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SparkChange and HANetf to launch the world’s first ETP backed by physical EU Carbon Allowances (EUAs)

 

  • SparkChange Physical Carbon EUA ETC (Ticker: CO2) provides investors with an easier way to invest in physical EUAs, which are carbon allowances, or “permits to pollute” that the EU Commission forces industrial emitters to obtain to cap the level of pollution in Europe.
  • Investors have a means of accessing European Union carbon emissions allowances for the first time through an exchange-traded product (ETP)
  • Competition for EUAs between investors and polluters is likely to have the effect of increasing scarcity and upward price pressure, and thus potentially increasing the rate at which polluting industries switch to cleaner technologies
  • EUAs valuations have risen more than 192% in the last 3 years [1] on the back of market reforms and are one of the top performing commodities of recent years [2]. Past performance is no guarantee of future performance.
  • The physical carbon ETC opens the market to investors who want to achieve environmental impact as the holding of allowances reduce the supply of EUAs overtime, contributing towards the effect of ‘NetZero’ carbon
  • ETCs are shown that they could outperform carbon investments tracking futures
  • SparkChange CO2 is a partnership between carbon experts, SparkChange, and exchange trade products expert HANetf, and is another example of the ability for HANetf and partners to bring innovation to the Global ETP market

 

4th November 2021, London

The launch of the world’s first exchange-traded product (ETP) backed by physical EU carbon allowances (EUAs) is taking place on the London Stock Exchange on November 4th 2021. 

SparkChange Physical Carbon EUA ETC (Ticker: CO2) provides investors with an easier way to invest in physical EU carbon allowances, or “permits to pollute” that the EU Commission forces industrial emitters to obtain to cap the level of pollution in Europe.

As polluters and investors compete for a supply of EUAs, investors will be able to reduce the amount of EUAs in the marketplace available to polluters. This is likely to have the effect of increasing scarcity and upward price pressure until they are too expensive for polluters, incentivising the polluters to switch away from using dirty fossil fuels to cleaner energy. This gives investors not only an opportunity to participate in on the top performing commodities of recent years [3], but in a new product that can actively contribute to decarbonisation. Past performance is no guarantee of future performance. Capital at risk.

SparkChange Physical Carbon EUA ETC (Ticker: CO2) is backed by physical allowances and thus tracks the price of EUAs (excluding fees). 

 

EUAs are increasing in scarcity value, contributing to upward price pressure

The EU Commission automatically reduces the issue of future allowances each year in order to decrease emissions over time, with the potential to create upward price pressure and drive scarcity value. Under EU law, holding EUAs for 12 months triggers additional permits being cancelled in future years adding to further scarcity and removing EUAs from polluters.  EUAs valuations have risen more than 192% [4] in the last 3 years on the back of market reforms and are one of the top performing commodities of recent years. [5] Past performance is no guarantee of future performance.  Your capital is at risk.

 

SparkChange CO2 physical carbon ETC prevents carbon emissions 

With SparkChange CO2, each unit is physically-backed by one EUA [6]. EUAs are physically withheld which prevents industrial firms from using that EUA to pollute, creating a positive environmental impact.  This not only ensures that SparkChange CO2 is always backed by physical EUAs, but also ensures that there are less EUAs available for polluting companies to purchase.

This can have the effect of increasing the price of EUAs, making pollution more expensive, and thus potentially increasing the rate at which polluting industries switch to cleaner technologies.  EUAs are also recognised as “valid” to achieve global net zero emissions targets by organizations including the Paris Aligned Investment Initiative and IIGCC.

 

Elliot Waxman, CEO of SparkChange, comments on the launch: 

“Carbon is now a physically-backed, investible instrument on the stock exchange. This gives investors convenient access to a product that is designed to stop carbon emissions and boost returns.  When constructing a low-carbon portfolio, SparkChange CO2 can help investors meet their environmental goals without having to exclude companies that are not yet green”. 

 

Easier access to the EUA market for investors

Currently, buying physical permits for carbon allowances is very difficult for investors. SparkChange CO2 has been designed to overcome the issues of investing in the physical carbon allowance market such as the complexity of opening an EUA registry account.

As SparkChange CO2 is an exchange traded product listed on the London Stock Exchange, investors have access to the benefits of exchange traded products provide investors including;

  • liquidity through a world class panel of market makers;
  • the ability to trade and settle the same as equities
  • the ability to execute market and limit orders.
  • central counterparty clearing, which reduces counterparty risk for larger trades and means that SparkChange CO2 will be an institutional class trading vehicle.
  • ETCs can be traded through an execution only brokerage account and can be added to ISAs and SIPPs

 

Holders of SparkChange CO2 will also be able to hold the ETP alongside their other investments and easily value their holding in their portfolio.

Please remember that investments can go down as well as up and when you trade exchange traded products your capital is at risk.

 

Comparison with futures-based products

Until now, investors wanting to access the carbon credit market have primarily done so using futures-based products.  However, HANetf research shows that a position in physical allowances has outperformed a rolling futures position by an average of 2% p.a. over the past 8 years [7]. The costs of rolling futures can change significantly over time and can also be a volatile part of the investment return profile. SparkChange CO2 removes this uncertainty by giving investors a direct participation in the underlying EUA market.

In addition, futures-based products do not affect the supply of EUAs. SparkChange CO2 avoids the performance drag associated with EUA futures-based products. This drag (known as “contango”) erodes the value of a futures-based investment over time, at the expense of the investor, and has recently been in the range of 50-130bp a year, but can be much higher [8]. As SparkChange CO2 uses physical EUAs rather than futures, investors will not suffer from this effect.

 

Nik Bienkowski, Co-CEO of HANetf “The SparkChange Physical Carbon EUA ETC (CO2 ETC) is a ground breaking way for investors to participate in the EU carbon emission allowance market, helping to decarbonise the earth and help revolutionise the way asset managers meet their net zero goals.  The SparkChange Physical Carbon EUA ETC has been designed to overcome the issues of investing in the physical carbon allowance market such as the complexity of opening an EUA registry account, and the contango costs of carbon futures – as a result, SparkChange CO2 has shown to outperform investments in carbon using futures. SparkChange CO2 is the world’s first exchange traded product backed by physical EU carbon allowances (EUAs) and makes it easier to access the potential returns and properties of owning physical EUA. SparkChange CO2 will complement HANetf’s growing offering of ESG and low carbon strategies.

 

A partnership between carbon experts, SparkChange, and exchange-traded product experts, HANetf

SparkChange CO2 is a partnership between SparkChange, a provider of specialist carbon investment products and data, and HANetf, a white label issuer of exchange traded products in Europe whose Founders and team have structured and launched many world firsts in the global ETF and ETC markets. The founders of HANetf were also part of the team responsible for creating the World’s carbon credit futures ETP in 2008. This underlines a long history of ETP innovation in this important asset class.

 

Learn more about our physical carbon ETC, visit the fund page here.

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