The once-niche carbon market is attracting wealthy individuals in pursuit of a new way to make money. And, at the same time, as society’s concerns about climate change grow, it is providing them with a potential route to a greener portfolio.
The rich and their money managers are now taking an interest in the market for carbon offsets, the controversial units that organizations use to compensate for their emissions. Some private investors are also trading EU carbon credits — regulated units popular with institutional investors — that certain polluting companies are obliged under European law to buy to emit carbon.
An attraction of this fast-growing carbon market is the potential it offers to make money from a relatively new asset class that is broadly uncorrelated with other assets. According to Karen Ermel, associate director of responsible investing at London-based private bank Coutts, it is a “growing market”, although currently less popular with clients than other “new” investments, such as cryptocurrencies and non-fungible tokens.
However, in light of the growing pressure on financial institutions to be more climate-conscious in their holdings, many wealthy investors seem keen to use carbon offsets to make their portfolios appear greener. The Bleijenberg family, which invested more than €1mn with Euronext-listed carbon-offsetting company DutchGreen Business, says it was attracted by “the combination of tremendous [expected] growth and the underlying purpose of helping nature, our planet’s most valuable asset”. It adds that “the nature conservation sector, environment and biodiversity is a multibillion-dollar market and the sector has just completed its seventh year of consecutive growth”.
Similarly, last year the wealthy Retallack family acquired a 3 per cent stake in DutchGreen, which it said had “the potential to become the first unicorn in this rapidly growing market”. Amy Clarke, chief impact officer at London-based wealth manager Tribe Impact Capital, says the “tightening of regulatory and policy regimes associated with the climate crisis” means investors are “quickly becoming aware of the attractiveness of carbon”.
The price of carbon-related assets has risen sharply in the past 18 months, amid the proliferation of net-zero commitments from companies and governments. Credits traded under the EU emissions trading system (ETS) more than doubled in price in the year to January to €89 per tonne, though prices fell significantly following the outbreak of war in Ukraine. Meanwhile, so-called nature-based offsets, such as those generated from tree-planting schemes, soared from $4.65 per tonne of carbon to more than $14 between June 2021 and April this year, according to S&P Global Platts.
But, with scientists warning that emissions must fall rapidly to spare the world the worst ravages of climate change — signals that policymakers appear to be acknowledging — analysts expect the price of carbon-related assets to keep rising and carbon markets to become more liquid. Catherine Hampton, sustainable investment lead at London-based wealth manager Cazenove Capital, says “finance-focused” clients — those who prioritize returns — are interested in EU ETS credits because of “the belief that the price of carbon will continue to rise”.
The number of credits in the EU system will also fall over time. This is a built-in feature, intended to drive down pollution and help the bloc meet its target of net-zero greenhouse gas emissions by 2050.
James Purcell, group head of sustainable investment at Luxembourg-based Quintet, says the wealth manager received a “flurry of inquiries” from high-net-worth clients about EU ETS credits in the run-up to last year’s COP26 UN climate change conference. So far, he says, these “return-seeking investors” have made “strong returns.” Over November alone, when COP26 was held, the price of EU credits rose from €57 to €75. By late April, they were €87.
Some wealthy clients less interested in financial returns are eager to talk up their sustainability credentials by buying and using, rather than trading, carbon offsets. Offsets are generated by projects such as initiatives to protect forests. Each unit is supposed to represent a tonne of carbon emissions that has been permanently avoided or removed from the atmosphere, although there are concerns that this requirement is not always met.
“We are seeing increasing interest from institutional investors to invest in carbon credits and offsets to meet their net-zero commitments,” says Stéphane Monier, chief investment officer at Geneva-based Lombard Odier Private Bank. Cazenove says its “impact-driven” clients typically have been more interested in offsets than in the EU ETS. The lure of these units is both ethical and reputational: many investors want to use them to compensate for the emissions associated with their portfolios, to make their holdings appear more environmentally friendly.
So-called financed emissions tend to represent the bulk of a financial institution’s carbon footprint, and banks, asset managers and investors are under increasing pressure to report and reduce them.
Well-known offset buyers include Microsoft co-founder Bill Gates. “Wealthy investors are used to being offered carbon offsets when they book flights or shop online. We are now seeing that demand translate into financial products,” says Purcell. “As an equity owner, you own a portion of the cash flow and a portion of the carbon emissions. We have seen clients want to offset those owned emissions with voluntary carbon offsets to achieve real-world impact.”
Secondary market trading in offsets is also growing, as is institutional investor interest in the development of offsetting projects. However, the market for offsets is unregulated, and critics say the units often do not genuinely deliver the climate benefits they promise.
Environmental campaigners and researchers point out that the low prices at which companies can buy offsets — many are available for $10 or less — may determine businesses from doing the hard work of reducing their own pollution. Groups such as influential standard-setter the Science Based Targets initiative have stressed that offsets should only be used to compensate for residual emissions that cannot be eliminated.
Critics also point to the problems associated with offsetting projects themselves: forests in the US that generate offsets bought by companies such as BP and Microsoft went up in flames last year as wildfires raged through Washington and Oregon. None, interest in the units continues to grow. A surge in demand has pushed up the price of offsets over the past 18 months, though they remain significantly cheaper than EU ETS credits.
New investment products are emerging that are bolstering demand, such as “carbon offset” funds. Cazenove says it purchases offsets to compensate for the emissions associated with the equities in its sustainable fund — the financed emissions that investors are responsible for. Cazenove, rather than his clients, pays for the offsets “as a testament to our commitment to invest for a better planet”. Meanwhile, Quintet has launched a fund that invests in “low-carbon companies” and offsets the emissions associated with those investments; it attracted €300mn of inflows in its first four weeks.
To allay fears about offset quality, companies such as specialist broker Howden are developing insurance products. “We’re seeing increasing interest, from buyers and sellers, in using insurance to protect against carbon offset invalidation due to factors like fraud, negligence and natural catastrophes,” says Charlie Langdale, the broker’s head of climate risk and resilience.
The business of growing wealth, almost inevitably, is associated with emissions, given the global economy’s reliance on fossil fuels. This means carbon markets are likely to be a growing focus for the rich and climate-conscious.
Fred Kooij, chief investment officer at Tribe, says the growing scrutiny of portfolio emissions has created a risk that people with emissions-intensive investments may want to hedge against by using carbon markets. Lombard Odier’s Monier says rising interest in offsets has created the challenge of “meeting this demand”.
As with sustainability investing more broadly, the money managers trading in carbon markets are chasing financial returns but are also hoping to have a positive impact — on the world, their own image, or both. “Carbon offsets are a new commodity and it is a rising trend,” says the Bleijenberg family. “We are very much behind the purpose of DutchGreen.”
This article is part of FT Wealtha section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment