Sustainable Investment Awards 2023

ESG investment initiative of the year (fixed income): Tramontana Asset Management

Tramontana Asset Management has secured the 'ESG investment initiative of the year (fixed income)' award for its carbon-backed financing note innovation, which allows institutional fixed income investors to access the carbon credit market.

The structure involves issuing a secured note – invested in by institutional investors – which is used to purchase carbon credits. The carbon credits are then held in a separate account for the duration of the note, and then the corporate client buys the carbon credits when the note matures.

The first transaction was signed with an unnamed major utility in the first quarter of 2022, Tramontana said. This allowed the firm to hedge its forward EU Allowance (EUA) price risk on an unmargined basis over a longer duration, rather than resorting to futures with the additional 'slippage' and execution costs associated with rolling these contracts.

As well as opening the carbon markets to fixed income investors, Tramontana said one of the strengths of the structure is its adaptability and scalability.

"The structure can be adapted to accommodate alternative energy transition assets such as pumped storage hydro, grid-scale batteries, or raw materials," a spokesperson told Environmental Finance. "The scalability of the solution has enabled us to transact the structure with numerous counterparties across a range of tenors."

The UK-based asset manager is also looking at additional ways to enhance the structure for corporates and investors.

"We are currently working on a mechanism to allow originators to build exposure over a period of weeks or months while hedged with a single note," the spokesperson said. "Additionally, the platform accommodates issuance of notes in different currencies backed by different allowances which opens the energy transition investment space to a wider pool of financing partners."