With lessons for the rest of us
Late last week, Deutsche Asset Management (DeAM), a division of the Deutsche Bank, became the most recent global financial institution to issue a climate change research omnibus report. Like earlier efforts by other institutions, the Bank’s report, Investing in Climate Change: An Asset Management Perspective, is as much about signalling their competency to manage the emerging risk/opportunity elephant that is climate change as it is about investment research. Release of the report coincided with their announcement that DeAM had hired a lead climate change strategist, Mark Fulton, and formed a five person Climate Change Investment Committee.
Giving a look forward, the Bank’s Global Head of Asset Management, Kevin Parker, states:
Our specific strategies seek to invest in industries and companies that are involved in both the mitigation of, and the adaptation to, climate change. In mitigation, we look at industries that are in the energy efficiency and clean technology fields. In adaptation, we search for companies that work on adjusting to climate change.
Interestingly, the Bank examines different strategies and concludes that a diversified portfolio which includes a broad universe of companies exposed to climate change offers lower risk and volatility than a “pure play” that concentrates on investing in a narrower field of generally small cap, focused companies (e.g. clean-tech).
Earlier this year, Citigroup, Lehman Brothers and UBS each provided similar takes on climate change and the investment opportunities it creates. Lehman Brothers report, The Business of Climate Change: Challenges and Opportunities may be the largest of the research papers, weighing in with 145 pages. (Neither Citigroup’s report, Climatic Consequences: Investment Implications of a Changing Climate, nor the UBS report, Climate Change: Beyond Whether appears to be available to non-clients.)
During 2006, Toronto’s Sprott Asset Management provided research that examined the implications of abrupt climate change (see Investment Implications of Abrupt Climatic Change). The U.K.’s Carbon Trust also introduced two research efforts intended primarily to educate the institutional investment community (see Climate Change & Equity Valuations, and Climate Change and Shareholder Value).
All of these papers are similar in providing a brief summary of the science and emerging policy of climate change, identification of key themes or drivers and a broad brush review of the respective investment strategies. Where they differed was in the level of detail given in their recommendations. Citigroup’s report appears to advance the theme furthest, going so far as to name 74 companies in 21 sectors that the authors believe to be well-positioned to capture the opportunities climate change will bring.
If I had to recommend one paper to read, it would probably be The Business of Climate Change: Challenges and Opportunities, prepared by Lehman Bros. It’s the longest but also the most readable of the reports I've had access to.
(JPMorgan doesn’t appear to offer an omnibus report on climate change, but has established JPMorgan Climate Change Research as a sub-section of its Global Corporate Research and appears to be producing a steady stream of publicly accessible reports on specific issues and opportunities related to climate change.)
Lessons for sustainable energy investors
While each of the reports brings the respective institution’s spin to the issues, a number of common themes emerge for investing in sustainable energy.
· Energy and the energy system that develops in response to climate change policy and regulation are central to all of the investment themes explored by the Banks;
· While much of the current excitement in energy is focused on renewable energy and clean-tech, i.e. mitigation strategies, the Banks also urge a focus on investment in adaptation (although, most of these relate to companies outside of the energy sector);
· As might be expected, a key focus is on sustainable energy technologies, including:
o Hydrogen technologies; and
o Energy efficiency;
· Emission efficient power generation (nuclear, coal gasification, carbon capture technologies).
None of the insights provided by these banks is particularly new or unexpected. However, it is informative to have each of the Banks pull their thoughts together in one place and its nice to know what the professionals are thinking.