VanEck Australia launches the first retail ETF which tracks global carbon credit futures to attract rising domestic appetite for climate risk investments.
- An ETF launched by VanEck Australia will track the Intercontinental Exchange’s (ICE) global carbon futures index.
- The ICE index tracks carbon credit futures from European, UK, Californian, and the northeastern US emissions trading schemes.
- Australian investors can lower exposure to climate risk from an economy that is heavily weighted towards the mining and energy industries.
A global carbon credits based ETF, from US-based global investment manager VanEck’s Australian arm, provides local investors (especially retail investors) an opportunity to gain exposure to international carbon credit markets. The index it tracks represents 95% of global exchange traded carbon credit volumes.
The launch is well timed, given the growing interest in climate mitigation and adaptation following Australia’s adoption of a climate change law. It will also provide an opportunity to diversity from reliance on the domestic market, which is dominated by sectors exposed to climate risk, such as mining, energy and other resources.
In terms of the carbon markets themselves, the ETF also provides access to the more liquid and transparent trade available internationally. Current the domestic carbon market cannot use international credits.
VanEck Australian ETF meets rising demand for green investments
VanEck’s Global Carbon Credits ETF (ASX:XCO2) provides Australians with sustainability-themed investment option. It also helps them diversify their portfolios that may be heavily invested in the domestic economy, dominated by mining and energy companies.
VanEck Australia is part of the US-based global investment management company of the same name. As at August 31, 2022, VanEck had $90.1 billion in assets under management across all of its exchange traded products, based on a recent product disclosure statement.
VanEck’s ETF claims to be the first retail fund of its kind offered in Australia. First announced in May 2022, it seeks to take advantage of the rising demand for ESG- and sustainability-themed investment options.
The fund’s promoter also cited the results of the recent elections as an indication of retail investor enthusiasm for increased exposure to international carbon markets.
Futures based approach provides access to major global carbon credit markets
Futures are a type of financial instrument representing a contract agreement to buy or sell a specific commodity asset or security at a set future date for a set price.
Carbon futures have several use cases, including providing a reference carbon price, and serving as means to hedge against rising carbon credit prices by companies looking to reduce emissions, and investors seeking to reduce exposure to heavy emitting assets in their portfolios. According to Refinitiv, trade in global carbon markets reached a record high value of $ 851 billion in 2021, up 164% year-on-year.
The ETF is based on the ICE Global Carbon Futures Index, which measures the performance of ICE carbon futures across the four most actively traded global carbon markets. The ICE carbon futures indices are derived from ICE’s quoted carbon markets and account for 95% of global exchange traded volumes.
The four markets in the index are the European Union Emissions Trading Scheme (EU ETS), the UK emissions trading scheme, the Western Climate Initiative (California cap and trade program) and the Regional Greenhouse gas initiative (RGGI) of the Northeastern US. The EU ETS accounts for 90% of the total carbon market trading value, and is the most liquid of all.
Forecast rise in carbon prices makes carbon trading a market to watch
A report by Credit Suisse found that the over 60 carbon markets and taxes implemented globally only cover 22% of global greenhouse gas emissions. ICE reports a 26% increase in contracts traded in 2021, over 2020, across the above four markets.
This suggests there is tremendous potential for growth in this asset class, both in terms of value traded, as well as from an appreciation in the price of credits.
Carbon markets are further subdivided into two categories, compliance carbon markets (CCM), and voluntary carbon markets (VCM). CCM are those where carbon allowances are traded and regulated by national regimes. Voluntary carbon markets are decentralised markets where participants voluntarily buy and sell carbon credits.
Globally, CCMs account for nearly 75% of total covered emissions with a price that is a carbon market-weighted average across all implemented compliance regimes. The EU ETS is the most liquid market, with trading turnover nearly 10x the annual emissions cap, and accounts for 90% of the global carbon trading value. The California cap-and-trade market is the second most liquid but is much smaller and lower in price.
The timeliness of the launching of this ETF goes beyond the rising pro-climate change sentiment in Australia. A recent proposal by the government to restrict its largest emitters from using international carbon credits to achieve emissions reduction goals and criticisms of its own marketplace give domestic investors little choice to invest in carbon credits.
Flawed domestic carbon markets undercuts net zero credibility goals
Questions about the integrity of the Australian Carbon Credit Unit market undercuts the credibility of the country’s net zero goals. An independent review of place cited concerns over the lack of transparency in credit issuance process, and concerns over governance of the Emissions Reduction Fund (ERF), the mechanism that operates the ACCU marketplace.
The quality of credits used to establish decarbonisation goals and pathways may be an issue for global partners doing business with Australian heavy industry. This in turn would impact the profitability of these companies, with a direct effect on the value of their stocks and bonds held in domestic portfolios.
The ban on the use of international credits is part of changes proposed in Australia’s Safeguard Mechanism (SGM). The purpose of the SGM is to help heavy emitters reduce their emissions and help the country achieve its net zero goals. Industry and markets responding to these proposed changes have urged the government to reconsider their proposed ban, suggesting net zero goals cannot be achieved in isolation.