Green Funds Arrive at Market Maturity
By Peter C. Fusaro
I
t’s been almost five years since the first green hedge fund Creating a green economy in the US is an immense
appeared. Today, there are up to 100 green hedge funds undertaking and opportunity. The US has 250 million cars and
and fund of funds. However, their strategies differ. They are trucks. These vehicles will now be more closely regulated under
in carbon emissions trading and carbon asset development, the Obama administration creating a huge market for “mobile
long/short cleantech and alternative energy market caps, emission reduction credits”. The US is also the world’s largest
water funds (including equities and water rights), forestry, and power market using over 4,300 TWh per annum. This market
weather derivatives. In the universe of the Energy Hedge Fund will be transformed, not only by renewable and smart grid
Center the following is the distribution: technology, but also by the creation of energy efficiency credits
which are a nascent market calling for a demand response.
The Green Hedge Fund Universe That will blossom into another fungible commodity market. In
•
Carbon & Other Emissions Trading: 27 funds this case, the size of the US market matters.
•
Long/Short Alternative Energy or Cleantech: 43 funds All these compliance driven markets will generate more
•
Water Funds: 11 funds trading by energy companies, banks and hedge funds. But
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Weather Derivatives: 3 funds since federal programs will be economy-wide they will also
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Forestry: 3 funds impact Fortune 1000 companies that never really had to
•
Fund of Funds: 9 funds bother with capping emissions before. That coverage of
perhaps 80% of the US economy creates a tremendous
While these strategies may vary, the goal of all is ‘green’. opportunity for environmental risk management and trading.
That is green both in terms of sustainable investing, as well as However, there is currently not enough intellectual talent for
in reducing the carbon intensity of the companies involved. the world’s most complex commodity market ever created
Most of these funds meet triple since it needs government
bottom-line metrics as well as
... most environmental trading in the US
regulation married to a capital
socially responsible investing
(SRI). However, the investors
– and probably in the EU and Asia –
markets solution. Because of the
dearth of talent, most
that they attract are mostly high
will reside at banks & hedge funds
environmental trading in the US
net worth and family office – and probably in the EU and
individuals as the sector remains financially immature and Asia – will reside at banks and hedge funds who are market
doesn’t attract much institutional investment as yet. That will makers in these arenas. This is already occurring to some
certainly change in the next two to three years as the US moves degree as a number of US corporations have asked hedge
forward at the federal level on climate change regulation, funds and banks to stockpile environmental credits for them.
renewable energy portfolio standards, renewable energy tax It is a cheaper solution for these companies and, frankly, not
credits and energy efficiency standards. These public policy part of their core competency.
initiatives will transform the US market and attract much
‘greener’ hedge fund investment. The Emerging Environmental Warehouse
Today, however, the US still has the most advanced The emerging global markets for the environment will create
environmental financial markets with hedge funds, banks and many environmental banks. Today, there are over 80 private
utilities trading 38 environmental financial markets with a equity funds for carbon finance alone. This number is sure to
size of probably US$11 billion in notional value. There is also rise despite current market sell-offs and economic uncertainty.
an emerging market for forestry and biodiversity credit Hedge funds that are active in environmental financial
banking and trading. That market today is estimated at US$3 markets are also becoming more active in the financing of
billion. The EU Emissions Trading System Phase II remains the renewable energy projects that reduce carbon emissions.
largest environmental financial market, but it must be We foresee hedge fund strategies proliferating and believe
remembered that the carbon footprint of the EU is that the number of green hedge funds will balloon to 500 to
substantially smaller than that of the US. The US carbon 1,000 in the next decade. The best is yet to come as the US
footprint is 6 billion tonnes per year and coupled with marches its environmental market forward and rejoins
Canada’s 1.3 billion tonne footprint represents over 25% of international efforts to reduce worldwide GHG emissions. The
global GHG emissions (see page 104). The emerging North global markets will have global exchanges for clearing such as
American market for carbon trading (including Mexico) will CME Group, ICE, Eurex, NYSE Bluenext and others.
dwarf both European and Kyoto efforts. However, what has The green trading take-off has now begun.
•
been lacking is a price for US carbon reductions. That is
changing and the financing of projects will also accelerate.
Peter C. Fusaro is Chairman of Global Change Associates
These developments will create many more hedge fund
and Co-Founder of the Energy Hedge Fund Center which
opportunities in both green trading and investment.
issued the first Green Hedge Fund Directory in January 2009.
www.energyhedgefunds.com
122 worldPower 2009
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