Carbon Credit & ESG Sustainability Fund

Investment Overview

This fund invests in carbon credits and sustainability-linked financial instruments across the world's major regulated carbon markets — the European Union Emissions Trading System (EU ETS), the UK Emissions Trading Scheme (UK ETS), and the California cap-and-trade programme. The fund is designed for investors who seek both financial returns from the structural upward pressure on carbon prices and alignment with ESG (Environmental, Social, and Governance) investment principles.

Carbon markets are compliance-driven markets in which major industrial emitters (power generators, heavy industry, airlines) must purchase carbon allowances to cover their verified emissions. The cap on allowances is progressively reduced over time by regulators, creating structural upward pressure on prices as demand remains strong and supply tightens.

How Carbon Markets Work

A carbon credit (or carbon allowance) gives the holder the right to emit one tonne of CO₂ or equivalent greenhouse gas. Regulated carbon markets operate on a cap-and-trade basis:

The cap: Regulators set a maximum total amount of greenhouse gas emissions permitted across all covered installations in the scheme. This cap is reduced over time in line with national or regional emissions reduction targets.

Allowance allocation: Each year, allowances are either auctioned to covered companies or, in some cases, allocated free of charge to industries at risk of carbon leakage. The total number of allowances issued annually declines as the cap tightens.

Trading: Companies that emit less than their allocation can sell surplus allowances. Companies that emit more than their allocation must purchase additional allowances from the market, the EU/UK government auctions, or other participants. Financial investors can also hold allowances as an investment.

Price formation: Carbon allowance prices are determined by supply (the cap) and demand (compliance buying plus speculative/investment demand). As caps tighten and penalties for non-compliance increase, the structural outlook for prices is upward — provided governments maintain their commitment to emissions reduction targets.

The Three Markets

EU Emissions Trading System (EU ETS): The world's largest carbon market by value, covering approximately 40% of EU greenhouse gas emissions across power generation, heavy industry, and aviation. The EU has committed to a 55% reduction in net emissions by 2030 versus 1990 levels (the 'Fit for 55' package), with the ETS cap being tightened accordingly. EU ETS carbon prices rose from approximately €5–8/tonne in 2017 to peak at approximately €100/tonne in early 2023, before moderating to around €65–75/tonne as of mid-2026 amid softer energy demand and some political uncertainty. The structural tightening of the cap supports long-term price recovery.

UK Emissions Trading Scheme (UK ETS): Launched in January 2021 following Brexit, the UK ETS covers power generation, industry, and domestic aviation. The UK government has committed to net zero by 2050 with ambitious interim targets. UK ETS prices have broadly tracked EU ETS levels with some divergence, and the two markets may eventually link — a development that would likely be positive for UK allowance prices if UK prices are trading at a discount.

California Cap-and-Trade (CCA): California's cap-and-trade programme is the largest in North America, covering approximately 85% of California's greenhouse gas emissions. California has legally binding emissions targets (40% below 1990 levels by 2030 under SB 32, and statewide carbon neutrality by 2045 under AB 1279). The CCA market is liquid, dollar-denominated, and has shown material price appreciation from approximately $12/tonne in 2018 to $30–40/tonne range as of 2026.

Investment Strategy

The fund takes long positions in carbon allowances across the three regulated markets, with an allocation framework that reflects the fund manager's assessment of relative value, regulatory trajectory, and liquidity:

• EU ETS: 50–60% of fund NAV (largest, most liquid market, clearest regulatory trajectory)
• UK ETS: 20–25% (smaller market with potential upside from cap tightening and possible EU linkage)
• California CCA: 20–25% (USD-denominated, politically stable California regulatory environment)

The fund does not invest in voluntary carbon markets (VCM credits), which have faced scrutiny over quality and additionality standards. The fund's focus exclusively on regulated compliance markets provides more predictable demand dynamics.

ESG Alignment

By holding carbon allowances, the fund's investors are reducing the supply of allowances available to industrial emitters — which either incentivises emissions reduction or requires emitters to pay higher prices for the remaining allowances. The fund's investment activity is thus directly aligned with the transition to net zero. This makes it one of the more credibly ESG-aligned financial products available: the investment mechanism is the emissions reduction mechanism.

Inflation and Energy Correlation

Carbon allowance prices have shown material positive correlation with European natural gas and power prices, as higher energy prices increase the cost of carbon-intensive energy generation and thus the demand for carbon allowances from power generators. This correlation has historically provided some inflation-protection characteristics — during the 2021–2023 energy price spike, EU ETS prices reached their all-time highs in tandem with record gas and power prices.

Risk Factors

Regulatory and political risk: Carbon prices are fundamentally driven by government policy. Political changes — including populist pressure to reduce carbon costs for industry, energy price crises, or changes in government — have previously caused sharp short-term declines in carbon prices. The EU has intervened in the ETS market during energy crises by releasing additional allowances. Any weakening of regulatory ambition would be negative for carbon prices.

Price volatility: Carbon allowance prices have been highly volatile historically. EU ETS prices fell approximately 75% in 2008–2012 due to oversupply and reduced industrial activity during the financial crisis. Investors should expect significant short-term price volatility and the possibility of sustained drawdowns.

Liquidity risk: While the major carbon markets are reasonably liquid for institutional participants, they are less liquid than equity or bond markets. In periods of market stress, bid-offer spreads may widen and large positions may be difficult to exit without price impact.

Fund illiquidity: Despite the underlying market liquidity, this is a four-year closed-end fund. Capital is committed for the fund life.

Currency risk for non-USD investors: The fund is USD-denominated. EU ETS and UK ETS positions carry EUR and GBP exposure respectively, which the fund manager partially hedges.

How to Enquire

Contact our investment team for the full fund information memorandum, carbon market analysis, and detailed position construction methodology. This opportunity is available to sophisticated and professional investors only. Minimum investment USD 75,000.

Important: Carbon credit markets are subject to significant regulatory and political risk. Carbon prices can and have fallen sharply. Target returns are not guaranteed and are linked to regulatory outcomes and market conditions that cannot be predicted. This is a high-risk investment that may not be suitable for all sophisticated investors. Independent financial and ESG advice should be sought before investing.