ESG Watch: Here’s the easiest way to play the booming carbon credit trade
Australia’s love affair with ESG continues to blossom, particularly now with a new change in government.
Fundie VanEck yesterday announced the launching of Australia’s first carbon credits ETF (exchange traded fund).
The VanEck Global Carbon Credits ETF (Synthetic) (ASX: XCO2) invests in the carbon credit markets – a market viewed as vital in fighting against climate change.
Specifically, XCO2 will track the ICE Global Carbon Futures Index, which sources carbon credit futures prices from the four largest carbon markets and emission trading schemes (ETS) in the world.
These four schemes are the European Union Emissions Trading Scheme, the Western Climate Initiative (California Cap and Trade Program), the Regional Greenhouse Gas Initiative (RGGI) and the UK Emissions Trading Scheme.
A carbon credit is a permit that allows a company that holds it to emit up to a certain amount of Co2 or other greenhouse gases.
The purpose is to limit the extent of pollution by taxing companies and putting a price on carbon itself.
“Australia currently does not have a carbon credit ‘cap and trading’ scheme,” explained VanEck’s CEO, Arian Neiron.
“With the new Labor government now in power and climate change front and centre, time will tell if climate policy will be more ambitious in mitigating greenhouse gas emissions, and align to the likes of the European Union,” he added.
Neiron believes that carbon credit prices will increase significantly as the fight against climate change gains momentum.
“This will raise the value of carbon credits futures, and this asset class will likely benefit significantly over the longer term, making it attractive for investors to get exposure,” he said.
According to forecasts, carbon credit prices are expected to reach over US$100 per ton of CO2 (currently around US$50 per ton).
Other forecasts also showed that carbon credit prices “would need to reach US$147 per ton of CO2 to meet a 1.5°C global warming limit by 2050”.
According to Neiron, carbon credits have historically been lowly correlated to other mainstream assets, so they can be potentially used as a hedge against the impact of carbon emissions risks in an investor’s portfolio.
“Companies too are better aligning their production with ESG investment goals, and many are using carbon credits to do this,” said Neiron.
A secondary market in trading of carbon credits is vibrant, and it’s one of the big benefits in trading global carbon credit futures, says Neiron.
Meanwhile, the benchmark underpinning ETF Securities’ ETFS Battery Tech & Lithium ETF (ASX Code: ACDC) has been recharged.
ACDC tracks the Solactive Battery Value-Chain Index benchmark, which has amended its selection methodology to include a range of ESG activity screens.
Companies in the index will now be screened for human rights, corruption and labour rights violations, involvement in weapons production, coal extraction and oil and gas production.
“This important change to the fund’s selection methodology follows years of feedback from clients,”says ETF Securities Head of Distribution, Kanish Chugh.
“It is a recognition that investors keen on battery technology are usually environmentally minded.”
The new ESG standards align ACDC with the policy approach of the Albanese government, which has made the growth of the electric vehicle (EV) market a key part of its emissions reduction and renewable energy plan.
The new Labor government has committed to bring down the cost of EVs by exempting many of them from import tariffs and fringe benefits tax.
The Albenese government has also promised to establish a National Electric Vehicle Strategy, which will develop other measures to increase electric car sales and infrastructure, and encourage local manufacturing of EV components.
The ACDC ETF meanwhile, invests in listed companies that provide electro-mechanical storage technology, and miners that produce metals used for manufacturing lithium batteries.
Its top holdings include include WA-based lithium miners Mineral Resources (ASX:MIN) and Pilbara Minerals (ASX:PLS), Dutch specialty metals producer AMG Advanced Metallurgical, and manufacturers Renault SA and Hyundai Electric & Energy System.