Outside of the broader complex of environmental, social and governance (ESG) investing complex, there’s sustainable investing – a style that, broadly speaking, focus on climate change and carbon reduction.
In fact, a case can be made that climate-related and carbon investing are distinct subsets of the broader sustainable asset allocation movement. There are important nuances for investors to note. For starters, the universe of ETFs devoted to climate change is largely comprised of equity-based funds with a small though growing smattering of fixed income options.
In the carbon investing space, some of the pertinent ETFs are equity-based, but the bulk of the largest funds in this still nascent category are built on foundations of a distinct asset class known as carbon credit futures contracts.
For those new to carbon investing, carbon credit futures contracts behave like more traditional commodities futures. As such, there’s element of diversification and correlation reduction to asset classes such as stocks and bonds offered by carbon offset ETFs.
Here are some of the relevant carbon offset/reduction ETFs to consider.
KraneShares Global Carbon Strategy ETF (KRBN)
First a primer on exactly what a carbon offset is. In simple terms, it’s a fee paid by a person or company that emits carbon to offset those emissions. For example, a corporation or politician that is a profligate user of private jet travel may opt to offset those emissions via carbon credits.
The KraneShares Global Carbon Strategy ETF (KRBN), which follows the IHS Markit’s Global Carbon Index, is the largest ETF in this category. Home to nearly $613 million in assets under management, KRBN turns three years old in July. Sure, that makes KRBN young, but youth aside, the ETF is relevant. Consider the point volume in the carbon markets tracked by the fund’s underlying index is nearly $700 billion on annual basis.
That’s saying something when considering carbon investing is just starting to scratch the surface of its attention-gathering prowess. Add to that, the case for even modest allocations to ETFs like KRBN is on the rise due to massive expenditures needed to meet various emissions reduction goals.
“Worldwide emissions must fall by half by 2030 and reach net zero by 2050 to have any chance at keeping the global temperature rise under 1.5 degrees Celsius,” noted Morningstar analyst Hortense Bioy. “Ultimately, global cooperation between governments is required to address the full scope of this threat, but the private sector and investors can be part of the transition, too.”
KraneShares California Carbon Allowance Strategy ETF (KCCA)
The KraneShares California Carbon Allowance Strategy ETF (KCCA) can be viewed as the California-focused equivalent to the aforementioned KRBN. Such regional focus may appear too nuanced to new investors, but experienced market participants know that California when it comes to state-level carbon reduction efforts.
KCCA follows the IHS Markit Carbon CCA Index, which is comprised of California carbon allowances (CCAs). The fund debuted in October 2021 and already has $227.62 million in assets under management, confirming there’s appetite for a region-dedicated carbon offset ETF. Recent goings on in the Golden State underscore possible benefits to owning KCCA.
“A recent update to its Climate Change Scoping Plan, the state’s overarching plan to meet its emissions targets, called for increasing the stringency of its 2030 emissions target that determines cap-and-trade supply,” according to KraneShares research. “Since then, key policymakers have indicated that the cap-and-trade program will be recalibrated to be more aggressive as soon as 2025. Additionally, they are considering other revisions to address the market’s historic surplus and future carbon offset use.”
Harbor Energy Transition Strategy ETF (RENW)
The Harbor Energy Transition Strategy ETF (RENW) also leverages commodities to provide exposure to the carbon transition, but it takes a different approach than the aforementioned KraneShares funds.
The Quantix Energy Transition Total Return Index – RENW’s underlying benchmark – “maintains exposure to at least 10 commodities from its eligible universe of energy transition themes in the United States (U.S.), Canada, United Kingdom (U.K.) and other European exchanges,” according to Harbor Capital. “Commodity futures from the component candidates are selected for the Index and weighted based on QCI’s quantitative methodology.”
RENW’s approach in this ETF category is unique because the fund’s holdings including some of the carbon credits found in KRBN and KCCA as well as more basic commodities, such as aluminum, copper and lead, among others.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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