The once niche carbon market is attracting wealthy people looking for a new way to make money. And at the same time, as society’s concerns about climate change grow, they are given a potential route to a greener portfolio.
The rich and their money managers are now taking an interest in the market for carbon offsets, the controversial units that organizations use to offset their emissions. Some private investors are also trading EU carbon credits, regulated units popular with institutional investors, which certain polluting companies are required by European law to buy in order to emit carbon.
One attraction of this fast-growing carbon market is the potential it offers to make money from a relatively new asset class that is generally uncorrelated to other assets. According to Karen Ermel, associate director of responsible investing at London-based private bank Coutts, it is a “growing market”, although it is currently less popular with clients than other “new” investments such as cryptocurrencies and non-fungible tokens.
However, in light of mounting pressure on financial institutions to be more climate-conscious in their holdings, many wealthy investors appear willing to use carbon offsets to make their portfolios appear greener. The Bleijenberg family, who have invested more than €1 million in Euronext-listed carbon offset company DutchGreen Business, say they were drawn to “the combination of [expected] growth and the underlying purpose of helping nature, our planet’s most valuable asset.” He adds that “the nature, environment and biodiversity conservation sector is a multi-billion dollar market and the sector has just completed its seventh consecutive year of growth”.
Similarly, last year the wealthy Retallack family took a 3 percent stake in DutchGreen, which it said had “the potential to become the first unicorn in this fast-growing market.” Amy Clarke, head of impact at Tribe Impact Capital, a London-based wealth manager, says that “the tightening of regulatory and political regimes associated with the climate crisis” means investors are “quickly realizing the appeal of carbon “.
The price of carbon-related assets has risen sharply in the last 18 months, amid a proliferation of net-zero emissions commitments by companies and governments. Credits traded under the EU Emissions Trading System (ETS) more than doubled in the year to January to €89 per tonne, although prices fell significantly after the outbreak of war in Ukraine. Meanwhile, so-called nature-based offsets, such as those generated from tree-planting schemes, soared from $4.65 per tonne of carbon to more than $14 between June 2021 and April this year, according to S&P Global. Platts.
But with scientists warning that emissions must fall rapidly to spare the world the worst ravages of climate change, signs that politicians seem to be acknowledging, analysts expect the price of carbon-related assets to continue rising and markets of carbon become more liquid. Catherine Hampton, director of sustainable investing at London-based wealth manager Cazenove Capital, says “finance-focused” clients, those who prioritize returns, are interested in EU ETS credits because of ” the belief that the price of carbon will continue to rise.
The number of credits in the EU system will also decrease over time. This is a built-in feature, intended to reduce pollution and help the bloc meet its goal of net-zero greenhouse gas emissions by 2050.
James Purcell, group head of sustainable investments at Luxembourg-based Quintet, says the wealth manager received a “flurry of inquiries” from high-net-worth clients about EU ETS credits in the run-up to the conference on UN climate change COP26 last year. So far, he says, these “yield-seeking investors” have made “solid returns.” Only in November, when COP26 was held, the price of EU credits rose from 57 to 75 euros. At the end of April, it was €87.
Some wealthy clients less interested in financial returns are eager to flaunt their sustainability credentials by buying and using, rather than trading, carbon offsets. Offsets are generated by projects such as initiatives to protect forests. Each unit is supposed to represent one tonne of carbon emissions that have been avoided or permanently removed from the atmosphere, although there are concerns that this requirement may not always be met.
“We are seeing growing interest from institutional investors to invest in carbon credits and offsets to meet their net-zero emissions commitments,” says Stéphane Monier, chief investment officer at Geneva-based Lombard Odier Private Bank. Cazenove says his “impact-driven” clients have typically been more interested in offsets than the EU ETS. The appeal of these units is both ethical and reputational: many investors want to use them to offset the emissions associated with their portfolios, to make their holdings appear more environmentally friendly.
So-called financed emissions tend to account for the majority of a financial institution’s carbon footprint, and banks, asset managers and investors are under increasing pressure to report and reduce them.
Well-known offset buyers include Microsoft co-founder Bill Gates. “Wealthy investors are used to being offered carbon offsets when they book flights or shop online. Now we are seeing demand translate into financial products,” says Purcell. “As a stock owner, you own a part of the cash flow and a part of the carbon emissions. We have seen clients want to offset those own emissions with voluntary carbon offsets to make a real-world impact.”
Offset trading on the secondary market is also growing, as is interest from institutional investors in developing offset projects. However, the offset market is unregulated and critics say the units often don’t really deliver the climate benefits they promise.
Environmental activists and researchers point out that the low prices at which companies can buy offsets (many are available for $10 or less) can deter companies from doing the hard work of reducing their own pollution. Groups such as the influential standards maker, the Science Based Targets initiative, have emphasized that offsets should only be used to offset residual emissions that cannot be removed.
Critics also point to problems associated with the offset projects themselves: Forests in the US that generate offsets bought by companies like BP and Microsoft caught fire last year when wildfires swept through Washington and Oregon. However, interest in the units continues to grow. An increase in demand has pushed up the price of offsets in the last 18 months, although they are still significantly cheaper than EU ETS credits.
New investment products are emerging that are driving demand, such as “carbon offset” funds. Cazenove says he buys offsets to offset the emissions associated with the stocks in his sustainable fund: financed emissions that investors are responsible for. Cazenove, instead of its clients, pays compensation “as a testimony to our commitment to invest for a better planet.” Meanwhile, Quintet has launched a fund that invests in “low-carbon companies” and offsets the emissions associated with those investments; it attracted €300 million in admissions in its first four weeks.
To allay fears about the quality of compensation, companies such as specialist broker Howden are developing insurance products. “We are seeing growing interest, from buyers and sellers, in using insurance to protect against carbon offset invalidation due to factors such as fraud, negligence and natural catastrophes,” says Charlie Langdale, head of climate risk and resiliency at the runner.
The business of increasing wealth is almost inevitably associated with emissions, given the dependence of the world economy on fossil fuels. This means carbon markets are likely to be a growing focus for the wealthy and climate-conscious.
Fred Kooij, chief investment officer at Tribe, says the increasing scrutiny of portfolio emissions has created a risk that people with emissions-intensive investments may want to hedge against by using carbon markets. Lombard Odier’s Monier says the growing interest in offsets has created a challenge to “meet this demand.”
As with investing in sustainability more broadly, money managers who trade carbon markets seek financial returns, but also hope to make a positive impact – on the world, on their own image, or both. “Carbon offsets are a new product and it’s a growing trend,” says the Bleijenberg family. “We are way behind the DutchGreen purpose.”
This article is part of FT Wealtha section that provides detailed coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investing
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