In recent years, many well-known corporations have unveiled ambitious carbon-reduction and net-zero goals.
That’s put newfound emphasis on carbon-related investing, including carbon offsets – an asset class that’s increasingly accessible to ordinary investors thanks to exchange traded funds such as the KraneShares Global Carbon Offset Strategy ETF (KSET). KSET, which tracks the S&P GSCI Global Voluntary Carbon Liquidity Weighted Index, turned a year old in April. What the fund lacks for in terms of age is more than made up for in terms of relevance.
KSET’s underlying index provides exposure to “the voluntary carbon market by tracking carbon offset futures contracts,” according to KraneShares. In other words, KSET is not an equity-based ETF. This is a potentially advantageous methodology; corporate adoption of carbon offsets isn’t a risk-free endeavor.
In a vacuum, companies embracing net-zero goals and using carbon offsets to achieve those objectives sounds like good news. However, there are risks for market participants to consider.
“Carbon offsets can play a role in financing investments that are needed to prevent global warming and achieve global net-zero targets,” observed Moody’s Investors Service. “But their use in corporate carbon transition strategies poses financial and reputational risks if they are not applied as part of a credible, science-based approach. Ambiguous or exaggerated decarbonization claims, inadequate vetting of carbon credits and excessive reliance on offsets as a transition risk management strategy can leave companies vulnerable to a range of credit risks.”
Companies that make net-zero/carbon offset claims need to be able to substantiate those claims to regulators and investors. If they cannot do so, they risk incurring regulatory penalties and being subject to investor scorn.
“Companies that use carbon offsets to make net zero or carbon neutrality claims in ways that are not consistent with science, or that overstate the scaling potential of offsets, face reputational and litigation risks,” added Moody’s.
With KSET, investors can mitigate some of these risks because the fund doesn’t feature equity exposure. If anything, carbon offset futures are an alternative asset class, indicating KSET may offer the added benefit of portfolio diversification.
Additionally, the KraneShares ETF could prove increasingly pertinent going forward as more states roll out their own carbon-reduction policies, which could include mandating that companies doing business in those jurisdictions make annual carbon emissions reports.
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