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Wealthy investors pile into the carbon market

Article from the Financial Times - May 11 2022

The once-niche carbon market is attracting wealthy individuals in pursuit of a new way to make money. And, at the same time, as society’s concerns over climate change grow, it is providing them with 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 organisations use to compensate for their emissions. Some private investors are also trading EU carbon credits — regulated units popular with institutional investors — that certain polluting companies are obliged under European law to buy to emit carbon. An attraction of this fast-growing carbon market is the potential it offers to make money from a relatively new asset class that is broadly uncorrelated with other assets. According to Karen Ermel, associate director of responsible investing at London-based private bank Coutts, it is a “growing market”, although currently less popular with clients than other “new” investments, such as cryptocurrencies and non-fungible tokens.

However, in light of the growing pressure on financial institutions to be more climate-conscious in their holdings, many wealthy investors seem keen to use carbon offsets to make their portfolios appear greener. The Bleijenberg family, which invested more than €1mn with Euronext-listed carbon-offsetting company DutchGreen Business, says it was attracted by “the combination of tremendous [expected] growth and the underlying purpose of helping nature, our planet’s most valuable asset”. It adds that “the nature conservation sector, environment and biodiversity is a multibillion-dollar market and the sector has just completed its seventh year of consecutive growth”. Similarly, last year the wealthy Retallack family acquired a 3 per cent stake in DutchGreen, which it said had “the potential to become the first unicorn in this rapidly growing market”. Amy Clarke, chief impact officer at London-based wealth manager Tribe Impact Capital, says the “tightening of regulatory and policy regimes associated with the climate crisis” means investors are “quickly becoming aware of the attractiveness of carbon”. The price of carbon-related assets has risen sharply in the past 18 months, amid the proliferation of net-zero commitments from companies and governments. Credits traded under the EU emissions trading system (ETS) more than doubled in price in the year to January to €89 per tonne, though prices fell significantly following 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 — signals that policymakers appear to be acknowledging — analysts expect the price of carbon-related assets to keep rising and carbon markets to become more liquid. Catherine Hampton, sustainable investment lead at London-based wealth manager Cazenove Capital, says “finance-focused” clients — those who prioritise 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 fall over time. This is a built-in feature, intended to drive down pollution and help the bloc meet its target of net-zero greenhouse gas emissions by 2050. James Purcell, group head of sustainable investment at Luxembourg-based Quintet, says the wealth manager received a “flurry of enquiries” from high-net-worth clients about EU ETS credits in the run-up to last year’s COP26 UN climate change conference. So far, he says, these “return-seeking investors” have made “strong returns”. Over November alone, when COP26 was held, the price of EU credits rose from €57 to €75. By late April, they were €87.

Some wealthy clients less interested in financial returns are eager to talk up 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 a tonne of carbon emissions that has been permanently avoided or removed from the atmosphere, though there are concerns this requirement is not always met. “We are seeing increasing interest from institutional investors to invest in carbon credits and offsets to meet their net-zero commitments,” says Stéphane Monier, chief investment officer at Geneva-based Lombard Odier Private Bank. Cazenove says its “impact-driven” clients typically have been more interested in offsets than in the EU ETS. The lure of these units is both ethical and : many investors want to use them to compensate for the emissions associated with their portfolios, to make their holdings appear more environmentally friendly.

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