Carbon Fund Advisors Inc. has launched a new actively managed exchange-traded fund (ETF) that provides exposure to the growing global compliance carbon markets.
The global effort to reduce carbon emissions falls into two categories. The first is a voluntary system where companies reduce their emissions on their own. The second is through compliance, which occurs when a regional, national or subnational regulator mandates that companies maintain a certain level of carbon emissions within their own specialized sector in what is called an emissions trading system (ETS).
When a company exceeds the specific carbon level for its sector in an ETS it must pay a fine to that regulatory entity or otherwise purchase enough allowances on the carbon market to offset the amount above the cap. An allowance permits the emitter to exceed the government-established carbon levels without having to pay a fine.
Allowances are auctioned, allocated or both depending on the ETS and trade within their specific ETS. Carbon Streaming BITA Compliance Index tracks certain ETSs through an allocation into a number of carbon allowance futures contracts.
To gain exposure to these markets, Sarasota Fla.-based Carbon Fund Advisors Inc. yesterday announced the launch of Carbon Strategy ETF (KARB), which tracks this index.
“We are putting together an ETF that will hold these futures as a proxy for carbon credit,” said Tim Collins, founder and president of the firm. “The only way for a retail investor or a non-regulated participant to get exposure is via an ETF.”
He explained how it is a growing industry with 32 ETSs globally, which cover more than 55% of the global gross domestic product. He added that the turnover for ETS's was more than $900 million in 2021 and it is anticipated that number will go up next year.
“I see it as a separate asset class and a burgeoning asset class and a huge opportunity with very little products currently in the market,” Collins said.
Thus far, there is only one other fund in the market that is similar to the Carbon Strategy ETF and that is the KraneShares Global Carbon Strategy ETF (KRBN), which rolled out in July. Collins expects the number of funds in this space to increase as the market matures.
One of the things that distinguishes the KARB from the KraneShares fund is the fact that the former employs an actively managed strategy while the other does not. Collins said the reason for that is to allow for unexpected changes in the industry.
“We thought that an active wrapper would allow us to be more nimble and react quicker to changing market conditions,” he said.
The company has partnered with Carbon Streaming, which will serve as the subadvisor on the ETF. It has experience in the ETS markets to make the proper ongoing decisions for the ETF, Collins said.
Carbon Fund Advisors will distribute the new ETF through its usual channels, including wirehouses. It will also roll out a full marketing and social media campaign to alert both advisors and investors about the availability of the fund.
Collins said that he wants to see the fund exceed $100 million in assets under management within 10 years. Meanwhile, as the firm is looking for new opportunities, the current objective, according to Collins, is to ensure the success of Carbon Strategy ETF.
"Right now, our focus is getting this product successfully listed and then feeling the pulse of the market and determining what the next step is dependent upon the development of the market,” he said.