It’s not often you hear someone say that the private equity industry can make the world a better place. But that was the message delivered by Jochen Wermuth, Founder of Green Growth Fund at SuperReturn International in Berlin. Impact investing, he said, was the future.
There are very real threats to the future of humanity, warned Jochen. Chief of these is climate change, which is wreaking havoc on the world. Hurricanes, wildfires and extreme storms are not only becoming more prolific, they are becoming more intense. Icebergs the size of New York are breaking off the ice cap, prompting record sea level rise. The one million refugees that arrived in Europe in the last few years is a drop in the ocean compared to the number that rising sea levels could create.
There is plenty that can be done, however. “It’s up to the business community to put the money to work to stop them having to leave,” said Jochen. “The good news is – it is possible today.”
"Many think impact investment has to do with philanthropy, but to me it has to do with positive externality and investment with market returns," says Jochen Wermuth, Founding Partner at Wermuth Asset Management. Watch our full interview with Wermuth:
The end of the world as we know it?
The sea change in renewable energy means the end of oil, coal and gas and the beginning of a new world, where the only future for the combustion engine is sitting alongside the horse-drawn carriage in the walls of a museum.
“There’s a major challenge we have in our current economy – it’s called the carbon bubble,” explained Jochen. “At the height of the mortgage crisis,15 trillion in assets had to be written off.”
“That pales into insignificance when you look at what might happen to oil, gas and coal assets. Between $23 and $100 trillion in future revenues from oil, coal and gas companies may need to be written off.”
“Why? Because out of a total of 1,500 gigatons we have in resources and 762 gigatons in reserves, we can only burn 20% – if we want to survive as a species. That may sound scary but that is the fact.”
But he also said that there is as much opportunity as there is doom. Fill the Sahara with solar panels and we could power the whole world. Solar is now so much cheaper that it is competing with oil – and winning.
“Between 2000 and 2016, anybody investing in renewable would have been nuts – because you were depending on government subsidies.
“By 2016 the breakthrough happened. Even in Berlin today, solar power costs the equivalent to $12 a barrel. There is no one lifting oil at that price, oil is no longer competitive.
“Free markets are taking over,” he added. “Never mind Trump saying he is going to build new coal power stations, no one will build them because it doesn’t make economic sense.”
What about cars?
Of course, it’s worth remembering that the vast majority of oil the world produces goes to power cars. But Jochen described how we were moving towards a future where, not only would everyone drive an electric car, but you would actually make money by doing so.
“By using the battery in the car you can solve the problem in renewables when there is no wind and no sun. You charge your car at night and you make 10% of your battery available for storage,” he said. “The ultimate goal is that you get the car for free on the condition that you plug it in, and that’s because of the money made on the battery power trading.”
Ultimately, this signalled the demise of the combustion engine. “These two major disruptions make up the green industrial revolution,” stated Jochen. “The world is no longer what it used to be.”
ESG vs Impact
For those of us tempted to lump impact investing in with ESG, Jochen was keen to rid us of this assumption. “ESG is for softies. BP is 95% ESG compliant but that is useless because the impact of an oil producing company and the oil combusting car is that the planet will no longer be habitable.”
If you are a conservative investor keep your fingers away from the listed assets of the old economy.
This was precisely why it was such a great time to invest in certain sectors of private equity, said Jochen, explaining himself by way of analogy.
“In 1900, on Wall Street on Easter day parade, there were only horse drawn carriages. The best investments were the whip makers, horse breeders and carriage makers.
“Just 13 year later, at the same Easter day parade there wasn’t a single horse. None of the investments in whip makers or carriage makers paid off. The same is happening now. Exxon, Chevron, BP and Mercedes will be the next to disappear.”
“If you are a conservative investor keep your fingers away from the listed assets of the old economy,” he advised.
“If you are a private equity investor all power to you because you can invest in the new champions of this new green revolution. You can do a lot of good, make money and have impact.”
Investment opportunities
Interesting sectors, according to Jochen, were storage, renewable power, resource efficiency, transport, industrial efficiency, clean air, clean water and agricultural products. In addition, 95% of future growth would come from emerging markets, he added.
We shouldn’t be shy, urged Joche. “We, the private equity community, are the ones that need to deliver the change we need, to make money and save this planet because the risks we have are huge.”
Jochen is adamant that private equity is – or could be – at the forefront of change that would not only continue its success, but make the world a better place. After all, he cautioned, “I don’t want to be asked by my children why we didn’t do anything to make a difference.”
