Tramontana Asset Management arranged a carbon-backed financing and hedging solution for a major utility and partnered with institutional fixed income investors to fund the transaction, helping it to win ESG investment initiative of the year (fixed income).

The financing involves the issuance of a secured note, collateralised by EU Allowances, carbon credits used in the EU Emissions Trading Scheme (ETS), which can be held in clearing systems by fixed income investors, enabling them to broaden their energy transition footprint.

This allowed the utility to hedge its forward carbon price risk on an unmargined basis out to a deferred tenor where there is no liquidity on exchange.

As liquidity in the EUA futures market is concentrated at the front of the curve, this trade enabled the utility to lock in a forward price and eliminate the balance sheet burden of exchange margining requirements. It was also able to save on the slippage and execution costs of rolling futures for hedging purposes.

"I am very proud of the team as this award recognises their ability to innovate solutions to the challenges faced by corporate and institutional clients due to the changing regulatory environment, such as the roll-out of the Carbon Border Adjustment Mechanism and the inclusion of shipping in the EU ETS" said Tanzil Dosani, Director at Tramontana Asset Management.

The structure is scalable across multiple financing partners. Tramontana believes the repeat transactions executed are a testament to this and it has allowed utility clients to diversify their financing base to include non-specialist investors.

Elsewhere, Tramontana has expanded its capabilities into physical gas, Renewable Obligation Certificates (ROCs) and Renewable Transport Fuel Certificates (RTFCs) over the past year.