Carbon Offset ETFs Offer Unique Avenues to Climate Investing

Climate and sustainable investing are broad themes, and with that breadth comes more opportunities for investors. One avenue is focusing on carbon reduction strategies. That can mean investing shares of companies or equity-based ETFs providing carbon-reducing services and technologies. Carbon offset ETFs offer another avenue. Access to this market has been democratized, thanks to funds such as the KraneShares Global Carbon Strategy ETF (KRBN).

In simple terms, carbon offsets are reductions or eliminations of carbon in one area to “cancel” the carbon emitted elsewhere.

KRBN, which turns three years old in July, reflects assets allocators’ growing appetite for carbon offset exposure. The fund had $606.21 million in assets under management as of May 4.

“There are transition risks associated with the shift to a low-carbon economy, such as changes in regulation, technology, and consumer behavior,” noted Morningstar analyst Hortense Bioy. “There are also physical risks, which refer to the vulnerability of a company’s supply chain, operations, and assets owing to increasing frequency of extreme weather events such as flooding or hurricanes.”

Diversification In Carbon Offset ETFs

KRBN adds another climate ETF option, as a dramatically different offering relative to clean tech or renewable energy ETFs. The KraneShares ETF holds carbon allowance futures contracts, which are essentially commodities, with similar risk/return profiles. As such, KRBN has diversification and correlation-reducing properties some investors may enjoy.

KRBN could also gain more traction with investors owing to the urgency related to various net-zero goals, which feature some tight timelines.

“Worldwide emissions must fall by half by 2030 and reach net zero by 2050 to have any chance at keeping the global temperature rise under 1.5 degrees Celsius. Ultimately, global cooperation between governments is required to address the full scope of this threat, but the private sector and investors can be part of the transition, too,” added Bioy.

KRBN is one of five carbon-focused ETFs in the KraneShares stable. Investors have added $5.1 million to the fund since the start of 2023.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.