Podcast episode

Carbon as an emerging, liquid asset class w/ Michael Azlen, Carbon Cap Management – EP212

With carbon prices becoming more common globally, carbon is an emerging, liquid asset class, according to Michael Azlen, CEO and co-portfolio manager of Carbon Cap Management. Michael shares his insights into investing in carbon markets with show host Gene Tunny. Michael, an experienced investment professional and regular speaker at investment conferences, shares his research on the benefits of diversifying investments across multiple carbon markets. Tune in to learn more about the potential of carbon markets as an investment opportunity. Disclaimer: This is for general information only, and does not constitute investment or financial advice. 
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What’s covered in EP212

  • Carbon markets and investing in an emerging asset class. (0:03)
  • Carbon markets and their correlation with other asset classes. (2:57)
  • Carbon markets and impact investing. (9:20)
  • Carbon markets and emissions trading schemes. (13:42)
  • Carbon market mechanisms and their effectiveness. (20:52)
  • Carbon markets and their potential for investment. (28:19)
  • Climate change impact on asset management industry. (33:35)
  • Final thoughts on carbon markets and investing with Michael Azlen. (38:25)

Links relevant to the conversation

About Michael Azlen and Carbon Cap:

Michael’s article on “The Carbon Risk Premium”:

Transcript: Carbon as an emerging, liquid asset class w/ Michael Azlen, Carbon Cap Management – EP212

N.B. This is a lightly edited version of a transcript originally created using the AI application It was then checked over by a human, Tim Hughes from Adept Economics, to see if the otter had missed anything, and with all respect to otters they do miss quite a bit. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Michael Azlen  00:03

By investing across all five of these markets, your overall portfolio volatility really comes down of course because your your nicely diversified, while it doesn’t necessarily impede your return expectations so that’s that’s one of the key observations of our research paper was this this very low cross correlation between carbon markets.

Gene Tunny  00:27

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning into the show. In this episode, you’ll learn about carbon as a liquid emerging asset class. Emissions of carbon dioxide are increasingly being priced globally through various emissions trading schemes, or through other mechanisms that impose carbon prices. To explore carbon markets I talk to a fund manager who is investing in carbon markets globally. My guest is Michael Azlen, CEO and Co-Portfolio Manager of Carbon Cap Management. Michael has 25 years of experience as an investment professional, and he’s a regular speaker at investment conferences worldwide. Also he’s been a guest lecturer in graduate programmes at London Business School for more than 15 years. I’m really pleased to have been able to interview Michael because he has some great insights into carbon markets. For instance, he explains how carbon markets are generally uncorrelated with equities, bonds and real estate, and hence they can help investors diversify in uncertain times. For the lawyers, this is for general information only and none of this should be interpreted as investment or financial advice. Okay, let’s get into the episode. I hope you enjoy my conversation with Michael Azlen on carbon markets.

Michael Azlen from Carbon Cap. Thanks for joining me on the programme.

Michael Azlen  02:20

Pleased to be here Gene, thanks for inviting me.

Gene Tunny  02:22

Oh, of course. I’ve covered climate change quite a bit on the show. But I haven’t had anyone who has the expertise in the carbon markets and investing in carbon as an emerging asset class or, or another way I’ve seen it expressed as a liquid asset class. So Michael, to start off with, could you tell us a bit about Carbon Cap, please, you’re the CEO and Co-Portfolio Manager there. What does Carbon Cap do exactly?

Michael Azlen  02:57

Sure. So So Carbon Cap runs the World Carbon Fund. It’s a climate change impact fund. And the Fund invests into the regulated compliance carbon markets around the world. The fund has two objectives. The first objective is to generate a positive return over any rolling 12 month period. So we don’t want to be up every month or every quarter. But over every rolling 12 month period, the objective is to be positive, regardless of the performance of carbon itself. And the second objective of the fund is to have an impact, a direct impact on climate change. And we do this in a number of ways. But the hardest impact is achieved through our commitment to take 20% of the performance fees that are generated. And we use those to purchase compliance carbon permits, again in the regulated market Gene. And we cancel those permits. And in the fund has been running for three and a half years, the total return net of fees to our clients is in excess of 100% now, so very strong returns over this three and a half year period. And therefore, you know, the nice thing about performing it is aligned with direct climate impact. So higher performance means more impact. And that creates a nice alignment of interest between between the investors ourselves as the manager and having an impact on climate change. The fund has grown significantly from the launch, we launched with only 10 million the fund is now $280 million in size. So we’re approaching 300 million and our client base is now moving much more institutional in nature. In terms of impact allocators. The fund holds Article Nine status here in Europe and that that status, Article Nine is the highest level of impact under the European taxonomy. So it’s an uncorrelated absolute return fund with climate impact. So it’s quite a quite a unique fund and I think you know, more and more clients are seeking uncorrelated returns as we’re, you know, the global macro situation is becoming quite difficult. I think the forecast from here out.

Gene Tunny  05:14

Okay, so yeah, I’ve got a few questions based on that. Michael uncorrelated, do you mean uncorrelated with the business cycle with the stock market? What do you mean by uncorrelated?

Michael Azlen  05:24

Yeah, so the background to to Carbon Cap Gene was after I built and sold my previous asset management business to a public company, I then became deeply involved in research onto the into the science of climate change, so nothing to do with carbon. And that led me to enrolling at the London School of Economics and their climate change programme. And this is where I learned about carbon markets. At that time, this was in 2018, carbon was trading in the different markets around the world about half a billion dollars daily. So it’s quite liquid. And I was quite surprised by that. And my first question as an investment professionals was, was your question. What are the what are the statistical properties of the asset class, you know, return and volatility and correlation. When I looked for the research Gene, there was no research on carbon. So I hired a PhD student from the LSE, myself, we collected the data, and we analysed and wrote that up as a full research paper. Now, it did take three years in the peer review process with academic papers. But I’m very pleased to tell you the paper was published last year in the Journal of Alternative Investments. So, so coming back to your question, when you’re asking, you know, what do we mean by correlation? In this sense, if you take the, you know, the daily, weekly or monthly returns of carbon, which is a liquid tradable asset class now, I should mention that, that that liquidity where it was trading half a billion a day, that was in 2018, now we’re trading 4 billion per day. So the liquidity has increased significantly. And and when you look at those correlation numbers over rolling periods, carbon just exhibits effectively no correlation at all to equities, to bonds to real estate to other commodities, it has very unique correlation properties

Gene Tunny  07:18

Right and what about the volatility is it much more volatile than those other asset classes?

Michael Azlen  07:24

So it varies between markets. So you know, today in the World Carbon Fund, we invest in five different liquid regulated carbon markets. And those volatilities vary from probably the lowest volatility market is between 10 to 15% volatility, and the highest volatility market maybe is about a 60% volatility. So there’s quite a difference in volatility in the different carbon markets.

Gene Tunny  07:48

Okay, so I might ask you about those different carbon markets in a moment, there are just a few other things to clear up. You talked about institutional investors, so you’re talking about, what investment banks, so the Goldman Sachs, or Morgan Stanley, you’re not okay, who are you talking about there? Pension funds, perhaps?

Michael Azlen  08:10

Yeah, exactly. So generally, you know, high net worth investors, and then retail investors would be non institutional, and then kind of in the middle ground, you would have family offices and multifamily offices in the middle ground. And then you would move into more institutional, which would be, as you say, professional investment management organisations. So this, these could be other investment management firms that have maybe a multi asset product, or they might run a fund of hedge funds product, and they would be an investor into our fund. And finally, the classic, you know, asset holders like in Australia, the super funds and other big pension funds. So we’re seeing also interest from the bigger pension funds now, because there’s an interesting aspect, not only the return and the low correlation, but the climate impact, and the potential for carbon exposure to give you somewhat of a climate hedge in your portfolio is another another interesting aspect. If you understand that climate change is now impacting equity and bond portfolios by having some carbon it’s somewhat of a hedge against some of those impacts.

Gene Tunny  09:19

Yeah, that makes sense. And can you explain, you mentioned this Article Nine, in the European taxonomy? I’m completely unfamiliar with that. Sorry. Could you explain what what that’s about?

Michael Azlen  09:32

So, Europe a couple of years ago, launched a new taxonomy to identify the level of transparency and impact for funds and they set minimum standards, reporting standards in order to achieve those different article levels and the highest level there of impact is Article Nine. So you know, in an in an effort to create an environment that kind of weeded out greenwashing, they said, let’s put some standards in here. Because you know, I mean, three years ago, every single fund was green in some aspect, right? Even if it really wasn’t green, it could be labelled green. And so Europe brought in this taxonomy and said, now, unless you meet these very strict reporting requirements, you can’t make a green claim. Or more importantly, you know, your fund will be ranked Article Six, Article Seven, Article eight, Article Nine. So there’s a varying degree of reporting, and you it to achieve Article Nine, you must demonstrate meaningful impact in terms of the activities of the fund have to be reported in detail, and you have to demonstrate impact. And so in our case, we have now a three year audit trail where we have purchased carbon permits with those performance fee amounts, and then we just cancel them. And that’s all audited and documented.

Gene Tunny  10:57

Okay, okay I’ll have to look more into that, that’s interesting. I mean, yeah, there have been a bit of concerns about greenwashing, or concerns about just how effective some of these carbon offsets are, whether they’re actually legitimately reducing greenhouse gas emissions. So I think that’s, that’s fair enough. Righto! I’ve got to ask you about this $4 billion a day of trading. And I mean, you’re involved in this sort of thing. And oh, can I ask first? Actually, you might have mentioned it before. Assets under management, are you do you disclose the assets under management of your of your fund?

Michael Azlen  11:36

Yeah so as I mentioned, we are currently running 280, two eight zero million dollars in the World Carbon Fund.

Gene Tunny  11:44

Gotcha. Because I latched on to that there’s that four billion dollars a day that’s being traded, who’s trading it, and who ultimately needs these carbon permits or these assets? So we’ve got, I mean, what is it that’s being traded? There’s the permit. So in Australia, we I think we call them Australian carbon credit units. So they represent what is it a tonne of co2 equivalent? And then there are also offsets. Can you tell us a bit about that market, who’s in it and what’s been traded, please, Michael?

Michael Azlen  12:13

So this, this is a real area of confusion Gene. So it’s really important that we clarify the difference between various carbon markets because there are actually three very distinct carbon markets. And they’re very, very different. So this is very, very important. So the first market that most people are actually familiar with, and let’s leave the Australian ACCU market. Let’s leave that to the side for a minute. I’m talking globally now. Most people are familiar with what’s called the voluntary carbon market, voluntary, because it means it’s a voluntary participation, a corporate can choose to buy these credits, can choose to buy these offsets. And here Gene terminology, we use the term credit and offset. In the voluntary market, it’s a carbon credit or a carbon offset. In the markets in which we invest, we invest in a completely separate market, the regulated market, the compliance carbon market, where companies must comply, and those are called carbon allowance permits. So in the voluntary market, most it’s called a carbon credit or offset. The normal project here Gene is planting trees, or trying to protect a forest or a mangrove swamp. It’s some type of project related activity. And then an independent party will calculate how much carbon is sequestered from the activity. They give it a rating, and they calculate the tonnes and they issue these credits and offsets. I’m going to give you five key bullet points about this voluntary market very, very important. Number one, it is completely unregulated. Number two, it’s illiquid, it’s it’s not a liquid asset. Number three it’s very small in size. I’ll come back to that. Number four, because it’s all of these different methodologies. It’s very opaque and complex to figure out, well, how did they calculate these credits, how many credits? And number five, I think very important, in the voluntary market, there is effectively an unlimited supply of these credits. This is where Gene you mentioned in the last ,just the last nine months, this year alone, there have been a number of investigative journalist articles that have uncovered practices in that market that have proven to show that some of the projects have not actually sequestered any carbon at all. And I think the key here Gene is that in any market as an economist, you’ll know this when you have a financial asset without any financial oversight, this brings moral hazard into the equation right? So if we can create more credits or offsets through a different methodology, we all benefit within that ecosystem. But there’s no independent oversight of that. So the problem of over crediting and sort of supply has become an issue. And so I think what we’re seeing is corporate buyers of wanting to make a climate impact are now somewhat shying away from that market, because they don’t want to be involved in these in these scandals. So that’s the voluntary market. If I move the lens to the regulated markets Gene, I want to give you five key bullet points about the regulated market. The first one, of course, it is highly regulated, because it is run by governments. Number two, it’s it’s very liquid, it now trades $4 billion every day. Number three, it’s large. So when we compare the size, this market is traded, last year, about 1 trillion with a T dollars, and the voluntary market did about 1 billion. So this is a 1000 times difference in size, not 10 times or 100 times this is huge. And number four, it’s very transparent. Of course, these these markets, because they’re run by the government, so they put all the rules on the website, it’s transparent. And number five and most important Gene, in the regulated market the supply of the permits is capped and every year that supply lower and lower and lower. So in one market, unlimited supply just keeps increasing, and in this market it’s capped and it keeps going down. So it’s quite, there’s quite a big difference between these two markets.

Gene Tunny  16:28

Yeah, gotcha. So you’re talking about the permits that are part of emissions trading schemes, or cap and trade schemes or whatever you want to call it. So what are the major markets, Michael, which economies have these schemes and which economies therefore have these regulated markets, there are these permits that you’re involved in investing in and trading?

Michael Azlen  16:53

So the good news here, Gene, is that not only is there, are there current, currently multiple countries and jurisdictions, but there are at least a dozen new countries that have announced they’re going to launch full Emission Trading Systems, cap and trade systems as you as you correctly identified, so the growth of the asset class is going to be tremendous in the next five years. The current markets that we invest into today are the European emission trading system. Number two is the UK emission trading system, which was established after Brexit more than two years ago. When the UK left Europe, they launched their own emission trading system. The third market is the California carbon market, which is in the state of California. Fourth market is the regional greenhouse gas cap and trade market, which is on the east coast of the United States. And it consists of 11 states together on the East Coast in one block carbon market. And the fifth market we invest in is the New Zealand carbon market, which has been around for a long time, it’s gone through transformations. It’s a small market, but it’s we think it’s quite a well run market and and that’s the fifth market. Um, one thing I want to point out, Europe has is the most liquid market, it trades probably half of that 4 billion daily, 2 billion a day is the European market. So very, very liquid and it was launched in 2005. From 2005 until today, emissions in Europe have dropped by 1 billion metric tonnes per year. That is a big success. And and for this reason, I think because of that success, obviously without impeding economic growth. I mean, that’s quite important, right? I think that is why we’ve had these big announcements in the last well, even the last three months, Brazil is moving legislation to launch a full cap and trade market, India and Japan, Japan, the third biggest emitter in the world. China, of course, launched after doing extensive research on the European market and the California, China launched the world’s biggest cap and trade market two years ago, covers 4.5 billion tonnes of carbon. So it’s massive. South Korea, Mexico should go live next year, they finished the two years of their pilot programme. So we’re expecting that may be the next fund that we could add into the fund. But there’s there’s many more countries I was recently in Singapore three weeks ago and Indonesia just launched their cap and trade market. Most of the Asian Tigers, Vietnam, Malaysia, Indonesia, they’re they’re all have plans at various stages, it’s taking time to, but they all have plans to launch cap and trade carbon markets, which is great news.

Gene Tunny  19:51

Right. The US is obviously a major omission from that list of countries. Do you think there’s any prospect of the the US, there are some states out there that you mentioned, is that right? But the whole US there’s no federal cap and trade scheme in the US is there?

Michael Azlen  20:09

No, and I think it’s unlikely we’re going to get a federal scheme, because of the, you know, the polarisation, you know, at the federal level, but but what we’re seeing Gene is, you have the state of California, and then you have 11 states on the east coast. So we already have those 12 states. Three months ago, the state of Washington, the 13th US state launched its own carbon market. That market launched three months ago. And in the last six months, New York State has announced it’s going to launch a full blown cap and trade carbon market probably within 18 months. So things are happening at the individual state level, but I think it’s unlikely we’re going to get federal carbon pricing.

Gene Tunny  20:52

Gotcha. And where’s Australia sit in this? So do you have any thoughts about these, these A double C Us or ACCUs that we have here? Is that something you’re not interested in investing in?

Michael Azlen  21:04

So in the fund, we have a market entry framework that has a number of criteria that a carbon market must pass in order for us to onboard that into the fund. And there’s very practical considerations like access to that market. But then there’s there’s other considerations such as, you know, transparency, country risk, policy risk, currency risk, and items like that. So, you know, on many of those, of course, Australia being a, you know, a Western democracy, there’s no issue, but the actual structure of the ACCU market in Australia is somewhat of a hybrid between the regulated market which has, you know, a cap which gets lowered every year, and the voluntary market, which is unlimited supply effectively. And, and therefore, when we apply those market, market entry, that market entry framework against the Australian market, it simply doesn’t pass it, it’s it doesn’t meet the stringency test, because of the fact that it allows voluntary project supply units to come in of very questionable calculation methodologies. And and really the other thing is Gene, durability. When you have a project that it I think we can measure that it may have sequestered carbon, but but it what is the risk of reversal? And how long will that carbon be stored, if it’s only stored for 10 years and then released back into the atmosphere, well, then you know, that that perhaps hasn’t been a very valid carbon credit. So durability and risk of reversal of the carbon then being re re emitted is very high. And so projects, such as soil carbon and whatnot, they do have this potential for risk of reversal and therefore low durability. Most projects now that I think more corporate buyers are looking at more permanent removal, such as, you know, direct air capture, and other strategies where you can prove long term, you’ve pulled the carbon out, you’ve injected it deep underground, you liquefy it, inject it into a storage well, for very long term durable storage, over 100 years, or maybe even over 1000 years. So you can really demonstrate storage.

Gene Tunny  23:21

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  23:26

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Gene Tunny  23:55

Now back to the show.

Now, who ultimately needs these permits, it’s emitters isn’t it? It’s big companies that are polluting. So smelters and power generators, fossil fuel generators. Is that right? They’re the ones who ultimately need it. They’ve got the demand.

Michael Azlen  24:17

Yeah, so in a cap and trade programme, the government controls the total quantity of emissions. But because there’s a limited number of permits, exactly, as you said. And the way they decide who’s in is they normally set a threshold Gene. So in most markets, it’s a 25,000 tonne per year threshold. So any company that emits more than 25,000 tonnes per year they’re notified by the government they’re in, they don’t have a choice. So that’s why we we call it a compliance instead of a voluntary market because you must comply. It means that the government audits you every year, and you must give the government the permits based on the audit. So if you we audit you and you met 2 million tonnes by April of this year, you have to give the government 2 million permits and the government controls the supply of those permits. So that’s a cap and trade. Every year the government, in the case of Europe let’s say, we, we sell at auctions 1.3 billion permits, at the end of the year the companies are audited. And if the total emissions are also 1.3, the companies then give those permits back to the government who destroy them, they they destroy the permit, and that that compliance cycle for one year has now been completed. The second year now the government sells 1.2 billion, destroys those then 1.1, then a billion then 900. So every year the supply of permits is going down. So we know within the ecosystem 1000s of companies, someone must select themselves to stop emitting carbon. And that’s the beauty of the mechanism Gene, it allows the price, the market sets the price of carbon, and that price signal is taken by participants and internalised. What do I mean? They compare the market price of carbon to their internal cost of abatement. In other words, the CEO calls in his head of engineering and says, John, you know, we’re emitting 2 million tonnes a year, it’s $100, that’s costing us $200 million a year. Can you get her emissions down? He says to the head of engineering, right? He’s profit motivated. And the head of engineering then looks at the latest technologies for that industrial process, and comes back and says to the CEO, yeah, we can get it down. But it costs $160 a tonne. Well, that that CEO has a very clear decision, then he’ll he will simply buy the permit for 100. But there will be another company in the ecosystem, where the head of engineering says it’s $40, we can reduce our emissions for 40 bucks a tonne. That’s a no brainer. The CEO chooses then to invest in that low carbon technology and they choose to cut their emissions. So this is the power of the mechanism. It forces what we call the three magic words, least cost abatement. Right, that those are the three magic words, tap and lower the emissions. That’s good, but we want to achieve it at the lowest possible cost. As an economist you will appreciate this is you know, this is a parsimonious solution to to this quite difficult problem.

Gene Tunny  27:17

Oh, yeah, absolutely. I mean, I think, yeah, that’s that’s something that economists would would agree on. I mean, one of the things that’s happened in Australia is because we, we don’t have a carbon price, but yet the politicians have made commitments to try and get emissions down, we end up doing all sorts of things that may not end up being that that least, what is it the least cost of abatement?

Michael Azlen  27:41

Yeah to achieve least cost abatement. Yeah, yeah. So because we want to we all want to cut emissions of course, we’ve seen the terrible impact, but we don’t want to do it at any price, right, we want to do it at the lowest possible cost. And so in a carbon market, as we keep lowering the number of permits, the supply, we know we as long as we have liquidity and price discovery taking place in that market, that that is important. We can be quite confident it’s the companies with the lowest cost they self select themselves to choose to reduce their emissions. And the reason they do it is they make more profit. I mean, they they’re not being green or ESG. They simply are reducing their emissions because they make more profit.

Gene Tunny  28:19

Yeah. Okay. I’d like to ask you a couple of questions about the market some of the technical details. Is there a futures market in, in these permits, the derivatives? I mean, what’s the, what’s the market look like?

Michael Azlen  28:34

So in each market that we invest in is slightly different in four of the five markets Gene, there is exchange listed futures and exchange listed options that trade like many other commodities, like oil, or wheat, or corn or, you know, other commodities. And most of the liquidity is in that exchange listed futures market. Most of the trading activity in carbon, probably no one knows the exact number, but I would say 70, or 80% of the trading activity, is those big end users hedging their carbon obligation. And as you said, it’s the power sector. electric utilities, steel, cement, chemicals, glass, these high emitting sectors are the main participants in, in carbon markets.

Gene Tunny  29:18

Gotcha. Gotcha. But they’re not your investors are they or are they? Oh, you’ve got no, no, no. Okay. So, but you’re you are participating in the market, but they’re the ones who ultimately need the permits. Okay. Gotcha. That makes sense. What about foreign exchange risk you mentioned? I mean, what you’re saying there, it sounds really embarrassing for Australia for our ACCUs, those criteria that you set out and how we don’t meet them over here. That’s, yeah that’s quite embarrassing for us, I imagine. You mentioned foreign exchange risk, do you hedge that foreign exchange risk?

Michael Azlen  30:00

In the fund? We do yeah. So where we invest in, you know, in a carbon market and in another currency we hedge that out. That’s, you know, quite common in our industry.

Gene Tunny  30:11

Gotcha. Okay. So we’ve, we’ve talked about, you know, regulated and you’re in the regulated space versus voluntary. I was surprised just how much larger the regulated is than the the voluntary, I suppose it makes sense if it’s, if it’s compulsory. You talked about a euro, the European scheme, and then the UK scheme. To what extent are these markets connected? Can I buy permits in in one scheme and use them in another? I mean, how does that how does it all work? Are they are these markets connected in any way?

Michael Azlen  30:48

So the long term plan, Gene is for carbon markets all to link together. So to give you an example, you know, four or five years ago, Switzerland had its own separate carbon market, and then it chose to link with the EU carbon market. And that is the long term trajectory. I think if we look 10 or 15 years into the future, hopefully, we initially will have maybe regional carbon markets, Asia, North America, South America, that kind of thing. And then eventually, one would hope, one global carbon price and carbon market, and we believe the asset class, you know, now is trading about 70 billion a month, as I mentioned, we think that, you know, when when China, South Korea, Mexico, Brazil, Japan, when all these markets spin up in the next three to five years, we’ll be trading probably well over, you know, half a trillion a month, I mean, it’s going to be a huge asset class, probably overtaking crude oil as the most heavily traded commodity in the world, probably within five to 10 years. So strategically, I think it’s a very important asset class. One of the very unique things is Gene, they’re not linked yet. So even though the California market the permit covers one tonne, same same commodity as the one tonne in the European market, because there’s no fungibility you can’t bring the permit and hand it in, in Europe, from California. When you look at the cross correlation. It’s zero, effectively. So to give you an example, this year, year to date performance, the European market is about flat on the year, the UK market is down 40% on the year, the California market is up 20% on the year, and the RGGI market on the east coast of the US is up I don’t know about 5% on the year. So you can see just from these numbers, very diverse performance, there’s no cross correlation. So by investing across all five of these markets, your overall portfolio volatility really comes down of course, because you’re, you’re nicely diversified. While it doesn’t necessarily impede your return expectations. So that’s that’s one of the key observations of our research paper was this this very low cross correlation between carbon markets.

Gene Tunny  33:03

Gotcha. Okay. Yeah, I’ll have to, I’ll put a link in the show notes to that. Michael, yeah this has been fascinating. I’ve learned a lot about about these markets. And it’s, it’s, there’s a lot I’m gonna have to follow up on just to make sure I’m as across it as I can. Can I ask you about your, your story how you ended up at Carbon Cap? I mean, you’re you’re in the UK now, aren’t you? You’re, so you’re based in London, you’ve got an office in Mayfair. But you’re obviously, I mean, you don’t have a British accent do you so what, can you tell us a bit about your story?

Michael Azlen  33:35

Yeah, so I’m a Canadian, and worked, began my career with two of Canada’s banks as a proprietary trader. After, I then came to London to do my graduate degree at London Business School. And I’ve actually been teaching now for 18 years on the graduate degree programme at London Business School. The last five years, I’ve been teaching a segment on the impact of climate change on the asset management industry, which is a very, very interesting and fast moving area. I worked in the hedge fund industry here in London in a number of roles. And then I set up my first business, regulated investment management business in 2005. And I was very fortunate Gene to grow that business to a decent size. And we were approached, and I managed to sell the business to a Swiss public company. And it was after that sale, and my earn out period, I had a little bit of time off, but that’s when I became deeply involved in research into climate change itself, nothing to do with carbon, I was, I was quite sceptical of the whole area of climate change, you know, because, to me, the you know, the temperature and weather didn’t seem that bad. And I also had known that the climate had always changed prior to humans being on the planet, quite dramatically right? Humans have only been on the planet 250,000 years or so. And we’ve got paleo climate records way back before then showing great variability in weather and the climate system. So I just sort of wanted to bottom out those two questions. And I’ve now read more than 200 Peer Reviewed papers, I was I was in a fortunate position because I didn’t have to work, I could simply focus on that. And I’m a bit geeky, you know, I like to read these these peer reviewed academic papers, and I fairly quickly, over about two or three months became convinced that the problem is extremely acute. If you’re an empirical person, you just weigh evidence, you just base your decision on evidence. It’s, it’s, you know, the concentration of co2 now in the atmosphere at 425 parts per million. I mean, it’s increased by 50%. And it just keeps climbing higher and higher. And the impacts, I don’t know, if you, you saw the data that came out just a few days ago, on September, me, not only was the month of September, the hottest September on record, but the deviation above the previous record was enormous. So the impacts that we’re seeing now are becoming, you know, massive. I know, in Australia, in particular, there’s been, you know, some some very big impacts both in fires and flooding events. And those are unfortunately likely to continue. So hopefully, you know, we can address this so that, that, that spurred my passion to do something Gene and I was fortunate to be able to get a Swiss private bank to back me to launch my second business. And now we have a very interesting Climate Impact Fund.

Gene Tunny  36:26

Hmm, good one, good one. Can I ask you about this course you are teaching, the impact of climate change on the asset management industry, I mean, I mean, you’re a case study of that, I mean, yes, obviously, you know, carbon now is a liquid asset class or an emerging asset class, as you call it. But are there other impacts that you that you consider in that course? I’m just just interested in what the content of that is broadly and what you see is the, those impacts.

Michael Azlen  36:54

Well, I mean, it’s a, this is a massive area now for, for academic investigation. It began with things like, for instance, looking at a diversified equity portfolio and trying to calculate initially, you know, the carbon footprint of that portfolio as a proxy for you know, the emissions. And then academics began to research well, what is the difference in performance between a portfolio that has a bigger carbon footprint, they call that a brown portfolio, versus a portfolio with a with a less carbon foot a green, and this Brown versus green, if you just Google that, that spread of performance in equities, and in fixed income markets, has been an area of very great research. But things have moved on since then. And now, what the research is looking at is trying to really identify with the actual climate risks that individual corporates are exposed to, either insurance companies in their in their insurance portfolio right with regard to flooding risk, fire risk, things of this nature. You can imagine banks, their lending risk. So in terms of a kind of Basel three stress test, but, but instead of looking at credit quality, we’re now trying to assess are they lending money to companies where those companies have undue climate risk, and therefore, you should factor that in? So it really extends to a pretty wide range. It’s a really fast moving and interesting area.

Gene Tunny  38:25

Gotcha. Okay, I’ll have to have a look at that. I mean, that might be a topic for another episode, I won’t to go into it now because you’ve, you’ve given me, you know, lots of good stuff to think about already, Michael so that’s been that’s been terrific. Any final thoughts before we wrap up?

Michael Azlen  38:42

No, I would just like to say, you know, I think everything begins and ends with education and learning about a topic, if you’ve got questions, if this has interested you today, I would direct you to our website, we have an open access website with a research library and we have a section on the website of little educational videos, short snippets, to help people understand how does the, you know, what do you mean by voluntary carbon market? What do you mean by regulated carbon market? And we have information, of course, on the latest science on what’s happening on climate change. So I would encourage people to, if you found today interesting, to you know, do your research and and please use the resources that are available our research paper, I think it is not available on the website, but I would happy, anyone who emails me, I’d be happy to send it and for any, you know, Australian based investors that would be interested in thinking about our fund, you know be of course very happy to have that conversation too.

Gene Tunny  39:43

Yeah, absolutely. I mean, I imagine it could be of interest to with yeah, super funds. I mean, we’ve got some big, obviously some big super funds here and we’ve got, I mean, I’m in Queensland here we’ve got a Queensland Investment Corporation, which is owned by the state government. I know that they’ve got, they’re interested in alternative investments, I’m not sure to what extent they’re interested in the carbon market, but anyway, it’s uh, yeah, absolutely if there is a, if there is someone listening right now and investors in Australia or anywhere, yeah, I think I think definitely check out your website, Michael and you know, this is obviously not financial advice, I can’t, this is general information only. But, you know, certainly, this is, it, I think you’re right. It is an emerging liquid asset class, and it’s something that really has to be considered in future portfolios. So, Michael Azlen that’s been terrific. I’ve really enjoyed the conversation. So thanks so much for your time and for your insights really, really thought it was great.

Michael Azlen  40:46

Gene, thank you very happy to participate today. Thanks for inviting me.

Gene Tunny  40:50


Michael Azlen  40:51

Cheers. Bye bye

Gene Tunny  40:53

Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.


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