“Carbon credits are a new asset class for many investors, and they tend to be unrelated to many other commodities and lines of business,” he says. “Carbon credits as a commodity have performed exceptionally well. When you look at 2021, the EU compliance market was up about 140% for the year. The GEO spot carbon contract was up about 1,000% in 2021 This is many times higher than the returns we’ve seen in bitcoin, oil, or the S&P 500.
In that context, the 15% internal rate of return targeted by carbon streaming – which can go north of 20% and even 30% in some scenarios, should carbon prices rise – may seem too low. But for investors who want to make a positive impact without losing the performance gained from investing in broad equity indices, those figures may be more than satisfactory.
Like any type of investment, participating in the carbon credit markets carries some degree of risk. According to Cochrane, investors looking to dip their toes in that space should be mindful of the distinction between compliant or regulated carbon markets, a US$400 billion industry subject to government regulations or oversight, and voluntary carbon markets. Markets, where there are forces of supply and demand prevails.
“When you’re buying those credits [in the voluntary market]You need to make sure that you are investing in the right projects,” he says. “There are about 6,000 carbon projects in existence today in many different jurisdictions. At Carbon Streaming, we take a lot of care and a lot of time with our team and advisors to make sure we are investing in the right projects. This process is incredibly important because we are investing our money for 30-, 40-year time periods in some cases.”
While the idea of investing in externally regulated markets may cause a little more unease among investors of any stripe, Cochrane stressed that efforts to stem the effects of climate change are growing around the world. Some very worthy projects are being launched in jurisdictions where regulated markets have not opened, where he says there is an opportunity for voluntary markets to take the slack.