Environmental markets surge to new highs

2021 saw markets ride a wave of investor enthusiasm for the environmental theme, writes Michael Hurley

A resurgence in environmental markets after a year scarred by the coronavirus pandemic saw prices rocket to new highs, reflecting the growing momentum behind – and investor interest in – efforts to address climate change.

Record prices were observed across the traded environmental markets, covered by Environmental Finance's Market Rankings.

In the carbon markets, which look to put a price on carbon and cap emissions of greenhouse gases, some US markets have seen prices spike about 50% above the level set 12 months earlier.

Winners of this year's Market Rankings told Environmental Finance that the increase has been driven by a variety of factors, including plans to reduce the amount of emissions allowances in some markets and growing interest from international investors – but speculative trading has also been observed.

Gordon Bennett, managing director of utility markets at Intercontinental Exchange, says an illustration is the increasing flow of money into carbon exchange-traded funds (ETFs).

"According to estimates, there is circa $2 billion of AUM in carbon ETFs showing the investor appetite for exposure to this asset class, as well as another indicator of how carbon is moving into the mainstream."

Meanwhile, in the EU's Emissions Trading System (ETS), "the cost of carbon has more than doubled since the start of 2021, which has caught a lot of market participants by surprise", according to Tim Atkinson, director of sales and structuring at CF Partners.

At the time of writing, the price of an EU Allowance had risen further to more than €85 ($96).

Market participants are upbeat about the future growth of these markets and broadly expect prices to continue to rise.

Meanwhile the market for renewable energy certificates (RECs) has been turbo-charged by voluntary purchases by corporates eager to meet emissions reductions pledges.

Prices for certificates in the US' national 'Green-e' market for voluntary buyers of RECs "rocketed to new heights" starting late last year, as the country's economy began its recovery from the initial impact of the coronavirus pandemic, says Jonathan Burnston, managing partner at Karbone.

"Over this past summer, you had Green-e RECs, which prior to Covid in 2019, over the past eight-to-10 years, had been range-bound between – at the very low end – 35-50 cents and $1, or maybe $1.20 on a good day, skyrocket this past summer to $7."

Similarly, in weather markets, the increasing frequency of extreme weather events over the last 12 months has driven the return to the market of hedge funds and investment banks.

It has also driven demand for products including parametric solutions for earthquakes, typhoons, flood, and hail, as well as for cold protection as gas prices rose to eye-watering levels – and even for products to hedge against the risk of hail to solar panels.

The total issuance of catastrophe bonds in 2021 had already exceeded the previous annual record by the end of November.

In a year in which the gathering at the UN climate conference (COP26) in Glasgow demonstrated that policymakers around the world are increasingly realising the urgency of the climate crisis, the environmental markets showed the growing force of the private sector to galvanise action.

Congratulations to all this year's winners.