I SPENT the front end of this week in Berlin for the latest quarterly meeting of the Deutsche Bank Global Investment Committee (we call it the "GIC").
This was my first visit to that wonderful city and I vow it will not be my last.
Berlin has it all: glorious buildings, wonderful vistas, friendly people and everywhere a deep sense of history. The history is inevitably tinged with sadness and
sometimes deep emotion but what I came away with was a profound admiration for what has been achieved there.
From the devastation of 1945 and the fission of the Wall has come a united city of great beauty, a perfect example of what can be done when hope and determination combine. For those who have not experienced it, I strongly recommend a visit.
But this was a working trip; the quarterly GIC is no tea party; it is several days of sustained effort and concentration during which we thrash out the overall "house view" and agree on a suite of forecasts for markets and key economic variables. With participants from all corners of the world you can imagine that the discussions are intense.
The GIC is not, however, merely an asset allocation forum. Our task is to think big and to try to detect the themes that may shape the future. So this week we spent a full day on climate change.
While scientific opinion is still not unanimous, particularly on the outcomes, it is clear that climate change is a theme that has morphed from theory into a solid economic force. Just as it must increasingly influence behaviour and the shape of our household budgets, this economic force poses threats and opportunities for investors.
It's a dauntingly big subject and the investment angles are in many ways still at formative stages. Already, though, latter day snake oil salesmen are limbering up to fleece the unwary.
The science has come a long way and we now have a generally accepted "cost curve" (expressed as euros per tonne) for carbon reduction. Carbon is already a tradable commodity, indeed putting an explicit, market-led price on carbon is central to the objective of emissions reductions.
The cost curve (developed by McKinsey) tells us that a carbon price of 40 should over time deliver the desired stabilised atmospheric greenhouse gas concentration of 450 parts per million. All very technical, but this cost curve is fascinating stuff and it points us to some counter-intuitive outcomes.
Naturally, all of us are likely to be attracted first to the carbon savings that cost least. Some of them actually save us money; building insulation for example saves us 150 per tonne so it's not hard to find an investment conclusion in there. Indeed, many self- financing carbon-saving strategies do not depend on risky high-tech developments at all while some very high-profile gizmos turn out not to be what they seem.
Thinking automotive, switching from petrol to diesel offers a cash saving of 15 per tonne, which probably surprises no-one. But how about the much vaunted Toyota Prius, darling of film stars and tree-huggers alike? Sit down before I tell you …. the Prius actually costs 4,500 per tonne of carbon saving.
OK, I know it's experimental technology and all that, but the warning's clear: don't assume that the place to make money must be at the technological cutting edge.
Climate change is already well established on the investment radar; in the mutual funds universe there is some 45 billion spread across 250 funds. But as with anything that's new, there are pitfalls. Carbon trading under the European Emissions Trading Scheme is highly volatile and the first attempt fell flat on its face, giving investors 100 per cent losses.
Arriving at some kind of clear investment conclusion is hard. Plenty of effort is going in to developing products for the individual investor. The point of this piece is not to make specific recommendations; rather it is to nail a flag to the mast. Whatever the scientific doubts, climate change as an economic force is here to stay. We, all of us, ignore it at our peril.
Peter Bickley is director of economics at Tilney Private Wealth Management
The full article contains 711 words and appears in The Scotsman newspaper.
