VanEck’s first carbon credits exchange-traded fund to test investor appetite

Even the keenest “green” investors have been excluded from the carbon credits market. Now that’s about to change with the first specialist fund due to launch on the ASX this week.

VanEck, the US fund manager, plans to launch the first carbon credits exchange-traded fund on Thursday.

The launch is certainly a “first” but the timing of the float is best described as “ambitious”; carbon credits have been sold off sharply this year while the underlying market is wrestling with serious integrity issues.

The global price of carbon credit as represented by the Ice Global Carbon Futures Index is down more than 13 per cent to date this year. In Australia, carbon credit prices soared last year to top $50 before the government intervened in the market in a move that sent prices lower – they are now closer to $33.

Meanwhile, the carbon credit sector has been undergoing a year-long hammering from powerful critics – both inside and outside the conservation movement – who suggest carbon credit schemes are ineffective at limiting pollution.

Needless to say the promoters of the new ETF are looking long term: Arian Neiron, chief executive at Van Eck Asia-Pacific, says the fund – which will track the ICE index – will give investors first-time access to the global market.

“We know people have been looking for a way into carbon credits – this fund represents the best sectors of the global market. This is a way to take advantage of the potential rise of carbon credit price,” Neiron says.

The fund will be made up of 50 per cent EU-based carbon credits – the world’s most mature market, which has been operating for almost two decades. The balance of the fund mostly includes US and UK credits.

Australian carbon credits have not been included as the local market does not yet offer the structure or liquidity required by an ETF, according to VanEck.

Though the appetite among investors for carbon credits has never been fully tested locally, the top end of the private “sophisticated investor” market came rushing into the sector early last year, when a globally focused carbon credit fund, Carbon Growth Opportunities Fund, raised five times more than it requested after wealthy Australian private investors subscribed for a final total of $US50m.

Carbon credits are bought and sold in a global market, where polluters seek offsets through purchasing units linked with carbon abatement. In Australia, carbon credits can also be sold on the open market, but the government is the biggest purchaser.

In recent months, investors have openly questioned whether companies paying for carbon credits actually provide any genuine value for shareholders – that is, do they actually reduce carbon emissions? It is estimated that around one third of the ASX 200 listed corporations have bought carbon credits either on local or overseas markets. The arrival of a listed fund translates that issue towards whether investing in carbon credits will be frustrated by similar integrity issues.

Claims that Australian carbon credits were “junk” began last year, when the Australian Conservation Foundation produced a report in conjunction with The Australia Institute.

The report stated that one in five carbon credits issued in the local market were effectively useless. Among the worst rorts identified by this research was so-called “avoided deforestation”, where credits could be created through not clearing land that was unlikely to have ever been disturbed in the first place.

Further analysis from the ANU by climate law specialist Andrew Macintosh suggested that up to 80 per cent of Australian carbon credits (known as ACCUs) are substandard.

More recently, the Albanese government has announced a ­review of the sector that is due to report before the end of the year.

Similarly in overseas markets, where there is a surplus of credits, there has been wide scepticism of carbon credit practices, especially in the airline industry.

Airline carbon offset programs had their credibility dented after a Deloitte report suggested the emissions from airlines would rise from 3 per cent to 22 per cent of global total if new fuel sources were not found.