Carbon Credits, US-China Diplomacy, EV Collaboration, & Investor Impact: KraneShares Summit Overview
The KraneShares Global Climate & Carbon Investment Summit, held in June at the New York Stock Exchange, showcased a range of speakers, from the likes of former U.S. Ambassadors to Senior Investment Analysts. Amidst unprecedented smoke from the Canadian wildfires, panel experts spoke about climate-related policy efforts, carbon cap-and-trade programs, US-China diplomacy, and the impact of investors on corporate climate strategy. Ultimately, the summit emphasized the imperative need for change on a global scale and reinforced the idea that China, climate, and the quest for uncorrelated assets are deeply intertwined.
We have provided a highlight reel and an in-depth summary of the event below.
Dr. Fan Dai & Carbon Markets
Dr. Fan Dai is a seasoned authority in policy implementation, carbon cap-and-trade programs, and diplomatic engagements with China. Since graduating from Berkeley Law, University of California, and earning a doctoral degree in Environmental Policy and Economics from the State University of New York College of Environmental Science and Forestry, her research has been focused on market mechanisms for climate change mitigation, energy efficiency, and innovations. She has a wealth of experience, having served as a senior advisor at the California Environmental Protection Agency (CalEPA) and for the California Governor’s Office of Business and Economic Development. Dr. Dai is now the Director of the California-China Climate Institute, leveraging her experience in market mechanisms and diplomacy with China.
Having launched the first multi-sector cap-and-trade program in North America, California is a national and global leader in carbon trading. The California Emissions Trading System (ETS) ranks among the largest in the world, with 44.5 billion in California Carbon Allowances (CCAs) traded in 2022.1 The California ETS serves as a model for other states and countries as they develop their own programs. The KraneShares California Carbon Allowance Strategy ETF (Ticker: KCCA) provides targeted exposure to the CCA cap-and-trade carbon allowance program. KCCA is benchmarked to the IHS Markit Carbon CCA Index, which tracks the most traded CCA futures contracts.
Dr. Dai told the audience how California’s carbon trading system came to fruition. “It was first legally authorized in AB 32 for the California Air Resources Board to explore these market-based mechanisms. That's how California started exploring carbon trading schemes.” AB 32 is the Global Warming Solutions Act of 2006, which authorized a department within the CalEPA, The California Air Resources Board (CARB), to develop and oversee California’s main greenhouse gas reduction programs. Now, California’s cap-and-trade program is a primary tool the state is utilizing to reach its ambitious goals of curbing carbon emissions 40 to 48 percent below 1990 levels by 2030 and 80 percent below 1990 levels by 2050.
After working for CalEPA and on the board of CARB, Dr. Dai assisted in creating the California-China Climate Institute in 2019. Dr. Dai explained, “The idea and concept of this institute came from a few years ago when then-Governor Jerry Brown went to China, met with President Xi Jinping, and talked about how we would institutionalize the collaboration between California and China on climate and energy issues.” As Director, she is leading efforts to foster cooperation and serving as a crucial link between California and its significant economic and environmental initiatives with China.
Dr. Dai explained to attendees that China used California as a blueprint for creating the Chinese National Emissions Trading Scheme. She noted that the California-China Climate Institute "put together about 11 papers, looking at the opportunities for collaboration between California, more broadly the United States, and China, in areas such as zero-emission vehicles, methane reduction, and cap-and-trade programs.”
The Future of Carbon Markets
Later in the day, panelist Bo Qin, lead Carbon Analyst at Bloomberg New Energy Finance, echoed Dr. Dai’s statement on the considerable growth of the carbon market, stating that “carbon markets moved above 900 billion in market value last year, six times what the value was in 2018. And we're on track to hit that 1 trillion psychological mark.” Regarding the trajectory of the carbon market, Qin emphasized that there has now been significant movement after “a long-time cruising on the runway.” Qin is optimistic about the future of carbon markets because lawmakers are incentivizing net-zero emissions more than ever.
Eron Bloomgarden, Founding Partner of Climate Finance Partners, explained that investing in the carbon market is a long-term commitment. There is an international shift happening, said Bloomgarden, “whether or not you believe in Climate Change, the physics of Climate Change are sound, and the policy response and global transition are happening.” Bloomgarden also views the creation of carbon markets as a historical milestone as “capital investment today, for long-lived assets that are going to be with us for the next 20 to 50 years, encourages innovation in that sector.” Recent government incentives like the Inflation Reduction Act in the U.S., and other initiatives internationally for big business to cap their carbon emissions, will be instrumental in the growing value of this market.
KraneShares Head of Climate, Luke Oliver, echoed Bloomgarden’s beliefs, stating that “carbon does have a long-term expected return, quite a significant one if you consider the tightening of regulation, climate initiatives, and emission targets that have been set globally. This is why we believe it is a compelling investment, as well as something that's going to have a huge impact on the global economy.”
Diplomacy in Action
Diplomacy then took center stage as Terry Branstad, former US Ambassador to China, and David Adelman, former Ambassador to Singapore and KraneShares’ General Counsel, shared their insights on global climate cooperation. Both Adelman and Branstad detailed their recent trip to China, which focused on establishing the US-China Green Institute. The institute is a nonprofit organization founded to work across the Pacific in both the US and China on climate change and green initiatives.
Adelman and Branstad invited Wu Dongsheng, the Deputy Director General of the Shanxi Provincial Development and Reform Commission, to give remarks on initiatives within his province. Shanxi is the top coal-producing province in China; however, they are moving toward eliminating carbon output, setting a goal of complete carbon neutrality by 2060. Dongsheng told the audience that Shanxi aims to achieve carbon neutrality with “new energy and renewable energy sources,” and he believes that “we should promote technological innovation as the model innovation” in the global economy.
In his speech, Dongsheng explained how the Taiyuan Energy Low Carbon Development Forum was started in 2016 and is held annually in Shanxi to further the global effort to combat climate change by “inviting national leaders and foreign dignitaries, national host ministries, the United Nations, international organizations, experts, and scholars to deliver speeches.” Attendees saw diplomacy in action when Dongsheng extended an invitation to Branstad to lead a delegation at the Forum later in 2023. This exchange marked a high note for the conference, as it demonstrated that climate is an area where collaboration between the US and China is possible and happening now.
Electric Vehicle Collaboration and Competition
The day’s conversation then shifted from collaboration to competition. The next panelist, Tom Gebhardt, former Chairman and CEO of Panasonic North America, told the audience that industry giants like General Motors, Toyota, and Volkswagen are incorporating electric vehicles (EVs) into their business strategy to compete with existing EV-focused companies like Tesla and BYD. Gebhardt told the audience, “Two interesting things about BYD and Tesla: Both know more about batteries than any of the other carmakers. BYD was originally a battery maker. Tesla and Panasonic have been working together for more than 10 years, and Tesla has been intimately aware of how to scale. So, there's a competitive advantage there all the carmakers are working towards.”
Gebhardt’s opinions are based on the deep industry knowledge in the realm of electric vehicles and battery technology that he developed throughout his ongoing 30-year career in the battery and automotive space. Gebhardt played a pivotal role in driving Panasonic’s strategic initiative to switch from a consumer focus to an industrial approach and has fostered high-level partnerships within the EV sector.
KraneShares CIO Brendan Ahern then asked Gebhardt if legacy automakers will pivot towards the EV space through collaboration with existing battery makers or by leveraging their “100 years of auto manufacturing know-how to work in the EV space.” Gebhardt responded, “I think there's a limited number of players who are going to be able to scale. Making a car is difficult. So, I think you're going to see some consolidation, but you're also going to see the major players emerge.” Gebhardt also noted that large automakers still generate 90% of the revenue from combustion engine vehicles. “So today, this still represents only 10% of their total portfolio.”
Long-standing automakers are still dealing with the difficulty of how much to invest in the EV space versus their real product line that's generating much of their revenue today. Gebhardt explained, “That's what has allowed some of the small players to emerge because they can be big in a smaller space.” While the EV market has seen significant growth internationally, Anthony Sassine, KraneShares Investment Strategist, noted that with around 35 million EVs on the road worldwide, competition will still be fierce to achieve the long-term global goal of replacing a staggering 1.3 billion internal combustion engine (ICE) cars.
The race to EV dominance goes further than the industrial level, as global governments have provided incentives like the Inflation Reduction Act to help their own EV markets succeed. So far, China has led the way in global efforts, backing EV adoption with government regulations and incentives. Gebhardt told the audience, “China did a tremendous job in selling the benefit of EVs” and has been particularly successful in promoting EV adoption through consumer incentives and stricter regulations. On June 21st, 2023, China extended its tax waiver on EVs through 2027, further committing to EV implementation.
The KraneShares Electric Vehicles & Future Mobility Index ETF (Ticker: KARS) is benchmarked to the Bloomberg Electric Vehicles Index, which captures companies engaged in the production of electric vehicles and/or their components. Panasonic Holdings Corp is a top holding in KARS, representing 4.39% of Net Assets as of 6/30/2023.2 Click here for most recent fund holdings.
The summit presented many big ideas and themes for participants to consider. To synthesize these concepts, the next panel brought together investment practitioners who are deploying climate-aware strategies in different capacities for their clients.
Melanie Fornes, a Research Analyst on Sustainable & Impact Investing at Glenmede, told the audience, “With this shift in business, as usual, there's an immense investment opportunity to be had. And that is a positive and actionable call for a lot of investors.” Fornes noted that investors are in the process of evolving their portfolios, stating, “We continue to see increasing demand for climate products. There is a mission alignment component, particularly with endowments, foundations, families, and individual investors. They're really seeing the call to action on the urgency of climate change today and going forward. And they see now the clear, kind of impact story to be had around climate action in their portfolios.”
Because climate-aligned strategies, like carbon-credit funds, are largely uncorrelated to traditional asset classes, investors are increasingly recognizing additional potential benefits that go beyond impact. As panelist Michelle Zeng, Head of Marketable Investments & Operational Due Diligence at Summit Trail Advisors, said, “We actually put carbon allowances in the inflation bucket. We do that because the CCA market has a floor, CPI plus 5%, that moves with inflation, so it makes perfect sense.”
Maya Beyhan, Senior Director, ESG Specialist, and Index Investment Strategist at S&P Dow Jones Indices, said that investors can “now treat carbon as a tradeable asset that they can utilize regardless of their specific climate goals.” S&P Dow Jones has indexes that track voluntary and compliance-based global carbon markets, including, as Beyhan pointed out, the IHS Markit Global Carbon Index, developed by S&P Dow Jones Indices in collaboration with KraneShares and Climate Finance Partners. Beyhan stated that “This index is such a great example of new measures to hedge risk and go long in the price of carbon, but also at the same time achieving sustainable investment.” She believes that thinking of carbon as a commodity opens new avenues for investors to diversify their portfolios and engage with the rapidly evolving climate landscape.
The KraneShares Global Carbon Strategy ETF (Ticker: KRBN) is benchmarked to IHS Markit’s Global Carbon Index, which offers broad coverage of cap-and-trade carbon allowances by tracking the most traded carbon credit futures contracts. The index introduces a new measure for hedging risk and going long the price of carbon while supporting responsible investing.
Another opportunity for climate-aligned portfolios lies in identifying companies that are “transitioning their operations, products, or revenue streams” to address climate-related challenges. This strategy, as described by Fornes, does not use “an exclusionary approach, but really aims to reduce climate-related physical and transition risks, while on the other end really trying to capitalize on some of the opportunities presented by the transition.” Fornes explained that many of the best investment opportunities are in transitional companies that aren’t considered green yet, but are “climate aware,” and showing commitment to improving their operations. Fornes explained that while the climate aspect of these strategies is important, it is secondary to other benefits identified in transitioning companies. “Our own thematic portfolios are always going to follow the best thinking from a financial and macroeconomic perspective. So again, you're not compromising that best portfolio allocation thinking,” Fornes stated.
Continuing the theme of transition equities, another way that asset managers can help companies to address climate-related challenges is through proactive shareholder engagement. Abby Frank, Associate Vice President & ESG Engagement Analyst at Rockefeller Asset Management, told the audience how shareholder engagement has a significant impact on corporate strategy. Frank stated, “Investor engagement is important. We think that it will lead to long-term outperformance, and so when a company is on an improvement trajectory, we see engagement as a way to really influence or accelerate that.”
The KraneShares Global Climate & Carbon Investment Summit featured esteemed speakers who are progressing the adoption of carbon as an asset class, raising US-China climate diplomacy, shaping the roadmap for electrification, and driving impact through shareholder engagement. Each speaker's extensive background and expertise showcased their dedication to their respective fields. Their nuanced perspectives helped attendees better understand the enormous investment opportunities emerging as we navigate toward a greener and more prosperous future.
For KCCA standard performance, top 10 holdings, risks, and other fund information, please click here.
For KARS standard performance, top 10 holdings, risks, and other fund information, please click here.
For KRBN standard performance, top 10 holdings, risks, and other fund information, please click here.
- Data from Bloomberg as of 12/31/2022
- Data from Bloomberg as of 6/30/2023