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Bailey McCann, Opalesque New York for New Managers: Carbon Cap Management, a London based environmental asset management firm has launched the World Carbon Fund. The fund invests in multiple liquid and regulated carbon markets on an absolute return basis. Alongside the absolute return strategy, the fund seeks a positive environmental impact by tying a percentage of fund investment to carbon sequestration. The fund invests into and trade liquid carbon allowance certificates, carbon futures and carbon options.
Cap and Trade Emissions Trading Systems (ETS) are regarded as being successful at reducing carbon dioxide emissions and, reflecting this, are now spreading to multiple countries around the world. These markets place a cap on total emissions and lower the cap each year while allowing market participants to trade carbon thereby setting a market price. The major carbon markets traded more than $250 billion in 2019.
"We believe that carbon has now emerged as both a valuable policy instrument and an investable asset class that has attractive properties for investors," Michael Azlen, Founder and CEO at Carbon Cap tells Opalesque New Managers. Regulated carbon markets come with high barriers to entry and the potential for uncorrelated returns. Certain industries like utilities are required to participate in the regulated markets, which creates investment opportunity. According to Azlen, the volatility of the carbon market also makes it difficult for inexperienced traders. But, the volatility can create value for experienced managers that have a robust risk management framework and can craft strategies that do well with volatility.
Indeed, despite recent volatility in the carbon market, the fund is up 5% year to date. Azlen notes that the strategy can provide an uncorrelated source of return because regulated carbon markets are not tied to the broad market or the economy.
20% of the fund's performance fees will be used to purchase and permanently cancel carbon allowances and offsets. As an example, a $1 million investment into the fund could result in the cancellation of 200 tonnes of carbon per year (based on 10% fund performance and current carbon prices). This is equivalent to the carbon footprint of 20 people in Europe or the carbon footprint of a small business or family office including their travel emissions. "What we're doing is taking those carbon allowances and ripping them up," Azlen explains. "That means that carbon can't be used ever again, which is ultimately better for the planet." In practical terms, this component of the fund also provides a measurable impact for investors that are focused on ESG. Azlen notes that the fund provides statements that reflect the sequestration impact.
Carbon Cap's investment team includes portfolio manager Nigel Felgate who has traded European energy and carbon for JP Morgan, Morgan Stanley, and Merrill Lynch over the past 15 years. Alex Child heads up carbon markets research having joined Carbon Cap from Vivid Economics where he worked on a range of projects involving carbon pricing and emissions trading systems. The advisory board includes professor Sam Fankhauser, Director of the LSE Grantham Research Institute on Climate Change as well as James Cameron a climate change spokesman associated with multiple initiatives including Pollination Capital. The fund is also anchored by an investment from a Swiss private bank.
The fund is currently open with a founders share class where investors receive a significant fee discount and capacity rights.
In April, Carbon Cap will also host a webinar outlining how carbon works as a liquid asset class. Carbon Cap has done extensive research into the carbon market and will be discussing the investment outlook for carbon as well as some of its research findings. The webinar will be offered through the Opalesque Skills Lab. Attendance is free.
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