Asset Manager Conference

KENFO Segment Investment Committee Meetings October 28 - November 8, 2021.

At the end of 2021, KENFO once again hosted its "Annual Asset Manager Conference." This year, presentations focused on climate change issues in light of the World Climate Change Conference (COP26) to be held in Glasgow from October 31 to November 12, 2021, as well as challenges in the current investment environment, sustainability of asset management and public finances, and inflation. 

Having a financial system where every decision takes climate change into account.
What do we need to achieve at COP26? Which coordinated international actions to tackle climate change are realistic?

The first presentation to KENFO’s Annual Asset Manager Conference and keynote address was delivered by Mark Carney, UN Special Envoy on Climate Action and Finance and former Governor of both the Bank of England and the Bank of Canada. Mark Carney is also the Prime Minister’s Finance Advisor for COP26, taking place in Glasgow immediately after KENFO’s Annual Asset Manager Conference from October 31 until November 12, 2021. 

 The UN Special Envoy described his assessment on the current situation as glass half full: part of the positive are the changes that are happening in the financial sector and, another positive is that finally the logic of the Paris Agreement is arriving at the country level. Commitments have to be backed up by ambitious and credible climate policies, because the more policy has credibility and predictability the more the financial sector will put money to work in anticipation of those policies creating a virtuous cycle of large scale investment, faster decarbonization, more jobs and faster growth. His core and simple message for the governments is that the money for ambitious climate action is coming into place and the financial sector is being transformed. The net zero principles become an organizing principle that cascades down to the company level and is now moving into the financial sector, to the end of having a financial system on which every decision takes climate change into account. The objective has also been to make global climate related financial disclosure mandatory and for this purpose a new standards board would be formally announced in Glasgow, the International Sustainability Standards Board (ISSB) to be headquartered in Frankfurt Germany, with another office in Montreal. The ISSB intends to produce a climate disclosure standard based on existing standards of the TCFD by the middle of next year. 

 Mr Carney explained that COP also was to bring climate risk management into the heart of finance: using the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) with over 90 authorities as of today 85% of the world’s emission and all of the globally systemically important financial institutions will be covered. Regarding a reasonable estimate on the costs of the energy transition over the course of the next three decades, he pointed to an amount of around 100 trillion dollars [now $130 trillion as announced at COP]. With regard to enormous financing needs for the climate transition he referred to the “Glasgow Financial Alliance for Net Zero” (GFANZ), bringing together asset owners, asset managers, banks, insurance companies, across the spectrum of finance with over 450 major financial institutions from 45 countries of all continents, having a cumulative balance sheet of above a 100 trillion dollars. That would be a reasonable estimate what the energy transition is going to cost globally over the course of the next decades. 

 His bid for the time after COP26 is to connect the supply of capital in the developed economies with the demand for it in the emerging and developing world. According to most estimates, emerging and developing economies will need an additional one trillion dollars a year for climate finance by the latter half of this decade. Carney called for a need to turn billions of public capital into trillions of private capital. So-called blended finance vehicles so far only have mobilized only fractions of the dollars put to work rather than multiples of them. Therefore, he is advocating for a new approach and to look at country platforms to deliver the financing needed using high multiplied blended finance structures with first loss elements. The private financial sector is looking for Paris aligned assets and can thus, contribute greatly to the transition.
 

Sustainable infrastructure investing and energy transition - in the context of climate and technological change & challenges

Against the background of the energy transition and the challenge of the climate crisis, Thierry Déau, founder and CEO of the Meridiam Group, sees positive impetus for infrastructure investments. Globally, Meridiam is involved in various infrastructure projects that have a positive impact on different markets around the world. Thierry Déau points to opportunities especially in the field of power supply and energy efficiency. A key focus for Meridiam is the achievement of the UN Sustainable Development Goals, which are identified and measured in every project developed, constructed or operated by Meridiam. Mr. Déau emphasizes that the financing and investment of infrastructure projects are often not the problem, but rather the resources in order to structure, implement and accompany such specialized projects. The energy transition in particular requires personnel on both the private and public sides who understand complex projects and can provide technical, economic and legal support. With an outlook on the energy market, which on the one hand needs to phase out old technologies and on the other hand promote innovations, Mr. Déau concludes with an optimistic view on the challenge of transformation and the race to a climate-neutral world.
 

For international public debt there is only one trend: upwards
Debt sustainability – an international perspective 

Dr. Ludger Schuknecht, Vice President of the Asian Infrastructure Investment Bank (AIIB), spoke about the situation of global public finances. The well-known economist, who as former chief economist of the German Federal Ministry of Finance advised both the ministers Wolfgang Schäuble and Olaf Scholz on financial and economic policy issues, played a key role in the euro crisis due to his extensive experience with international institutions such as the International Monetary Fund (IMF) and the World Bank. Schuknecht, who after holding positions at the IMF and the World Trade Organization prepared monetary policy decisions as head of fiscal policy at the European Central Bank and was later deputy secretary-general of the OECD in Paris, does not believe that current global government finances are sustainable. Debt in the industrialized countries is currently at about the same level as in 1945 after World War II, he said. The Keynesian model of "debt up in the recession" and "debt down in the good times" has not worked in the industrialized countries in recent years; the trend has always been in one direction only: upward. In the emerging markets, too, the level of debt has risen considerably. For the G7 countries, the average level is even higher at 140% of GDP, and there are currently discussions about even higher debt levels to finance further government activity. In addition, there are risk factors for the sustainability of public finances, in particular aging population and the risk of further financial crises, which have repeatedly pushed up debt levels. The largest countries with the highest debt levels are Japan, Italy, the U.S., Canada, France, Spain and the U.K.; Germany still has some safety margins to what is considered risky. In emerging countries, debt levels are much lower, but there are still some risks. India with 90% public debt, China with a lot of hidden debt in state-owned enterprises, and Singapore as a special case with high debts but also high assets. All in all, we are in a situation that would have set alarm bells ringing in the past. Even the IMF states that 80% of the countries have "vulnerabilities" in the state sector. The main future risks are population aging and future financial crises, which have cost Ireland and Greece, for example, about 30% of GDP and led to significant increases in debt levels. A study by the Bank for International Settlements (BIS) shows that a safety margin of about 50-60% in government debt is needed to overcome a severe financial crisis. 

Against the backdrop of a substantial rise in asset prices, significant money supply dynamics and thus considerable private sector debt, the prospects of bubbles bursting in the financial markets are not exactly remote, especially if interest rates were to rise and risk premiums were to rise again as a result. Schuknecht therefore argues in favor of achieving sustainability of public finances by means of a reform of government activity and structural reforms and by limiting government spending to a financeable and realistic level rather than entering a "cloud cuckoo land" of ever greater government activity and government intervention.

“Technology-related growth sectors are leading the way” - Overview of current developments in Private Market - challenges in the areas of high company valuations, expected inflation, ESG/climate change as well as technological change.

Helen Steers, Partner in the European Investment Team of Pantheon Ventures, a leading manager of private markets investments, gave an overview of recent developments in the alternative investment market. This market has continued to grow, reaching record levels of assets under management and fundraising activity. Assets under management doubled in private markets between 2016 and 2020. Helen Steers explained that a further doubling is expected by 2025. By 2020, private markets accounted for about five per cent of all asset classes. 

The reasons why the recovery in investment activity and the performance of alternative investments since the outbreak of the Covid pandemic has exceeded expectations is attributed by Ms Steers to the fact that, the markets were relatively well prepared for a downturn. In addition, this segment has been able to react quickly to supply chain and staff shortages and to support companies with cash. Furthermore, fund managers have shifted their portfolios to more resilient sectors, such as information technology, even before the pandemic. 

Ms Steers sees long-term investment trends in technology as a cross-cutting theme affecting all sectors, the democratisation of financial services, changing consumer preferences and improving the human condition. For Pantheon, this means that four industry sectors have accounted for more than 75% of new deals: Information Technology, Consumer discretionary, Industrials and Healthcare.   
Ms Steers concluded her presentation looking at developments in the field of sustainability. There, too, new technologies are supporting sustainable investment opportunities. In addition to an increase in disclosure and reporting requirements, an integrated approach to ESG is becoming more important, according to Helen Steers. Moreover, investors are more committed than ever on equality and the elimination of social inequalities.

“Germany should put itself at the tip of the spear of green technology” 
Challenges in the current investment environment and investment outlook

At the end of this year's Annual Asset Manager Conference, Dr. Asoka Wöhrmann, Chief Executive Officer and Chairman of the Management Board of DWS KGaA, spoke about current trends and developments on the financial market. He focused on two topics that will shape the 2020s: the development of inflation and "green industrialization". 

Against the background of rising inflation and interest rate developments, Mr. Wöhrmann drew a historical bow to the real estate crisis in 1989 in Japan and the Lehman crisis in 2008. Compared to historical crises, currently there is a special "supply shock", which meets rising government debts, representing a special challenge for central banks. DWS CEO Wöhrmann expects higher inflation in the future than in the past two decades and sees this development as the next stage of financial repression. One challenge for investors is to balance its investment frameworks and portfolio construction in the mix of different durations, interest rates, liquidity and risk considerations. 

In addition to these macroeconomic considerations, Wöhrmann went into detail of the green transition and the challenges it poses for investors. This transformation represents the biggest change of the last 150 years. As Chairman of the Board, he sees the increased demand for ESG-compliant products on both the institutional and retail side. He was convinced that sustainability strategies always perform equally strong or better than conventional investment strategies and referred to corresponding data series. Especially in difficult market phases, he said, it has been proven that "sustainability is not just a good-weather strategy, but an all-weather strategy." The focus should be on the development and transformation of key industries such as the energy sector. With regard to active shareholder engagement, Wöhrmann criticized the fact that some only look at voting rights. "When it comes to corporate engagement, we need a clear milestone plan along which to act," Wöhrmann demanded. Asset managers can assert their expectations and influence, especially through direct contact and one on ones. 

Wöhrmann continues to see opportunities for Germany: "Germany is a high-tech country and should put itself at the tip of the spear of green technology," was his clear assessment.