move towards a global net-zero economy. The Intergovernmental Panel on Climate Change (IPCC) estimates the global investment volume for a successful transformation at 50 to 100 trillion dollars. That's roughly once the entire world's national product. "This investment is demand. For certain companies, this necessarily means higher sales, higher profits and rising share prices," clarifies Michael Huber, Südwestbank.

The sectors of particular interest are easy to identify. "Wind and solar energy, batteries. Carbon capture technologies. Providers of electric vehicles, fuel cells, alternative fuels and energy efficiency solutions," lists Kai Röhrl, Robeco. "But even apparent losers can turn out to be winners," adds Welge: "Did you know that it takes 70 tons of cement to build the base of a wind turbine? The more wind turbines we put down, the better for the cement industry." "Another exciting topic is water and how we supply water-poor areas. One of the most interesting ways is to export food grown in water-rich regions.

That brings the food industry into focus," Kemper reflects. "Food is a good keyword," adds Michael Huber, "after all, conventional agriculture is responsible for around one third of global CO 2 emissions. Eating habits - especially among the younger generation - are therefore changing dramatically. Companies that make their mark on vegan nutrition will therefore have enormous potential." Ideas, the panel agrees, are more than plentiful. "The difficulty lies in identifying future climate winners and then using them intelligently in the portfolio," Axel Angermann clarifies.

"That's a challenge," nods Christian Jasperneite, M.M.Warburg & CO, "we often don't even know today which technologies will prevail. Identifying entrepreneurial disruption early on is very difficult. Of course, it is clear to everyone that Tesla or Amazon have disruptive characteristics. But who would have bet on that 15 years ago?" Bankers are rising to the challenge. "It's about selection. So we're in demand as advisors. Many companies have fascinating business models. But their shares are extremely highly valued. That's where we have to go with the classic methods of financial analysis," says Welge. "It's also important to look closely at the funds," adds Kemper, "many have nice names, sell themselves with great stories. But they often occupy small niches and then concentrate on a few stocks.

The risks of such products are underestimated by retail investors." The bottom line from the roundtable: funds or individual companies developing transformative technologies for a net-zero economy are a satellite investment and should therefore make up no more than ten to 20 percent of a portfolio. A second way to bring the climate issue into the portfolio is to rank companies according to their CO2 emissions and then minimise this in the portfolio. "The idea behind this is that companies that emit little CO2 are better positioned and less vulnerable if politicians tighten the reins more in future," explains Michael Huber. "Climate-neutral funds or those that explicitly invest only in companies that are compatible with the Paris 1.5-degree target also fit this strategy," adds Kai Röhrl. "The question, however, is always: How do you calculate compatibility in concrete terms?", considers Christian Jasperneite: "We're talking about reduction paths here. Global budgets for CO2 . But we only know these approximately. I therefore have the feeling that many indices and funds are not based on this, but only on the CO2 intensity.

That leads the panel to the question of what investors can really do to make a difference. "What do we achieve for the climate if we sell companies with high CO2 emissions?" asks Röhrl. "The fact that a share moves from the seller's portfolio to the buyer's creates no effect," analyses Welge, "after all, secondary market transactions via the stock exchange are not about new capital." "Maybe indirectly the refinancing aspect plays a small role. But in the end I need commitment, the exercise of shareholder rights. The leverage is greater there," Jasperneite clarifies. At the moment, a lot of things are still going wrong: "The stocks that actually need commitment are being sold by sustainable investors. And the buyers don't care about the issue at all." "I therefore think a best-in-class approach, i.e. the selection of the best in each sector, makes more sense than exclusion. You can only make a difference where you're invested. And it also makes economic sense to accompany sectors like energy or utilities in their transformation. After all, in a net-zero world, we will need much more electricity," Welge says.

"However, investors only achieve a real impact by providing fresh equity or debt capital to companies whose activities have a real social benefit," Angermann makes clear. "In the bond market, this is easy. In the case of so-called green bonds, entrepreneurs or governments have to make it clear every year which projects they are financing with them and with what success. But on the equity side it becomes more difficult," says Jasperneite.

"Currently, the relevant funds are still making do with a detour via the 17 UN Sustainable Development Goals (SDGs). They invest in companies whose business models explicitly contribute to these goals with a high share of sales," explains Kemper and continues: "It is interesting that many of these goals also have something to do with CO 2, with the energy transition. And with that, the carbon footprint of these investments shifts at the same time." "But the secondary market problem remains. If you are looking for real impact, you have to look around in the private equity and venture capital market," Axel Angermann makes clear.

Especially in the impact sector, the panel criticizes, there is still a lot to do. "At some point we need uniform and binding rules - when is a fund sustainable, when does it achieve impact? As long as more or less everyone decides for themselves, there will always be a certain suspicion of greenwashing," Angermann concludes.

"But that will come to an end," Michael Huber is convinced. "From next spring, banks and asset managers will be obliged to ask every client whether they are interested in sustainable investments. Then there will be inquiries. And then the client will have to decide for himself whether the respective approach is in line with his convictions." "All in all, however, this means that in future much more capital than before will flow into these areas," says Lutz Welge: "Every decade has its dominant investment theme. In the hot twenties, it will be climate and sustainability."

// What does climate change mean for capital investors?

The fight against climate change will have a massive impact on capital markets for years to come. "For investors, this is the mother of all megatrends, so to speak," says Kai Röhrl. To profit from it, analysis, selection and diversification are needed. "A case for funds," says Stephan Kemper, concluding, "Because 'E' is an important aspect of all ESG investments, it also means that sustainable investments should be the core of every portfolio in the future."

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