Investors rushed to get aboard a new environmental fund
BlackRock chairman and CEO Larry Fink speaks with the persuasiveness of a $US10 trillion ($13.6 trillion) investment platform when he says the climate transition is an “historic” money-making opportunity.
But it’s not just the giants who see an extraordinary alignment of risk, reward and the right thing to do in the world’s bid to avoid catastrophic climate change by capping global warming at 1.5C.
Last July, Carbon Growth Partners (CGP) launched a fund to invest in carbon credits – a tradeable unit representing the reduction or removal of one tonne of carbon dioxide-equivalent from the atmosphere.
A global first, the Carbon Growth Opportunities Fund set a modest, initial target of raising $US10m before getting bowled over in the rush and eventually accepting $US50m, overwhelmingly from wealthy Australians.
The money raised has almost been fully allocated to a range of carbon-munching projects in some of the world’s more exotic locations.
They include reforesting degraded farmland in Uruguay, carbon abatement in the Keo Seima wildlife sanctuary in Mondulkiri, Cambodia, and protecting threatened species’ habitat in Borneo.
The credits generated enable individuals and companies to offset their emissions from energy and transport, with an equivalent volume of credits “retired” from the market once they are used.
As a result of the runaway success of its first fund, CGP and its adviser KG Capital Partners believe there are enough attractive opportunities to justify a second raising from sophisticated investors.
CGP chief executive Rich Gilmore is even more emphatic than BlackRock’s Fink about the potential of the climate transition market.
“The world is going through a permanent, systemic, structural adjustment to price carbon in all sectors of the economy,” Gilmore says. “We believe this is one of the most significant and promising investment themes over the next 30 years.”
To understand why, Gilmore starts with the proposition that the “voluntary” offsets market is a misnomer.
While there’s no legal requirement to do so, companies are still reducing net emissions, including through the use of offsets, because of intense pressure from customers and shareholders, as well as good governance requirements.
These commitments are only now translating into action, and it’s expected to take decades and trillions of dollars to decarbonise the energy and transport sectors.
Carbon credits are the tool to bridge the transition but are constrained by supply – especially high-quality, nature-based projects – partly because of the complicated process to get them verified.
As the gap between pledges made and action taken narrows, Gilmore says prices of carbon credits should rise, providing capital growth for investors.
The regulated European Union emissions trading system is the biggest in the world, with prices rising at a 65 per cent annual compound rate over the last four years to a record €53 per tonne last May.
About 11,000 of the continent’s biggest energy users participate in a cap and trade system where the cap is reduced over time.
In 2020, more than $US200bn in carbon allowances were traded.
Turnover in the “voluntary” international carbon market where CGP is active is much less mature and difficult to estimate because most of it is still over-thecounter.
However, Gilmore says volumes on exchanges including CBL Markets and Air Carbon are doubling each year, admittedly off a low base, from about $US400m in 2019 to $US1bn last year and a forecast $US2bn this year.
Three key factors, he says, will drive price growth in carbon credits over the next decade.
First, demand for verified carbon offsets is expected to expand tenfold in the near term and 50-fold in the medium term, and second, supply is constrained, with abundant, low-cost energy credits being phased out and naturebased credits difficult to create.
Finally, new players will establish open positions in the market, boosting prices as a result of greater depth and liquidity.
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