Climate Conference Catalyst for Carbon ETF

The 26th Conference of the Parties to the UN Framework Convention on Climate Change (COP26) wrapped up a couple of weeks ago and while the event was certainly ballyhooed among climate activists, it remains to be seen exactly how well governments do at delivering on the various pledges made at the Glasgow confab.

While climate conferences usually amount to a lot of grandstanding and posturing, advisors know that many clients aren't just aware of climate issues and events like COP26. They're increasingly prioritizing climate awareness in how they invest. So it's possible something like COP2 can be a conversation starter.

Indeed, there's something to build on in the wake of COP26. Consider all the Nationally Determined Contributions (NDCs) to emerge from the conference. Those accords, many of which are between multiple countries, are aimed at eliminating or reducing methane, deforestation and coal consumption, among other concepts.

Of course, the question is how all that talk is translated into the action investment ideas. Consider the KraneShares Global Carbon ETF (NYSEARCA:KRBN).

COP26 Puts KRBN In Focus

KRBN looks to top the IHS HS Markit Global Carbon Index and while it doesn't hold stocks, that doesn't mean climate-aware clients won't be interested. The opposite could well be true.

The fund's underlying index currently is a basket of the marquee European and North American cap-and-trade programs: European Union Allowances (EUA), California Carbon Allowances (CCA) and the Regional Greenhouse Gas Initiative (RGGI). Following COP26, KRBN is all the more relevant.

“Several countries also unveiled new net-zero targets, and if all current net-zero pledges are met, temperature increases could be as little as 1.8 degrees Celsius, closing in on the global goal of below 1.5 degrees Celsius,” says Eron Bloomgarden, partner at Climate Finance Partners (CLIFI). “The meeting also dealt with practical issues relating to how countries will report their emissions, how often they should update their NDCs and critically, agreed on how to structure international trading of carbon credits under Article 6 of the Paris Agreement.”

While parsing through the finer points of UN climate accords isn't an advisor's primary job – let's be honest, it's boring – there are some points to consider following COP26 that could highlight the utility of KRBN as a small position for clients.

“The Article 6 section of COP’s agenda was one of the most closely-watched elements of this year’s summit. Negotiators have been battling for six years to agree on a set of rules governing transactions between countries, and by extension those involving private sector actors, that will assist them in achieving their NDC targets,” adds Bloomgarden. “Delegates also approved regulations that will govern the registration and creation of tradeable emissions reduction – referred in the Paris Agreement as ITMOs (Internationally Transferred Mitigation Outcomes) – tradable reductions that can be bought by governments to set against their targets.”

Don't Be Dismissive of KRBN

On the surface, KRBN might appear to be one of those ETFs with an opaque strategy and a scant following. Advisors should note both points are false. The strategy is straight-forward and effective as highlighted by 94% year-to-date.

Add to that, asset allocators are embracing the fund. When KRBN was highlighted here in mid-June, it had $439 million in assets under management. Today, that figure is $1.41 billion. Beyond those compelling points, there are other reasons to give KRBN a look.

At COP26, “more than 30 countries and financial institutions signed a statement committing to halting all financing for fossil fuel development overseas and diverting the spending to green energy,” notes Bloomgarden. “Additionally, 450 investment firms across 45 countries representing assets of $130 trillion committed to aligning towards the net-zero transition via the launch of the Glasgow Financial Alliance for Net-Zero (GFANZ).”

Commitments like those further highlight the potential of KRBN and the data say market participants are already warming to that idea.

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