MSCI: Carbon Markets and an Emerging Derivatives Class

Financial markets. Emerging and specialised subject, opportunities and risks. Futures derivatives linked to carbon prices recorded positive risk-adjusted returns over the last 11 years, with low correlations with traditional asset classes, including commodities (see table in image below, MSCI article). As more companies chart their net-zero paths, derivatives could play an interesting role in helping investors manage carbon price risk, as well as hedging against "traditional" financial risks (such as credit, interest rate and default risk). That is, entities regulated by the ETS (emissions-trading systems) - and investors - can also make use of carbon futures derivatives, already traded on several exchanges, and thus protect their costs of future emissions, several years in advance. Policymakers can also consult spot and future carbon prices to measure the effectiveness of their policies, designing and improving strategies for the future. Not to mention that carbon can contribute as a new asset class to the diversification of the long-term investment portfolio. Click to read this very technical MSCI article, including references for further reading.