How To Invest In Carbon Credits To Greenify Your Portfolio

Are you looking to invest in carbon credits? You are not alone. Carbon credits are all the rage right now as the climate crisis is the top agenda for companies, individuals, and even governments. Plus, investing in carbon credits also ensures that our money is being used for the good of society while also supporting the climate change movement. 

If you do not know what carbon credits are, do not worry. We are here to cover the basics and help you understand whether investing in them is a good option or not. 

In simple terms, carbon credits are essentially an instrument that helps governments limit greenhouse emissions across the country. States and industries have a limit on how much carbon dioxide they can produce in a given year. 

Let’s take a closer look to understand how they work.

Understanding Carbon Credits

Carbon credits are permits that allow entities like companies or governments to emit greenhouse gases. You can say that they are ‘permissions to pollute.’ Each unit of carbon credit entitles the holder to emit one ton of greenhouse gases. 

Moreover, polluting entities that manage to control their emissions and save their credits can offer their credits to other entities. On the other hand, if a company is struggling with their credits, they can always buy more. 

Governments or companies that go over their allowance without purchasing additional credits are fined. This system is part of an international agreement called the ‘Kyoto Protocol,’ which would set carbon emissions for all participating countries. 

A specific number of credits are given to companies that diminish over time. These credits can also be traded, sold, and bought between companies. Much like other markets, credits are more pricey when there is a positive demand for them. This is why companies have an incentive to save costs by reducing their emissions. 

According to a study by Wood Mackenzie, the globalized carbon trading market might be worth $22 trillion by 2050.

How to Invest in Carbon Credits?

So how do you invest in carbon credits? Well, it is not very straightforward. Carbon credits are a part of a cap-and-trade system, which is an effective way to put a price and limit carbon emissions simultaneously. 

The limit caps greenhouse emissions, while the trading allows businesses to purchase and sell carbon credits. One of the easiest ways to get involved with carbon credits is emission trading funds(ETFs). Carbon credit futures and individual companies are also ways an individual can get exposure to carbon credits. 

Let’s learn about them in detail. 

Carbon Credit ETFs

Carbon credit ETFs are traded on an exchange, just like stocks. They are bought and sold throughout the trading day so their prices fluctuate wildly. Some of the best carbon ETFs to invest in are mentioned below. 

• KraneShares European Carbon Allowance ETF (KEUA): This ETF provides access to European carbon credits through the EU Emissions Trading Scheme. 
• KraneShares Global Carbon ETF (KRBN): This ETF covers three major compliance markets but its composition favors the European Union allowances. It is one of the best ETF options since it provides investors with good exposure to the carbon markets with minimal risk. 
• iShares MSCI ACWI Low Carbon Target ETF (CRBN): This ETF consists of holdings made up of more than 1,000 low-carbon businesses worldwide, including tech giants like Apple, Microsoft, and Amazon. It is greatly diversified and is considered low-risk than other carbon credit ETFs. 
• KraneShares California Carbon Shares ETF (KCCA): It offers direct access to the California carbon allowance. It offers pretty good exposure to the carbon markets but at the cost of increased risk and volatility. 
• BlackRock US Carbon Transition Readiness ETF (LCTU): This particular ETF consists of over 300 assets from mid to large-cap US businesses. While it does not offer much exposure to the development of the carbon markets, it is considered a great long-term option due to its diverse holdings. 
• SPDR MSCI ACWI Climate Paris Aligned ETF (NZAC): It follows the corresponding index and consists of holdings of more than 1,000 low-carbon businesses from around the globe. It is highly diversified and has very low risk but at the cost of less exposure to the carbon markets.  

Read Also:- Top 10 ETF Concerns Every American Investor Should Keep in Check

Carbon Credit Futures

Futures are one of the most common instruments used by investors to gauge how carbon credit prices will move. In a futures contract, one party agrees to purchase a specified amount of carbon credits on a specified date. The other party consents to deliver the specified amount of carbon credits on the agreed date. 

However, this form of trading is not accessible to beginners and usually done by accredited and experienced investors. 

Individual Companies 

Besides ETFs and carbon credit futures, another way to invest in carbon credits is to invest directly in companies that trade them. For example, in 2021, Delta Airlines purchased 12 million carbon credits for $137 million. 

Investors can also buy carbon credits directly from brokers, developers, or a dedicated marketplace. 

Some of the companies that are involved in carbon credit markets are mentioned below.

Tesla (TSLA): Tesla is an electric car manufacturer and its profits have been driven by selling carbon credits over the years. Regulatory carbon credit sales accounted for more than 20% of Tesla’s profits in Q1 of 2022. 

Microsoft (MSFT): Microsoft has taken some monumental measures to reduce its carbon emissions. They plan to become carbon-negative by 2030 and remove all of the carbon they have emitted by 2050. In 2021, Microsoft purchased 1.3 million tons of carbon credits for their forestry projects. 

Nike(NKE): NIKE has vowed to cut their carbon emissions by 30% across their supply chains worldwide by 2030. It has also partnered with Ecotrust Forest Management to counterbalance its shipping emissions. 

Carbon Streaming Corporation (NETZ.NEO): If you have a high-risk tolerance, NETZ is the first streaming/royalty deal in carbon credits and one of the first carbon credit businesses to go public. 

How to Invest in Carbon Credit ETFs?

Investing in carbon credit ETFs is one of the most straightforward options for beginner investors. In ETFs, there are various levels of exposure, with the lowest being ‘low-carbon.’ These include companies whose operations do not have a significant impact on the environment and are not necessarily carbon-credit related. 

You can invest in carbon ETFs through investment platforms or by opening a brokerage account. 

Investment Platforms

Using an investment platform is the easiest way to access carbon ETFs but if you also want to reduce your own carbon footprint, there are sustainability investment platforms too. 

For example, Betterment offers diversified ETFs. Moreover, their Climate Impact portfolio invests in low-carbon companies and includes Global Low Carbon Stocks. 

Wealthfront is another example that allows investors to customize their portfolio and invest in several ETFs including KraneShare Global Strategy ETF and iShares MSCI ACWI Low Carbon Target ETF. 

Brokerage Accounts

If you do not want to use an investment platform, you can open a brokerage account and find ETFs to invest in. 

We have listed several US Carbon credit ETFs above to help you simplify your options. However, if you want to invest in carbon credits in the UK, here are some options. 

UK Carbon Credit ETFs

WisdomTree (CARP): This ETF is available on the London Stock Exchange and provides exposure to total return investment in European Union Carbon Emissions Allowance (EUAs) by monitoring the Solactive Carbon Emissions Allowance Rolling Futures Total Return Index. 

SparkChange Physical Carbon EUA ETC (CO2.L): This is the world’s first physically-backed ETF commodity investing in directly and exclusively EU allowances. 

Australia Carbon Credit ETFs

If you are wondering how to invest in carbon credits in Australia, here is a great option. 

VanEck Global Carbon Credits ETF (ASX: XCO2): This is Australia’s first carbon credit ETF that tracks the ICE Global Carbon Future Index, which monitors carbon credit future contracts in the EU, California, RGGI, and the UK Market. 

Read Also:- Best S&P 500 ETFs Of 2024

How to Track Your Investment?

Once you have invested in a carbon credit ETF, you just have to wait and watch how it performs. Many carbon credit ETFs have seen a significant price increase over time. But, they are still highly volatile, meaning your portfolio will definitely fluctuate for some time. 

Although carbon credit ETFs are a great initiative that mitigates the risks of climate change, they are not immune to the highs and lows of the stock market. 

Here are 4 major metrics that you should track after investing.

Price to Earnings Ratio: The ratio between the share price and earnings per share at the time of investment. 

Return on Equity: This is calculated by dividing net income by shareholder’s equity. 

Benchmarking: Performance benchmarks overseen by The Voluntary Carbon Market or The Integrity Council. 

Asset Allocation: This will help you compare your portfolio’s winners and losers. 

Pros and Cons of Investing in Carbon Credits

Much like every other investment, carbon credit investments also come with their fair share of disadvantages and benefits. 

Advantages of Investing in Carbon Credits

Accessibility: Carbon credit ETFs are fairly easy to access and are available for beginners. All you need is a brokerage account or investment platform and you can start investing in green projects. 

Profitability: In the last year, carbon credits were among the top-performing commodities. Investing in them can help investors generate excellent returns. 

Environment-friendly: Investing in companies involved in the green movement will help you greenify your portfolio and also reduce your carbon footprint. 

Drawbacks of Investing in Carbon Credits

Limited Exposure: Each carbon credit ETF only provides you exposure to specific assets in a restricted geographical area. They essentially provide low exposure to the expansion of the global carbon markets. 

Lack of Regulation: Carbon markets are still in their initial stages and many governments are not equipped to regulate and control trading. 

Risk: All investments bear risk and carbon credits are no exception. It is advised to conduct your due diligence or consult a financial advisor before investing in carbon stocks or ETFs. 

Things to Consider Before Investing in Carbon Credits

Environmental Impact

When buying a carbon credit, make sure to assess how it impacts the environment. It is important to support projects that have a positive impact on the environment and help reduce greenhouse gas emissions from the atmosphere. 

Buy carbon credits issued under an Emissions Trading Scheme or with standards recognized by the international community to ensure that you are making a positive impact on our planet. 

Relevance of Your Company

Make sure to invest in carbon credits that are closely tied to your corporate or business activities. If you invest in carbon credits, always go for projects that will have a positive impact on the same communities that you serve. 

However, it is important to note that not many carbon markets are regulated and not every business or company abides by the rules and regulations. Any company can claim to be sustainable to attract investors. This is why it is important to conduct your due diligence before investing. 

Type of Projects

Typically, there are two types of projects that generate carbon credits. 

• Actions that aim to avoid generating greenhouse gas emissions. In this category, you can invest in constructing green energy structures, renewable energy projects, or projects that oppose deforestation. 
• Actions that remove existing carbon from the atmosphere. These are advanced technological projects that build carbon capture and sequestration technology. 

Final Words

The carbon credit market is still in its initial stages and there are a lot of unexplored territories and opportunities yet to be explored. However, the good news is that they are available through ETFs, and carbon credits can be accessible to even beginner investors. If you want your investments to make a positive impact on the environment and help reduce carbon dioxide emissions, carbon markets are your best bet. 

But, no investment comes without risk. It is best to keep an eye on the market and research as much as possible before investing. Working with a broker or a financial advisor can streamline the process, especially if you are a beginner investor. 

Frequently Asked Questions(FAQs)