Ninepoint Carbon Credit ETF Commentary

As of July 29, 2022, the Ninepoint Carbon Credit ETF was valued at a NAVPU of $18.79 (Series F). At the launch of the fund on Feb 16, 2022, the NAVPU was $20.00 (Series F).

Investment Strategy

The Fund seeks to achieve its investment objectives by primarily investing directly in carbon allowance futures. The Fund currently invests in the major carbon allowance futures globally, namely, the European Union Allowance (the “EUA”), the California Carbon Allowance (the “CCA”), the UK Allowance (the “UKA”) and the Regional Greenhouse Gas Initiative (the “RGGI”). The Fund may invest in additional carbon allowance futures contracts as the global carbon credit market grows.

Market Performance

For the month of July, markets rebounded with S&P 500 rising 9.2% on a total return basis. Amid the ongoing inflation concern, the Federal Reserve acted with another 75bps rate hike, while the European Central Bank also announced its first-rate hike since 2011, by a larger-than-expected 50bps. The euro has hit a price parity against the US dollar, for the first time since the early years of the European currency’s creation. Brent Crude fell more than 4% in July, while gold fell by 2.3%.

Compliance carbon markets have been depressed by an accumulation of bearish sentiments going into the third quarter. In Europe, EUA-(European Union Allowance) fell 12.9% as increasing oil prices and inflation concerns were seen as a risk to industrial demand. Adding to bearish fundamentals was the proposal to raise €20bn from the sale of 250mn EUAs (European Union Allowance) from the market Stability Reserve to fund the transition away from Russian energy. UKA (UK Allowance) also dropped 7.8%.

In America, CCA (California Carbon Allowance) and RRGI (Regional Greenhouse Gas Initiative) dropped 7.8% and 6.0% respectively. While CCA (California Carbon Allowance) prices seemed to be macro-driven amid the recession fear in the face of decades-high inflation, RGGI (Regional Greenhouse Gas Initiative) price movements were mainly driven by legal development - The 11-state cap-and-trade program declined to levels not seen since early May on uncertainty regarding the unresolved legal challenges surrounding Pennsylvania’s RGGI (Regional Greenhouse Gas Initiative) linkage. Pennsylvania officially joined the RGGI on July 1, 2022, in an effort to reduce greenhouse gas emissions in the state, however, in only a few days, a Pennsylvania judge temporarily suspended the state from implementing the linkage amid pressures from GOP lawmakers and the coal industry. Governor Tom Wolf’s administration committed to appeal the ruling. The ongoing court challenges are expected to cause some volatility to the regional program.

Carbon Credit as an Alternative Asset Class

The diversification benefits offered by a traditional 60:40 equity/bond portfolio have been shaken. Concerns have been raised that the equity/bond correlation dynamics has shifted from negative to positive at the start of the pandemic and, more recently, over the past six months. As such, besides the traditional fixed income products, investors are increasingly interested in uncorrelated asset classes such as precious metals, cryptocurrencies, private debt, and – carbon credit.

Carbon credit, as a new form of environmental commodity, has certainly drawn some attention. As the drive to curb global warming gathers pace, the global regulatory environment is creating an attractive demand for carbon credits for investors looking for alternative strategies to bonds and equities.

We analyzed the moving 500-day correlation between Carbon Credit and other asset classes, in all cases, carbon credit has exhibited an attractive low correlation (less than 0.5) since 2016.

Most importantly, there is a well understood and logical case for the low correlation because of the design parameters of an ETS. In Europe for example, the price of EUA is mainly driven by the following three factors:

1. Weather Conditions: Energy demand rose sharply during the particularly cold weather in Europe at the beginning of 2021. In the short term, higher demand for energy leads to increased production and higher emissions, and thus translates directly into an increase in demand for carbon credit.

2. Energy Prices: The recent high gas prices encouraged companies to switch to high carbon emitting fuels such as coal and, as a result, increase demand for carbon credits.

3. Climate Policies: More aggressive climate policies such as the “Fit for 55” and phase 4 of the EU ETS starting from 2021 further limit the amount of carbon credit supply available in the market.

Why Ninepoint Carbon Credit ETF?

For an emerging asset class like carbon credit, diversification is at the heart of our fund strategy. Currently, the Ninepoint Carbon Credit ETF invests equally in the four major ETS markets globally with quarterly rebalancing. Having a diverse market exposure has demonstrated its benefits to serve investors well. Below are four key reasons for investors to consider Ninepoint Carbon Credit ETF:

1. Diversification: Balanced exposure to all carbon credit markets can help minimize single jurisdiction risk by eliminating over-concentration to any single market, as recent market action has demonstrated. Having a diversified underlying market portfolio is important for an emerging asset class with volatile price patterns, like carbon credits.

2. Global Exposure: The fund provides investors with access to a US$851 billion global carbon credit market which has grown by 18x since 2017¹. Compared to volume-weighted fund or funds that invest in one single market, we believe that our equal-weighted fund strategy has a better value proposition, over the long-term, given its overweight to the under-represented and rapidly growing carbon credit trading markets.

3. Core Value: As a Canadian fund, by overweighting the North American market relative to its total index weight, we are aligning our strategy with our values and our local community.

4. Easy Access: The fund is structured as an alternative mutual fund offering on Fundserv as well as an ETF series on the NEO Exchange (NEO:CBON / CBON.U)

Product Inquiries:

Sarah Wang
Senior Business Analyst
Ninepoint Partners
swang@ninepoint.com

¹Refinitiv, “Carbon Market Year in Review 2021”. Global carbon markets value surged to record $851 bln last year-Refinitiv (Reuters - January 2022).