Having been enthusiastically appropriated by boiler room-style cold callers several years ago, the term ‘carbon credits’ is probably most associated with ‘investment scam’ by most investors in the UK. However, one specialist fund returned 52.7% to its investors in 2018, net of all fees and commissions, precisely by betting on carbon credits.
Northlander Commodity Advisors, whose $484 million fund is peanuts within the context of mainstream asset managers, was able to deliver the phenomenal news to investors through an end-of-year letter as a result of a 230% increase in the value of EU emission allowance units – carbon credits.
With the EU approaching its 2020 deadline for strict target reductions in emissions, the carbon trade has flourished as industry has been forced to compensate for over-shooting limits imposed on its emissions. This has significantly boosted the demand for official EU carbon credits, which are used to pay for any emissions surplus. The system is designed to economically incentivise the shift towards clean, renewable energy sources and low carbon heavy industry.
EU carbon credits should not be confused with many of those sold by boiler room cold callers close to a decade ago, which were mainly another kind of voluntary carbon credit created to incentivise ecologically beneficial projects in the developing world. However, for investors fearing it is already too late to benefit from the EU carbon credit boom, Northlander founder and chief investment officer Ulf Ek believes the bull market still has a long way to run:
“The current market price of around €25 is still far from a fundamental equilibrium price, which we see around €35-40. We can also picture a scenario where prices go even higher once coal to gas fuel switching starts taking place.”
Northlander’s 2018 success stands in stark contrast to that of other funds focused on more traditional commodities. Oil prices fell off a cliff from October on and metal prices also slumped as global demand tailed off. The price of a tonne of copper fell from $3350 in June to around $2600 by August. Northlander’s carbon credit returns were reduced by smaller positions in oil and coal. However, despite its hugely successful 2018, Northlander’s assets under management have remained relatively flat into 2019, a situation Mr Ek puts down to ‘profit taking’. Particularly institutional investors in the fund have taken money out to shore up the impact of unsuccessful investments elsewhere.
Specialist funds such as the Northlander Commodity Advisors are defined as high risk and are therefore not available to those investing online as retail investors. It should also be pointed out that a narrow investment focus such as putting a large weighting into one commodity is an approach that can just as easily go wrong as result in outstanding returns when it goes right.
EU carbon credit prices spent multiple successive years languishing in the doldrums before their recent surge. However, for retail investors who are interested in exploring this alternative commodity, there are retail-facing energy, commodities and ethical/green funds that have allocations to EU carbon credits. There are also a few ETFs that track the market.