State Street’s solution helps facilitate the integration of carbon-related assets into portfolios.
The carbon asset market has been historically fragmented. Now, financial firm State Street plans to make it easier for asset managers to integrate carbon-related assets into their portfolios.
The Boston-based financial giant launched State Street Carbon Asset Servicing to help clients integrate carbon credits into their ESG and non-ESG portfolios. The platform helps portfolio managers with depositary services and fund administration. This includes record keeping, price calculation, reporting, and other features.
The fund administration and depository services are required in the European Union. State Street’s platform will allow asset owners to incorporate this emerging asset class into State Street’s core investment servicing that’s offered to portfolio managers.
“The carbon assets market is growing dramatically—as the total traded value for compliance and voluntary credits reached a record €865 billion in 2022 and is expected to grow fifteen-fold by 2030 as new regulations in major regions push corporations globally to report on and offset their greenhouse gas emissions,” said Phil Kim, global head of ESG Product at State Street, citing data from Refinitiv and McKinsey.
The system will coordinate data from multiple parties, such as carbon registries, cash agents, and exchanges. Clients will gain access to the carbon asset class via spot and derivatives markets, allowing them to trade carbon credits or directly hold carbon allowances.
“Carbon assets are an emerging, idiosyncratic asset class with their own risk-return profile,” wrote Rick Lacaille and Richard Fontes in a recent State Street report. “Whereas traditional asset classes derive their risk-return profile from forecasted performance of a firm or a series of cash flows, carbon assets derive their value from the forecasted ‘price’ of carbon emissions and the perceived rate at which the global economy – and its constituents – will decarbonize.”
This provides some advantages, as carbon assets have a low correlation with traditional asset classes. As such, carbon credits can provide potential diversification benefits within portfolios.
Because every asset has a carbon footprint, a portfolio that holds traditional asset classes will be exposed to carbon’s priced and unpriced costs. Investors might consider hedging against the risk of price fluctuations of carbon emissions.
“As businesses continue to move toward models that reduce greenhouse gases and emission standards increase in scale and magnitude, the price of carbon offsets are likely to increase. Investing in carbon assets can help fund the energy transition and diversify portfolios, all while offering the opportunity for investment returns,” added Kim.
State Street’s Carbon Assets Category Growth, Strategy and What Comes Next report, “Global carbon emissions reached a record high of 58 gigatons last year. About 12.5 gigatons are traded in the global carbon compliance markets.” The report adds, “Although voluntary trading is still quite low, total traded volume on emissions exchanges was roughly 20 percent of global emissions. Demand for carbon assets is expected to grow substantially as governments, companies, and communities tap into the power of markets to facilitate the energy transition.”