Luke Oliver, Managing Director and Head of Climate Investments for KraneShares, joined Keith Black, Managing Director of RIA Channel, to discuss investing in the transitioning technologies required by climate change.
While many investors wish to align capital to solve climate issues for ESG reasons, McKinsey estimates that $275 trillion will be spent between now and 2050 to prevent or slow climate change. Oliver noted that investing in this opportunity can be justified as a pure investment thesis focused on risk and return. There are three distinct investment opportunities. First, equities of companies that are positioned well relative to climate change. Second, materials that facilitate the transition to clean energy include cobalt, lithium, and copper. Third, the carbon permit markets that are required by a variety of global regulators.
Regulators in Europe, the UK, California, and the US Northeast now require permits to produce carbon emissions. These permits, which allow for a specific quantity of carbon emissions, are designed to become increasingly scarce over time. If the emissions reductions required by the permits decline faster than actual emissions, polluting companies may need to buy carbon permits at ever higher prices.
The carbon permit markets in each region are backed by futures markets. KraneShares now manages $800 million in ETFs allocated to these futures markets. The KraneShares Global Carbon Strategy ETF (KRBN) focuses on a diversified portfolio of compliance carbon markets, while ETFs are available for California-specific (KCCA) and European-specific (KEUA) permit markets.
While the historical returns of carbon permit markets have been volatile, they have earned higher returns than equities with a low level of correlation. KraneShares notes that some investors allocate to their carbon ETFs as impact investors, while others hold the ETFs in their alternative investment allocation. Investors may wish to hold carbon credit ETFs in the amount of 2-4% of their equity holdings, which is the amount needed to hedge the short carbon exposure held in an equity portfolio.
Resources:
Futures: The Most Effective Way To Get Exposure To Carbon Markets