Carbon-related ETPs outperform as carbon permit prices spike

Feb 28th, 2012 | By | Category: Commodities

Exchange-traded products related to carbon and clean energy have enjoyed a strong start to the year, driven in part by rising energy prices, but also by a spike in the price of carbon. The Barclays iPath Carbon ETN (GRN), for example, which tracks the performance of carbon-related permits, is up almost 30% year to date.

Carbon and clean energy ETPs outperform on rising carbon prices

Carbon and clean energy ETPs have outperformed in 2012 on rising energy and carbon emission permit prices.

European Union carbon emission permits have surged higher in 2012 on continued speculation that European lawmakers will implement measures to support prices.

Permits recently traded at their highest level in three months after officials intimated that they would support amendments to restrict the number of emission permits sold at future auctions.

EU countries are also expected to discuss restrictions on another type of carbon credit, known as Assigned Amount Units. The discussions may include limits on sales and the use of revenue from excess rights, according to a draft EU document.

It is widely accepted that climate change and rising carbon prices will increasingly impact the profitability of companies and portfolios over the coming decades, as rising carbon prices are eventually transmitted through into increased costs for business.

It is hoped that carbon trading mechanisms, by targeting corporate profitably, will encourage companies to reduce their carbon footprint. This transmission mechanism helps explain why clean energy companies have had a strong start to the year, and suggests that, long term, funds investing in clean energy, carbon and carbon-efficient companies have a bright future.


DB X-Tracker S&P US Carbon Efficient ETF (XGRC)

EasyETF Low Carbon 100 Europe ETF (ECN)


Barclays iPath Global Carbon ETN (GRN)

Reflecting the positive outlook for the sector, FTSE Group, together with partners CDP and ENDS Carbon, recently launched four new indices within the FTSE CDP Carbon Strategy Index Series. The indices are designed to help investors reduce the long-term investment risks associated with climate change and related regulation in these markets. The indices are a likely precursor to ETF launches.

The new indices in the series include the FTSE CDP Carbon Strategy Australia 200 Index, FTSE CDP Carbon Strategy Australia 300 Index, FTSE CDP Carbon Strategy Europe Index and FTSE CDP Carbon Strategy Japan Index. These indices join two existing UK indices: the FTSE CDP Carbon Strategy All-Share Index and the FTSE CDP Carbon Strategy 350 Index.

David Harris, Director Responsible Investment, FTSE Group comments, “Institutional investors have demonstrated an appetite for using alternative index weighting methodologies, including the incorporation of risk based approaches.  At the same time they are under increasing pressure to demonstrate action on integrating climate change and carbon-related risks in their portfolios.”

The FTSE CDP Carbon Strategy Index Series has been created for core equity holdings by taking an established FTSE index and evaluating each company within the index to identify its level of exposure to future carbon risks. The companies within the index are then re-weighted based on their level of carbon risk. This open and transparent approach to calculating carbon risk based on a set of future-orientated criteria, rather than historic emissions data, is unique to the FTSE CDP Carbon Strategy Index Series.

Paul Simpson, Chief Executive Officer, CDP, commented, “One of the key elements to avoiding dangerous climate change is that we shift capital flow towards companies that are acting to reduce carbon. These indices, which apply forward-looking analysis to the CDP data set, offer investors a straightforward mechanism to protect themselves from risk and factor climate change into their investment decisions.”

Dr Craig Mackenzie, Technical Director, ENDS Carbon, added, “Despite some setbacks, policy makers around the world are increasingly acting to introduce legislation to tackle climate change. The Australian carbon tax is one of a number of new developments. As time goes on, the risks associated with climate change for companies and investors will only rise. This index series provides pension funds with a way to integrate these risks into their investment strategies.”

While the FTSE CDP Carbon Strategy Index series is not yet tracked by any ETFs, investors can gain similar exposure with the following ETPs:

The DB X-tracker S&P US Carbon Efficient ETF (XGRC) tracks the performance of no more than 375 companies with relatively low carbon emissions, while seeking to closely track the return of the S&P 500, its parent index. The S&P US Carbon Efficient Index (reference benchmark) is composed of a subset of the constituents of the S&P 500 that have a relatively low carbon footprint, while maintaining at least 50% of the original weight representation for every GICS sector in the S&P 500. The carbon footprint is calculated by Trucost Plc and is defined as the company’s annual greenhouse gas (GHG) emissions assessment, expressed as tons of carbon dioxide equivalent (CO2e), divided by annual revenues.

The EasyETF Low Carbon 100 Europe ETF (ECN) provides investors with access to Europe’s 100 leading large-cap companies with the lowest carbon footprint in their respective sectors of activity. The companies are divided up by sector to ensure that the index would be broadly representative. Published and calculated by NYSE Euronext, the composition of the index is reviewed annually to take into consideration the efforts companies have made to reduce their CO2 emissions.

The  ETFS Carbon ETC (CARB) is designed to track the price of carbon emissions allowance futures. CARB tracks the ICE ECX EUA Futures Contract traded in London on the ICE Futures Market – currently the most liquid exchange traded contract within the EU Emission Trading Scheme (EU ETS).

The Barclays iPath Global Carbon ETN (GRN) tracks the performance of the most liquid carbon-related credit plans. The ETN incorporates new carbon-related credit plans as they develop around the world. It currently includes two carbon-related credit plans: European Union Emission Trading Scheme (EU ETS), and Kyoto Protocol’s Clean Development Mechanism.

The PowerShares Global Clean Energy ETF (PSBW) tracks the WilderHill New Energy Global Innovation Index comprised of companies worldwide whose innovative technologies and services focus on generation and use of cleaner energy, conservation, efficiency, and advancing renewable energy generally.

The iShares S&P Global Clean Energy ETF (INRG) provides exposure to the 30 largest and most liquid listed companies globally that are involved in clean energy-related businesses.

The Amundi Green Tech Living Planet ETF (AWWF) tracks the Living Planet Green Tech Europe Index which overweights companies that generate at least 20% of their revenues from green/renewable sectors, while excluding non-green and “unethical” companies.

The EasyETF FTSE Environmental Opportunities 100 ETF (EEVEUR) tracks the 100 largest global companies by market-cap that generate at least 20% of their business from involvement in environmental activities, including renewable & alternative energy, energy efficiency, water technology and waste & pollution control.

The ETFX DAXglobal Alternative Energy ETF (ALTP) tracks the performance of approximately 15 alternative energy companies generating more than 50% of their revenues in one of the following five sub-sectors: Natural Gas, Solar, Wind, Ethanol, Geothermal/Hybrids/Batteries.

The Credit Suisse Global Alternative Energy ETF (CSAE) tracks a proprietary index offering investors exposure to 30 of the largest companies involved in the wind, solar, bioenergy, natural gas and geothermal energy sectors.

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