Every reason to switch to green investing
An interview with Jochen Wermuth, impact investor, Founder of the Green Growth Funds and Board Member of Germany’s new €24bn Energy Transition Fund
The Berlin Green Investment Summit 2019 will take place on the 5th June at Soho House Berlin. Secure your spot here
This interview is part of the Eco Innovation Alliance x The Beam dossier on Climate Solutions
You were enjoying a successful career before you decided to switch to ‘green investing’. Was there a specific moment which influenced you to make this change?
One day someone pointed out that though I was a big donor to Greenpeace, at the same time I was investing in oil companies. Then I went to the North of Russia with my wife, who is an environmentalist. There, there is as much oil running into the Arctic sea every year as the five million tonnes that BP spilled into the Gulf of Mexico. The people that drink the water from the oil-covered rivers end up having cancer ten times more frequently than others. After the local doctor took us to an embryo collection with deformed babies, I realised I didn’t want to be supporting companies that make a profit at the expense of human life, or the other life forms of the planet.
You’ve taken quite a leadership role in influencing other people. What makes you so passionate about ensuring more people are adopting these investment practices?
Morally, we feel that climate change is the human rights issue of our time: it will kill the poorest first, who have had the least to do with causing climate change.
For financial reasons, it makes no economic sense to invest in oil or gas or coal anymore. A solar power plant now produces power at two cents per kilowatt hour and oil could only compete at US$5 a barrel (and it’s currently at around US$60).
Finally, for fiduciary reasons, if you manage other people’s money you have a duty of care. You should worry that if you invest in oil, gas and coal companies you will lose all their money.
We very much like the idea of Sir Ronald Cohen who set up the G20 Global Steering Committee on Impact Investing. He sees an impact revolution taking place where we are in the third phase of capitalism. The first phase was pure brutal exploration, then we came to social market capitalism where most business people were basically out for profit first. The new phase will be risk, return and impact as the new normal; where everybody will be able to know what the impact of their bank account or their investments will be. We want to allow everybody in the world to participate in high return, positive impact investment, and we want to democratise impact investment.
What are your strategies for convincing other investors or funds to follow your lead and support the Green Industrial Revolution? And why do you think it’s been so difficult to find people to support sustainable business ventures thus far?
Well, first of all I think we have seen an amazing breakthrough. We came from 10 million commitments in 2012 which grew to 50 billion in 2014 just before the COP21. Then Dubai built the world’s largest solar power plant and shattered all records for solar cost. From there, it was clear to many investors that it didn’t make sense to invest in oil, gas exploration anymore. The commitments to divest then exploded to 1.5 trillion by COP21. We’re now at five trillion, and investors globally are calling for a price on carbon and for disclosure on CO2 footprints.
There are a lot of people committed to the cause, but there is a shortage of investment into sustainable companies. If we want to achieve the Paris Agreement, we are about 1% of GDP or 1 trillion euros a year short of investment. In order to achieve that we need professional managers, we need courageous people who move the capital and who know how to do this.
This is also a problem with information asymmetry. Many investors have good intentions, but lack the numbers and tangible information, nor do they have a standardised metric with which to analyse whether companies are sustainable or not. What do you think could be done to bridge this gap between uninformed investors and the sustainable energy movement?
There are a few risks with regard to information, or rather misinformation. Firstly, greenwashing is a big risk. The second risk is the amount of money behind oil, gas and car companies giving solar, wind and electric car companies a bad reputation. People have said to me: “you know that a solar panel never generates as much energy as it takes to create it?” to which I reply “yes, and that was true 50 years ago, and today in 1.5 years you get that energy back, and it generates power for another 40 to 80 years free for you.” I hope that we can get people to see through the fake news.
I also hope that we can put together credible asset managers like Generation Asset Management set up by Al Gore and others that have a listing so that regular citizens can buy stocks in such a sustainable companies. Unfortunately at the moment to invest in funds you have to pay large commissions to buy in and out, and you may lose all your money in between. There are better options like the Harvard or Yale endowment approach where people all invest longer term, more sustainably, and with higher returns. This is what we are trying to make available to every citizen of the world.
So when you’re investing, which other parameters do you take into consideration, other than of course positive impact? What else are you looking for?
We don’t think that you should take any reduction to your expected market return on the investment. If you accept no return, and just give away your money then you’re a charitable investor or a philanthropist. We are finance-first investors. We don’t look to maximise the impact, but rather look to maximise return with positive impact. Then if we have successful financial returns, then more investors will come.
“The areas where we see the greatest potential today are other areas where the global capital flood has not yet arrived. This is, for example, in growth-stage private equity.”
We look at the typical ESG (Environmental, Social and Governance) criteria, and we look to make sure that we have a healthy, diverse management team. We still live in a very sexist society. Many male private equity investors select only male-owned or male-managed companies. If you invest in female-run companies then you get better managers for the same price so to speak, because of this bias and prejudice. So gender-lens investing is one of the things we look at.
Do you have a favourite asset class at the moment that you’re looking towards as the next opportunity in this [impact investing] space?
Our basic approach is that of a value investor, starting with a macro analysis: is it wise to put any money to work to start with, or is it smart with sit with cash and do nothing? Then we look whether we want to be in fixed income, equities, or perhaps alternatives: private equity, venture, infrastructure, or in real assets, such as real estate, land, forests or water. There is a huge amount of liquidity floating around, which has driven the valuations of many assets beyond reason, be it the level of real estate prices and rents you have to pay in Berlin, or the yields you get on bonds…
Or lack thereof.
Yes, exactly lack thereof, the yields go negative such that you get nothing which is definitely not good.
The areas where we see the greatest potential today are other areas where the global capital flood has not yet arrived. This is, for example, in growth-stage private equity. These can grow exponentially and profitably, whilst solving the problems of humanity. However, they’re still loss making, and because of that they’re having a hard time raising money. By investing in such companies you can have a very high return because you help them move from loss-making to profitability. You can also have a very high impact, so that’s our focus.
Secondly we’re looking at very long-term assets. For example, in Western Australia, for 600 euros you can buy and reforest a hectare of unused farmland. Over 20 years this will generate about 100 CO2 emissions certificates (from approximately 100 tonnes of CO2 capture). If you value those at 100 euros per tonne, then you have a 10,000 euro return on a 600 euro investment. After 20 years, not only will you have earned the money on your carbon emissions certificates, but you also own a proper forest.
There is also an initiative by Project Drawdown which brings together almost 1000 researchers from around the world to find the leading projects to draw down CO2 from the atmosphere again so that we can get back to pre-industrial levels. They found out that cows walking on the beach grow faster, eat less and burp less. You can save 30% of the CO2 emissions from the cows. That is as much as cutting a third of the emissions from the German car fleet. So with very small interventions we can make a huge impact on the environment and these are the sort of long-term projects we are looking at. Other simple ones are covering highways with solar panels, or covering rooftops of logistics centres with solar panels.
There are many great projects to implement, the question is how do we get people to put more money behind it.
Well certainly Asia’s largest banks are stepping up financing of renewable energy projects. How do you think moves like this will affect the European investment scene? Do you think they will follow suit?
Yes the Chinese are now leading the investments by far, they’ve taken over the German solar industry by basically having the same manufacturers which build the solar industry, build the Chinese industry. Europe will either become irrelevant economically and politically, and therefore unable to sustain its liberal values, or Europe catches up now and decides to also invest aggressively.
Norway’s sovereign wealth fund just began divesting from fossil fuels. Some are applauding the move, and others believe the scope leaves much to be desired. What do you think about that decision, and to what extent do you expect other large funds to follow suit?
I think it’s a great success and a cause for celebration. They are hugely influential with a thousand billion under management: they set the standards for the world. Similarly, the Pope called for ‘Care for Our Common Home’. He said that we should protect Mother Earth, and care for our kin and our environment. These are very powerful signals, and very much needed for people in business to stop being cynical and to stop focussing on just making money at the expense of others and at the expense of the planet.
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Jochen Wermuth is the Founder of Wermuth Asset Management, a family office committed to investing not only for returns, but with positive social and environmental impact. He has over 20 years of investment experience, having worked prior as a Director at Deutsche Bank, and as an EU and World Bank-financed economic advisor.