Carbon fund assets reach $12.9 billion, up 63%
London, 21 August: Assets managed by carbon funds have grown to $12.87 billion, up from $7.9 billion one year ago, according to research* by Environmental Finance Publications, with 80 private-sector carbon funds, government procurement vehicles and buyers’ pools either operational, raising money or fully invested.

However, growth in the sector – up 33% year-on-year in terms of the number of funds, and 63% in assets under management – is lagging growth in the wider carbon markets. Looming uncertainty over the shape of the global carbon markets after the Kyoto period ends in 2012, the effects of the credit crunch, and the success of first-movers in raising investment into this asset class have all contributed to a slowdown of capital joining the carbon market.

These funds either buy carbon credits – usually, but not exclusively, from Clean Development Mechanism (CDM) projects in developing countries – to sell for profit, or to supply their investors with credits to be used to meet emissions reduction targets under the Kyoto Protocol, or the EU Emissions Trading Scheme (ETS).

“The main interest has been from compliance buyers” with emissions targets, said Markus Huewener, CEO of Germany-based carbon asset manager First Climate. “And demand for pre-2012 [credits] is no longer there. They have their strategies in place.”

Meanwhile, without clarity on the supply and demand picture after 2012, buyers approaching the market as investors, not to meet compliance targets, are “not interested in carbon risk after 2012”, Huewener added.  

Others suggest that the growing maturity of the carbon markets means that carbon funds are losing market share to other intermediaries, such as hedge funds and investment banks. Much of the early capital dedicated to carbon funds came from governments seeking to meet their Kyoto targets, observed Sam Fankhauser, managing director of strategic consultancy at IDEAcarbon, in London. “That’s being replaced by the private sector, which is more creative and is finding different ways” to finance projects and buy carbon credits.

However, it is likely that an international agreement on a post-2012 climate regime will provide a fillip to the carbon funds sector, as will the emergence of carbon caps in the US, say market participants. “The US will give a boost,” said Fankhauser. “Most [proposed] US systems would involve a certain amount of [carbon] offset imports, which will boost demand for carbon funds.”

Huewener added that institutional investors are increasingly eyeing the market, but the type of investment is evolving from simply buying carbon assets, to taking equity positions in the underlying projects to benefit from projects’ other revenue streams. 

In 2007, carbon markets globally were worth around $64 billion, up from around $30 billion in 2006, according to figures from the World Bank. They are expected to grow to more than $100 billion in 2008.

Last year’s survey by Environmental Finance identified 56 carbon funds managing $7.9 billion, while in 2006 there were 42 managing $4.6 billion in assets. If those of the 80 funds listed this year which are still fund-raising meet their stated targets, they will attract a further $5.49 billion.

*From Carbon Funds 2008/09, Environmental Finance Publications