KraneShares ETFs Offer Advisors Way To Invest In Climate Change

Financial advisors face a major challenge when considering how to shelter clients’ wealth from the risks posed by climate change.

Just what is the best direction to take?

The choices are somewhat overwhelming. And, like any shift in strategy, there is a corresponding risk.

One interesting play is KraneShares Global Carbon Strategy (KRBN). The exchange-traded fund is sold on the New York Stock Exchange and is part of a suite of ETFs assembled by New York-based Krane Funds Advisors.

KraneShares’ Global Carbon Strategy fits into the climate change theme by offering shares backed by the carbon allowances the fund purchases. The allowances encourage heavy carbon users to transition away from fossil fuels by limiting the amount of carbon dioxide they can emit each year.

Energy usage is shifting to alternative energy sources. But the transition has been a slow one since fossil fuels remain cheap and easily accessible. Currently, 80% of the world still relies on fossil fuels, according to the non-profit Environmental and Energy Study Institute.

KraneShares’ ETF (KRBN) fits somewhere between fossil fuels and green energy investments. The fund does not directly invest in green energy. Instead, it trades pollution permits. By doing so, KraneShares is profiting from tighter emissions standards while facilitating the transition to green energy. Investors who buy the ETF’s shares are essentially provided a climate-change hedge.

Carbon permits are a quirk of a system created by governments decades ago. They encourage smokestack industries to shift to green energy sources. Polluters are required to buy permits. Over time, the limits on carbon emissions get stricter and the permits become more expensive. Eventually, the permits will be phased out.

Polluters that reduce emissions and fall under the limits can sell or trade their permits to investors or companies needing permits.

Capping emissions and requiring permits creates an economic incentive to reduce pollution, said Luke Oliver, the KraneShares managing director who oversees climate investments. “The theory is that as the price of (emitting) carbon goes up, you start to remove more carbon emissions out of the economy.”

Companies will be under increased pressure to reduce carbon emissions and shift toward renewables as public pressure to address climate change intensifies, Oliver said.

Smokestack industries will first move to lower-cost fossil fuels. Natural gas, for example, has half the emissions of coal, Oliver said. “By raising the price of carbon, you are first pushing people toward natural gas. At some point they will actually shift toward renewables because it is cheaper.”

Launched in 2020, KRBN grew rapidly last year. The ETF currently has assets of $2.67 billion and posted a 1-year total return of 61.7%, besting the Bloomberg Commodity Index, according to Morningstar.

KRBN lists an expense ratio of 79 basis points. KraneShares also offers the California Carbon Allowance Strategy (KCCA) with assets of $140 million. The ETF trades California carbon allowances issued as part of the state’s cap-and-trade program.

To naysayers who claim that buying the KRBN and its West Coast cousin (KCCA) merely encourages more pollution, Oliver replies: “We are actually doing the exact opposite.”

Oliver adds: “This market exists whether we are an investor or not. By buying these permits we are making them more liquid. We are supporting the policy change tool used to fight climate change.”

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