“You always think it is impossible until it is done” Nelson Mandela
Unless we take action on climate change future generations will be “roasted, toasted, fried and grilled” as Christine Lagarde, acting president of the International Monetary Fund (IMF), has put it. Scientists are telling us that we need to leave the vast majority of our fossil fuel reserves safely under ground so that we avoid this fate. But those reserves are already accounted for on the balance sheets of companies active in the fossil fuel sector, contributing to a large part of their market capitalisation.
Unless we take action on climate change future generations will be “roasted, toasted, fried and grilled” as Christine Lagarde, acting president of the International Monetary Fund (IMF), has put it. Scientists are telling us that we need to leave the vast majority of our fossil fuel reserves safely under ground so that we avoid this fate. But those reserves are already accounted for on the balance sheets of companies active in the fossil fuel sector, contributing to a large part of their market capitalisation.
So if governments tackle climate change, by imposing meaningful carbon legislation, the logical conclusion is that the stock prices of companies in the fossil fuel sector will be severely devalued.1 If such a price correction is going to happen rapidly, it could potentially have significant ramifications on the entire financial system due to the high exposure of financial institutions to such industries. It could have similar consequences, if not worse, than the sub-prime mortgage crisis which unfolded in 2008.
Divestment as Strategy to Cause Change
Unfortunately many of us are not even aware that we are investors in carbon assets, through our pension fund savings. Organisations such as the Asset Owner Disclosure Project 2 are aiming to raise awareness by pressuring pension funds to increase the disclosure of climate risk inherent in retirement savings.
Other initiatives are taking stronger actions by launching divestment campaigns which are gaining momentum. At colleges and universities in the US alone already 400 divestment campaigns are underway. History has proven that divesting can be a successful strategy for achieving change. The organised anti-Apartheid disinvestment campaign also started on US campuses in the late 70th and resulted that boards of trustees of several prominent universities voted to divest completely from South Africa. This was adopted in 1986 by US federal legislation and pressured the South African Government to begin negotiations, ultimately leading to the end of the Apartheid system and freeing Nelson Mandela from prison.
Fossil Fuel Investments “Worthless Financially”
The fossil fuel divestment ‘movement’ has already spread beyond campuses and now involves amongst others churches and cities. In the US, cities such as Seattle and San Francisco are among those which have already divested. Storebrand, a major Norwegian pension funds and life insurance company, was the first large scale mover from the private sector. They recently divested from 19 fossil fuel companies to ensure “long-term stable returns” – as these stocks, they say, will be “worthless financially” in the future. Other asset managers are less drastic in their shift e.g. the Swedish AP4, one of Europe’s largest pension funds, recently announced it halved the carbon footprint of their portfolio.
Another Bubble in the Making?
But the fossil fuel sector is not just under pressure from a growing awareness of the ‘carbon bubble’, there is also growing controversy about the economic viability of the US shale gas boom. The shale gas revolution, which was supposed to take the world into a new era of fossil fuel abundance, is allegedly suffering from extremely high depletion rates and therefore could turn out as commercial failure,3 without even taking the true cost, for environmental damage and contribution to climate change, into account.
US investment banks are one of the most vocal proponents of shale gas exploitation. In 2011 it was one of the largest profit generating sector for them through income from mergers and acquisitions activities with a volume of $46.5bn, despite the fact that high depletion rates lead to write-offs and that many wells were under-performing due to marginal production costs being above gas market prices.4
Big Banks Means Big Energy
The subprime crisis was a product of institutionalized irresponsibility of so called sophisticated investors and little changes have been made to the system since then. Companies in the fossil fuel sector have close ties with large financial institutions as it takes a massive concentration of capital to move “elite” fossil fuels, which can only be found in some places, from underground to the end users.
That is in stark contrast to decentralised renewable energy which can be harvested nearly anywhere in the world. Each individual project typically requires only small-scale investments. The required technology is already mature and provides a solution to the climate crisis as well as a wealth creating opportunity. It is true, that the renewable energy sector in many countries still relies on Government subsidies, but those subsidies are dwarfed in comparison to the subsidies for fossil fuels. According to Richard Branson “Carbon War Room”, “over 50% of the climate change challenge can be addressed today – and profitably – by existing technologies, under existing policy”.
Clean Energy Crowdfunding as a Solution
So how can we avoid capital markets bubbles? And how can we make profitable investments in a sustainable world we want to see?
Divesting from fossil fuel alone will not create the desired change. We need to reduce the demand for fossil fuels by un-tapping alternative sources of energy for our own consumption and we need to build a new more resilient financial operating system. A scalable alternative finance solution, avoiding financial intermediaries which have a vested interest in fossil fuels, is crowdfunding for clean energy. It provides ordinary people with a ‘safe-haven’ for their savings from the short-term thinking of capital markets. It doesn’t mean that those investments are entirely risk free. They are not, but they are uncorrelated to movements of capital markets and such investments are typically backed by assets (e.g wind turbine, solar panel) and they rely truly abundant natural resources.
Crowdfunding platforms offer transparent investment opportunities. They make it easy to find and compare investment opportunities. The efficiency of the investment process allows to make small investments into projects enabling investors to diversify their risk and to achieve a risk reducing portfolio effect. By providing ‘patient’ capital those investments contribute to the creation of long-term real wealth.
Today there are very little clean energy investment opportunities on crowdfunding platforms globally and crowdfunding regulations in the US, UK or Italy weren’t drafted with this sector in mind.
Nevertheless, todays platform technology and the existing regulatory frameworks offers great opportunity to scale the sector. Hopefully soon crowdfunding for clean energy will enable us to avoid the simmering ‘sub-clime’ crisis. Suddenly we have a choice and can make the impossible possible, a transition towards utilising sustainable energy sources without big banks and big energy companies standing in the way.
References:
1 - See: www.carbontracker.org
2 - See: www.adoproject.net
3 - Scientists Wary of Shale Oil and Gas as U.S. Energy Salvation, Science Daily 28th October 2013
4 - Shale and Wall Street: Was the decline in natural gas prices orchestrated, February 2013, Deborah Rogers
Photo credit to: __Lakwatser0__.http://bit.ly/Rqx4kG
Divestment as Strategy to Cause Change
Unfortunately many of us are not even aware that we are investors in carbon assets, through our pension fund savings. Organisations such as the Asset Owner Disclosure Project 2 are aiming to raise awareness by pressuring pension funds to increase the disclosure of climate risk inherent in retirement savings.
Other initiatives are taking stronger actions by launching divestment campaigns which are gaining momentum. At colleges and universities in the US alone already 400 divestment campaigns are underway. History has proven that divesting can be a successful strategy for achieving change. The organised anti-Apartheid disinvestment campaign also started on US campuses in the late 70th and resulted that boards of trustees of several prominent universities voted to divest completely from South Africa. This was adopted in 1986 by US federal legislation and pressured the South African Government to begin negotiations, ultimately leading to the end of the Apartheid system and freeing Nelson Mandela from prison.
Fossil Fuel Investments “Worthless Financially”
The fossil fuel divestment ‘movement’ has already spread beyond campuses and now involves amongst others churches and cities. In the US, cities such as Seattle and San Francisco are among those which have already divested. Storebrand, a major Norwegian pension funds and life insurance company, was the first large scale mover from the private sector. They recently divested from 19 fossil fuel companies to ensure “long-term stable returns” – as these stocks, they say, will be “worthless financially” in the future. Other asset managers are less drastic in their shift e.g. the Swedish AP4, one of Europe’s largest pension funds, recently announced it halved the carbon footprint of their portfolio.
Another Bubble in the Making?
But the fossil fuel sector is not just under pressure from a growing awareness of the ‘carbon bubble’, there is also growing controversy about the economic viability of the US shale gas boom. The shale gas revolution, which was supposed to take the world into a new era of fossil fuel abundance, is allegedly suffering from extremely high depletion rates and therefore could turn out as commercial failure,3 without even taking the true cost, for environmental damage and contribution to climate change, into account.
US investment banks are one of the most vocal proponents of shale gas exploitation. In 2011 it was one of the largest profit generating sector for them through income from mergers and acquisitions activities with a volume of $46.5bn, despite the fact that high depletion rates lead to write-offs and that many wells were under-performing due to marginal production costs being above gas market prices.4
Big Banks Means Big Energy
The subprime crisis was a product of institutionalized irresponsibility of so called sophisticated investors and little changes have been made to the system since then. Companies in the fossil fuel sector have close ties with large financial institutions as it takes a massive concentration of capital to move “elite” fossil fuels, which can only be found in some places, from underground to the end users.
That is in stark contrast to decentralised renewable energy which can be harvested nearly anywhere in the world. Each individual project typically requires only small-scale investments. The required technology is already mature and provides a solution to the climate crisis as well as a wealth creating opportunity. It is true, that the renewable energy sector in many countries still relies on Government subsidies, but those subsidies are dwarfed in comparison to the subsidies for fossil fuels. According to Richard Branson “Carbon War Room”, “over 50% of the climate change challenge can be addressed today – and profitably – by existing technologies, under existing policy”.
Clean Energy Crowdfunding as a Solution
So how can we avoid capital markets bubbles? And how can we make profitable investments in a sustainable world we want to see?
Divesting from fossil fuel alone will not create the desired change. We need to reduce the demand for fossil fuels by un-tapping alternative sources of energy for our own consumption and we need to build a new more resilient financial operating system. A scalable alternative finance solution, avoiding financial intermediaries which have a vested interest in fossil fuels, is crowdfunding for clean energy. It provides ordinary people with a ‘safe-haven’ for their savings from the short-term thinking of capital markets. It doesn’t mean that those investments are entirely risk free. They are not, but they are uncorrelated to movements of capital markets and such investments are typically backed by assets (e.g wind turbine, solar panel) and they rely truly abundant natural resources.
Crowdfunding platforms offer transparent investment opportunities. They make it easy to find and compare investment opportunities. The efficiency of the investment process allows to make small investments into projects enabling investors to diversify their risk and to achieve a risk reducing portfolio effect. By providing ‘patient’ capital those investments contribute to the creation of long-term real wealth.
Today there are very little clean energy investment opportunities on crowdfunding platforms globally and crowdfunding regulations in the US, UK or Italy weren’t drafted with this sector in mind.
Nevertheless, todays platform technology and the existing regulatory frameworks offers great opportunity to scale the sector. Hopefully soon crowdfunding for clean energy will enable us to avoid the simmering ‘sub-clime’ crisis. Suddenly we have a choice and can make the impossible possible, a transition towards utilising sustainable energy sources without big banks and big energy companies standing in the way.
References:
1 - See: www.carbontracker.org
2 - See: www.adoproject.net
3 - Scientists Wary of Shale Oil and Gas as U.S. Energy Salvation, Science Daily 28th October 2013
4 - Shale and Wall Street: Was the decline in natural gas prices orchestrated, February 2013, Deborah Rogers
Photo credit to: __Lakwatser0__.http://bit.ly/Rqx4kG
About the author - Rex Kempcke
Rex is an innovative banker with more than 15 years experience in retail banking, treasury and commodity trading at Commerzbank, J.P. Morgan and ABB Financial Services. Through his passion for entrepreneurship and new markets he got involved during the dot-com era in building up a business incubation unit for ABB, subsequently spinning off a company which pioneered the implementation of the European emissions trading scheme. He continued his career in the climate change sector first by joining EcoSecurties, a leading startup company in developing carbon reduction projects worldwide, and more recently as director in the environmental markets team of BNP Paribas.
Rex strongly believes that crowdfunding will cause a paradigm shift in the financial service industry and that it will make a significant contribution to the transition towards a sustainable economy. Born and raised in Germany, he gained a qualification as banker and a Masters degree in economics from University Hamburg. He currently lives in the UK with his wife and two daughters.
Rex is an innovative banker with more than 15 years experience in retail banking, treasury and commodity trading at Commerzbank, J.P. Morgan and ABB Financial Services. Through his passion for entrepreneurship and new markets he got involved during the dot-com era in building up a business incubation unit for ABB, subsequently spinning off a company which pioneered the implementation of the European emissions trading scheme. He continued his career in the climate change sector first by joining EcoSecurties, a leading startup company in developing carbon reduction projects worldwide, and more recently as director in the environmental markets team of BNP Paribas.
Rex strongly believes that crowdfunding will cause a paradigm shift in the financial service industry and that it will make a significant contribution to the transition towards a sustainable economy. Born and raised in Germany, he gained a qualification as banker and a Masters degree in economics from University Hamburg. He currently lives in the UK with his wife and two daughters.
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