Salt Funds Management’s experimental carbon credits trading fund has drawn “phenomenal” interest from investors, according to the firm’s co-managing director, Paul Harrison.
Harrison said whether that curiosity translated into action would be known later today when applications close for the Salt Carbon Fund – to be listed on the NZX this Thursday.
“We didn’t know what to expect but we’ve had a lot of interest after marketing the fund through broking channels,” he said. “We’re very happy with the response.”
The fund, structured as an open-ended listed vehicle, is unique in NZ – and possibly the world, Harrison said.
“There’s one other fund we found but that trades in derivatives rather than directly in the carbon credit market as we’re going to,” he said.
To begin with the Salt fund will focus on the NZ carbon credit market, which Harrison said offers the most value at the moment.
Currently, he said there were about $3 billion worth of carbon credits available in NZ, typically traded in over-the-counter deals via the Emissions Trading Scheme.
“There’ll be no problem getting any,” Harrison said.
The listed fund would generate returns by providing investors with “exposure to movements in the price of carbon credits”, Salt says.
Entities based both locally and offshore can buy ETS credits in NZ to offset carbon emissions, which are increasingly set in law across many jurisdictions.
“Returns will be dictated by the underlying price for carbon,” Harrison said. “The Productivity Commission recently forecast the carbon price to rise to $75 per tonne [of carbon dioxide emission]. We have a view of where it might go.”
A supporting report published by the Salt fund sponsoring broker, OM Financial (OMF), says the carbon credit price could rise to as high as almost $160 per tonne by 2050 if NZ is to meet its emission objectives under the Paris climate change agreement.
The spot price for NZ carbon credits currently sits around $25 per tonne, the OMF report says. But the report says a number of changes are underway that could put pressure on the carbon price, including:
- the proposed Zero Carbon Act that will require NZ to have net zero emissions by 2050;
- a new Climate Change Commission to help the NZ government meet carbon targets;
- a just-completed review of the ETS that could see agriculture roped into the scheme and the removal of the “quasi” price cap of $25 per tonne on carbon; and,
- other changes to the ETS auction and carbon credit allocation system.
“In addition, at an international level, it is expected that rules around the development of international carbon markets could be finalised by the end of this year,” the OMF study says. “The linking to these markets will be at the discretion and agreement of countries involved.”
Harrison said from a portfolio point of view, carbon credits could represent a good diversifier.
Based on modeling, he said there appeared to be little, or no, correlation of the carbon price with equities.
“Maybe [the carbon price] is correlated to GDP,” Harrison said.
He said some investors categorised carbon credits as a commodity while others saw it as a new asset class.
Salt is offering the fund (under the ticker label CO2) on the NZX under waivers rather than waiting for the new streamlined listing rules that take effect next year.
“We were ready to launch and didn’t want to wait any longer,” Harrison said. “The listed fund market will develop over time. Why shouldn’t managed funds be traded like equities? Smartshares doesn’t have to be the only listed fund option.”
Salt manages more than $2 billion, mainly in Australasian equities, including large institutional mandates for Westpac/BT and AMP Capital.