“Die Welt” article on climate endowment: 16 May 2020
Read the the original post in German here.
The Corona crisis has mercilessly revealed that large parts of the economy lack resilience. The capital markets were also brutally pulled down: Custody accounts, which lacked a focus on sustainability, lost dramatically in value. Only a few investments were resilient and sustainable enough to escape the crash. For Jochen Wermuth, resilience could be a life motto: The investor’s funds are higher than at the beginning of the year, and the 24 billion euro German nuclear fund, the so-called KENFO, on whose investment committee he sits, has lost much less than the market as a whole. Wermuth attributes this to its investment strategy, which excludes a whole range of business models that burden the environment and climate. These non-sustainable business models were particularly hard hit in the downturn. Those who avoided them before were able to limit their losses.
“We invest according to strict environmental and social criteria. This has paid off during the crisis,” says Wermuth. He sees the crisis as a milestone that separates the investment world into a before and after. And this is exactly where the Berliner-by-choice wants to launch a big green thing. Wermuth’s idea contrasts with the public mood. It seems that climate protection has lost its relevance for many German citizens in the pandemic.
But investors with green stocks have done much better in the downturn. But those who really want to invest with a clear conscience have little choice. Financial visionary Wermuth wants to change this and is planning a green investment vehicle based on the model of investor legend Warren Buffett. If his vision becomes reality, German savers will soon be able to buy solar plants, wind projects, resource-saving recycling and energy efficiency in one paper.
“Today, it is not possible for possible for private retail investors to invest in a wide range of genuine eco-investments”, says Wermuth. “We want to change that,” he is planning a kind of green endowment fund, the “Climate Endowment Fund “, which will be modelled on the American endowments. Elite universities such as Harvard or Yale have had their assets managed by such endowment funds for decades and often achieve double-digit annual returns. The magic formula is to achieve the best possible diversification and, in the case of illiquid assets such as private equity, infrastructure and others, tohave a strong professional team working on a partnership-basis, being paid largely on a success basis. The excess returns result from the fact that only large investors have the financial leeway to put in place the strong teams needed and to tie up capital in such a long-term manner: Economically speaking, they earn an “illiquidity premium”. Wermuth’s chief attraction: He wants to put a green stamp on the proven model and across all asset classes only make investments that also reduce greenhouse gas emissions.
Wermuth also wants to distribute the money in his endowment fund across a wide range of asset classes. The special thing about it is that only a quarter is invested in shares and bonds. Three-quarters of the money goes into venture and buy-out private equity investments, infrastructure projects and non-publicly listed companies, which are normally inaccessible to private investors. For example, a collection of medium size hydroelectric power plants in Norway that promises its owners a return of eight percent. Forest or agricultural land is also to become part of the endowment fund. In order to offer private savers this investment opportunity, he wants to bundle all green activities in his “Climate Endowment Fund” and then list it on the stock exchange, such that retail investors can buy shares in it without the liquidity constraints and sales commissions associated with retail funds in general.
“16 Trillions of Euros are lying in the current accounts of EU citizens alone. If we could get just 6% percent of that as equity capital in ecological projects, leverage and recycle the capital several times, this amount would suffice to close the global climate finance gap and achieve our global climate goals,” says Wermuth.
Those who want to invest sustainably today do not have it easy. It is true that there are now numerous products that have committed themselves to green and social criteria. However, the funds labelled “sustainabile” mostly contain technology stocks, and it is not unusual for oil companies to appear in other positions. The iShares MSCI World ESG screened, which selects stocks according to environmental and social criteria and also assumes good corporate governance, includes several companies that are climate sinners, such as ExxonMobil, Total or ConocoPhillips. The controversial food company Nestlé is also one of the heavyweights in the portfolio.
In addition to ESG products, there are some funds that offer investors access to at least a small part of the green cosmos. The actively managed Robeco Smart Energy invests in companies that provide the infrastructure for the global energy turnaround: In addition to alternative energy producers, these include chip and software specialists who build and maintain smart grids. The passive index fund iShares Global Clean Energy puts investors’ money into producers or suppliers of renewable energy.
In Great Britain, on the other hand, there are numerous listed investment companies. Companies like Greencoat U.K. Wind and The Renewables Infrastructure Group are investment vehicles that invest in individual solar projects or wind farms. On a euro basis, these particular stocks have generated an average annual return of five to seven percent over the past five years.
Such project shares are Wermuth a number too small. He wants to set up something bigger. He got into the financial markets in the first place because he was annoyed by bad bank advice.
“My grandmother had a sawmill in the Black Forest, but once it was sold, the family wealth was badly managed by advisers from large banks” Wermuth recalls. That was a kind of awakening experience for him at the time. The studied mathematician and economist threw himself into the practice and theory of investing. “Securities analysis” and “The intelligent investor” by Benjamin Graham and David Dodd, which defines “value investing”, became his investment bible. There Wermuth internalized that the financial markets are about long-term structured investing. Over time, thanks to the compound interest effect, prosperity develops like a snowball that rolls down the mountain and gets bigger and bigger.
The bustling Tesla driver, who owns six electric cars, made his first million at Deutsche Bank of all places – in London and Moscow. For the German industry leader, he built up the Eastern European business, sold bonds and earned hefty commissions. And in Russia he now sees exciting investment opportunities again – should there be adoption of EU rule of law which he considers a possibility given the Corona and oil price crises. Many companies are valued at ridiculously low prices. For normal investors, however, the Russian market is also not easy to invest, says Wermuth, because oil and gas companies dominate the major indices. His strategy excludes those on the long side but includes them on the short side as he sees no future for fossil fuel companies.
It is exactly the right environment for Wermuth. As an investor he is on his way to becoming something like Germany’s green Warren Buffett. The fact that climate protection has long been government policy in the European Union is a good thing for him. Wermuth has already achieved one superlative: he is one of the largest individual donors to the Greens. Four years ago he provided the party with 300,000 euros. Now he wants to do something for the broad mass of investors: “The Climate Endowment combines long-term asset accumulation with a clear conscience, but investors still have to be patient and have a certain amount of time. This year there will probably be no more IPOs. But in 2021 it could be ready if a size comparable to the Harvard and Yale Endowment is reached thanks to institutional investors looking for professional long-term investments with positive climate impact.