Investors looking for opportunity and diversification beyond traditional allocations would do well to consider carbon allowances. Carbon allowance investing offers a diversified return stream for portfolios from traditional stocks and bonds with notable returns over time.
In the decade between August 2014 and June 2024, the annualized returns of carbon allowances were 20.43%, according to Bloomberg data, cited by KraneShares. Carbon allowance measurements included the top four markets, weighted according to volume. In comparison, the S&P 500 Index generated 12.98% annualized returns, while the Agg generated returns of 1.41%.
This asset class generated higher annualized returns than stocks and bonds with low correlations. Carbon allowance correlations were just 0.307 for U.S. equities and 0.085 for U.S. bonds over the same period. It’s worth noting that volatility for carbon allowances were significantly elevated over equities and bonds in the decade measured. Carbon allowances generated annualized volatility of 28.79%, equities 15.39%, and bonds 4.84%.
Given returns and low correlations, carbon allowances make a notable addition to portfolios for those with the appetite for volatility.
“Adding carbon allowances may enhance returns when used as a complement to a traditional 60% stock and 40% bond portfolio,” KraneShares wrote.
KraneShares calculated annual returns and volatility for a variety of portfolio models to demonstrate the impact carbon allowances may have. A traditional portfolio of 60% equities and 40% bonds, using the S&P 500 and Agg respectively, offered an annual return of 8.59% over the last decade. Its volatility clocked in at 10.11%. Meanwhile, a portfolio of 50% stocks, 30% bonds, and 20% commodities offered annual returns of 7.28% and volatility of 10.85%.
However, a portfolio comprising 60% stocks, 30% bonds, and 10% carbon allowances generated annual returns of 10.76%. Volatility measured 11.03% over the same period.
The KraneShares Global Carbon Strategy ETF (KRBN ) was the first of its kind to offer an investment take on carbon credits trading. KRBN tracks the S&P Global Carbon Credit Index, which follows the world’s most liquid carbon credit futures contracts.
This includes contracts from the European Union Allowances and California Carbon Allowances. It also includes the RGGI markets and the United Kingdom Allowances. KRBN carries a management fee of 0.79%.
For more news, information, and analysis, visit the Climate Insights Channel.
