RI interview: Kevin Parker, Global Head, Deutsche AM: Declaring victory on green investing

Investors are starting to allocate assets to the green theme in a big way, says DeAM chief.

Kevin Parker, New York-based Global Head of Deutsche Asset Management (DeAM), is sticking his neck out again on climate change. He is bullish that 2011 is the year that DeAM’s bet on green investing comes into the money as the environment materialises into one of the next big ‘mega themes’: “I feel like we could declare victory right now, because this ball is rolling!” he says. Institutional investors, according to Parker, are starting to allocate assets in a big way in anticipation of a low carbon future: “Asset owners running trillions of dollars that have signed up to initiatives like the United Nations Principles for Responsible Investment (UNPRI) and the Investor Network on Climate Risk (INCR) are now seriously looking at what they should do.” For a large, mainstream funds house, Deutsche is a rarity. It took up the climate theme in a big way in 2005, mostly at Parker’s behest. It has its own in-house environmental research division, DB Climate Change Advisors, which makes its work publicly available as an educational spur to investors. In DeAM’s New York HQ the offices immediately adjacent to Parker’s own belong notably to the climate change team. And Parker himself, a former investment banker and member of the Group Executive Committee of Deutsche Bank, has been a vocal proponent of investing on the climate change theme, as well as a critic of US government policy on the topic. However, given the recent political failures at UN summits in Cancún and Copenhagen, one could be forgiven for thinking that in investment terms the odds on Parker’s climate strategylook long. Asset managers are, after all, not green campaigners. But the long shadow of the politics of climate change after recent disappointing UN global summits doesn’t worry Parker unduly: “All Cancún and Copenhagen are telling you is that you can’t get 190 national politicians around a table to fully agree on something. Not in the short term anyway. But the politicians are there, and the reality is that it’s not going to be governments that put up most of the capital. It is, however, up to them to put together the right investment frameworks for private capital to flow. We’re seeing that now. We believe the retooling of the global economy to a low carbon reality is going to be one of the biggest investment themes of our lifetime.” On the day I interview Parker, a foot of snow falls overnight in New York, adding to one of the worst winters in recent years. Rising to the theme, the DeAM chief says the US government predicts the New York State area could be hit by greater precipitation and flash flooding as a result of climate change: “Although global temperatures continue to gradually rise there are many variations and inconsistencies around the world, and microclimates emerging as a result. One prediction for northern Europe, for example, is a much colder climate despite rising global temperatures, because of impacts on the Gulf Stream. What’s certain is that many conversations you have with people these days revolve around strange weather patterns. At the same time, there is a lot of work happening in this area by the climate risk
divisions of major insurers to model this stuff and understand it, so it’s becoming a financial issue too. You also have a resources crunch going on. We have savvy Middle East investors coming to us and saying oil is going to run out in the next 50 years and they need to start hedging against that.” Despite Parker’s bullishness, the money is not there presently: “We’re not seeing the bulk of assets today, but we expect them this year and then bigger volumes every year from here. China says they are going to spend $1 trillion over the next 10 years on renewable energy, so the horse has left the barn on this one!” He points out that asset owners representing some $68 trillion around the world have now signed up to the Carbon Disclosure Project: “The definition of an asset owner is to manage generational wealth, not think exclusively about the next quarter or even the next five years. The generational view says that environmental issues and the availability of oil, gas and a whole lot of other natural resources will hit major sustainability crises at various points over the next 50 years.” The DeAM chief says the market is indicating that a global price on carbon is coming: “The market doesn’t yet know what that price will be, but long-term it doesn’t want to expose itself to the risk. The existence of that risk and the buying of security against it is already modifying company valuations.” To date, Parker says DeAM has taken in $12 billion in assets on the climate change theme, but only $50m from US investors, despite launching the country’s first climate change mutual fund. Regarding his homeland, Parker has serious doubts: “Things are obviously not happening at the federal level but they are happening at the state level.” A recent quote by the DeAM chief accusing the US administration of being “asleep at the wheel” on climate change was picked up by former Presidential candidate and Senator John Kerry to goad the government into action and “stop the investments going elsewhere”. That unpredictability ofgovernment policy has made for investment volatility, as Parker notes: “The last year has been horrible for the sector. It has not been easy to make money. Having said that, wind energy is clearly a long-term big winner and solar energy prices will continue to drop and become increasingly competitive with fossil fuels. We think natural gas is also a big winner and that coal is a dead man walking. There are also huge energy efficiency opportunities in buildings, building technologies and grid suppliers.” With that in mind, Parker is spreading the climate change message across each of DeAM’ business lines from equity to fixed income to alternatives, and notably within RREEF, its $56bn global property business: “The evidence is that green properties command higher rents and valuations. RREEF is looking more and more at buildings certified to LEED level (Leadership in Energy and Environmental Design) and actively managing properties based on environmental criteria.”
On specific products, Parker says DeAM is marketing a low carbon intensity bond fund, which is selling well. In the pipeline, he says an exchange-traded fund (ETF) will likely be launched in the second quarter of 2011 based on the tie-up in February this year with NASDAQ for the DB NASDAQ OMX Clean Tech Index. He says the manager is also researching closed-end funds in infrastructure and renewable energy as well as sub-funds on energy efficiency and water resource themes.
Parker was the instigator of a carbon dioxide emissions counter that Deutsche has on a huge billboard on 33rd Street and 7th Avenue. He believes it is part of a message that is getting through: “When I spoke at the United Nations four years ago it was practically to an empty room, but today that has changed. The asset management business has an almost unique position on climate change as a provider of capital to companies. We believe it should step up and promote a low carbon future.”