Opportunities to invest in carbon are increasing and the trend looks set to continue; supported by the recent
Glasgow Climate Pact
The Paris Agreement
Emissions Trading Scheme (ETS)
As the dust settles after COP26, and with Article 6 agreed, it’s expected that more countries and territories will launch similar schemes. Continued investor interest is expected due to the attractive demand and supply dynamics of carbon permits embedded in these schemes, the historical low correlation with other asset classes and the possibility that carbon pricing can offer a hedge to
An overview of carbon markets
According to the World Bank, there are now 65 carbon pricing initiatives in operation globally, covering some 45 national jurisdictions and currently account for a total of 21.5% of global
Within the carbon market, what is the role of financial investors?
As with many securities, the primary motivation for any investor is based on the understanding that the price or cost of a permit is likely to increase. In the case of carbon, there is increased confidence in this happening given the need to “offer an incentive” to industry to reduce emissions and invest into less polluting alternative technologies and methods of production (in other words increase the tax on pollution). The design of the various ETS’s will facilitate this. In the EU there is a progressive reduction
(2.2% per year)
in the number of permits allocated each year and more industries are likely to be covered and be required to purchase permits. For example, under the EU’s ambitious “Fit for 55” plan agreed in the summer of 2021, the maritime industry is also likely to be added to the scheme. In California, auction prices for permits are required to increase at a rate of
- Low correlation to other investible securities, in global
EquityThe universe of traded company shares. Investments can fluctuate according to market conditions, the performance of individual companies and that of the broader equity market.
CreditSynonymous with fixed income - securities where the security issuer is obligated to repay investors the amount they borrowed plus an interest margin.
- As a potential inflation hedge. The rally in carbon prices in Europe this year is in part due to supply issues with
Natural gasNatural gas is a non-renewable hydrocarbon used as a source of energy for heating, cooking, and electricity generation.
CorrelatedA measure of the proximity of performance between different investments.
- Financial and impact incentives, given the imperative for investors to bring down both a portfolio’s
Carbon intensityCarbon intensity compares the amount of emissions to some unit of economic output (e.g. GDP or per million £/$ of sales).
Absolute carbonA reduction in absolute carbon refers to the total quantity of greenhouse gas being emitted.
SustainabilityMeeting today’s needs without compromising the ability of future generations to meet their needs, by working towards the attainment of the UN SDGs.
If the over-arching aim of these policy tools is to increase the price of carbon, shift the market into facilitating a low carbon future, and internalise the expense of transition within companies rather than onto the consumer, then some managers with particularly carbon intensive portfolios may choose to buy carbon allowances as a way to offset the carbon they own. We hope this will be embedded in an approach that sees managers moving to reduce absolute carbon emissions through engagement and by setting a
Science Based Target (SBT)