Carbon emissions, biodiversity loss and how we tackle these issues are becoming more pressing around the world. Luckily, the world is recognizing the need to act but also realizing the extent of the challenges ahead to reduce carbon emissions. In recent years, we’ve seen a rapid increase in sustainability trends in financial markets that show a growing awareness of the need for solutions that will tackle these challenges. Let’s look closer at some of these trends:
ESG Equity Index
As the Environmental, Social, and Governance (ESG) network develop, ESG investments must keep up to provide strong solutions to market participants. This development has led to index providers making sure their indices reflect the path for ESG investment. At the heart of this ESG evolution is enormous growth in ESG investments, including derivatives, like CME Group’s E-mini-S&P 500 ESG Index futures, which have become the most liquid ESG equity index futures contract globally.
In line with the changing ESG landscape, S&P Dow Jones Indices amended the eligibility requirements for their ESG indices in May 2022. The updates to exclusions and eligibility requirements reflect the growing need for index providers to properly account for companies’ business activities, which ultimately ensures ESG investors can accurately assess the behavior of those companies within the index.
Recent trends in E-mini-S&P 500 ESG Index futures show how investors can find solutions that fit their ESG needs. The average daily volume in ESG futures is up over 100% already in 2022 and has steadily grown since the contract’s launch. Since November 2019, ESG futures contracts have exceeded $94 billion of traded notional, and in April 2022, exceeded 13,500 contracts of open interest, equivalent to nearly $3 billion.
In the last 2 years, sales of electric vehicles (EVS) have more than doubled. ³ Over 6 million EVs were sold last year, which makes up nearly 10% of the global market. Higher EV penetration is part of the move to a low-carbon economy, which is increasing as world leaders look to reduce carbon emissions and hit net-zero targets.
Decarbonizing the transport industry will need more metals like aluminum, copper, nickel, cobalt, and lithium. Indeed, the International Energy Agency predicts demand for lithium could increase up to fortyfold in the next 20 years, and demand for cobalt by a factor of 20-25, although there is uncertainty around the precise growth rates, which will be influenced by advancing technology and governmental climate policies. ⁴
CME Group offers trading in both cobalt and lithium futures, and with the rapidly increasing demand, prices in both contracts have trended higher. Cobalt is currently trading at $34/kg, more than twice the level it was at the launch in December 2020. With an even quicker increase, the price of lithium has risen sharply from $13/kg in 2021 to over $40 in 2022.
As the world looks to increase decarbonization, bioenergy is another sustainability trend to look out for. In the European Union (EU), the recently expanded Renewable Energy Directive II calls for further usage in both biofuel feedstocks and waste feedstocks. The EU is aiming for a minimum level of 40% share for renewable energy sources by 2030, an increase from 32% under previous iterations of the directive.
The EU has pledged to cut carbon emissions by 55% by the next decade. The US is also leading the way in the production of renewable diesel. These initiatives are likely to increase the supply of bioenergy markets which will be needed to meet the growth plans for renewable diesel in the US and European production of hydrotreated vegetable oil.
Voluntary Carbon Markets
Strong demand for voluntary carbon markets continues, partly driven by the commitments of corporates to reduce their carbon emissions to help achieve net-zero emission goals by 2050.
In 2021, CME Group launched the Global Emission Offset future. A volume record of 1,810 contracts (the equivalent of 1.81 million carbon credits) was reached on March 10. The Nature-based Carbon Offset futures contract traded a record 4,277 contracts or 4.27 million carbon credits a week later. ING bank estimates the growth in demand for voluntary offsets could increase 15 times the 2020 levels by 2030 and 100 times the 2020 levels by 2050.
In equities, biofuels, metals, and carbon offset markets, participants are addressing the risks around an evolving set of climate challenges. New tools have emerged to help manage those risks across several asset classes. This shows not only the strong demand for risk management solutions but also how nearly all markets are affected by environmental concerns.
While the uptake of renewable energy sources like wind and solar has increased considerably, the world still relies heavily on fossil fuels. The next step on the renewables journey is the scaling up of alternative energy sources to suit commercial applications and meet industrial needs. According to Deloitte, the costs for solar photovoltaic systems have decreased 85% over the past decade.
Renewable energy doesn’t just mean solar and wind. Hydrogen, biomass, and advanced batteries are all alternative sources to watch as more organizations look to increase their investment in renewables. As renewables scale up, they need to be paired with nature-based solutions such as no-till farming, forest replenishment, and revitalization of marine vegetation that capture carbon.
One repercussion we have seen as more organizations move to reduce carbon emissions is greenflation, referring to the price increase of materials needed to create renewable technologies. The global renewable energy market was valued at $881 billion in 2020 - by 2030, it’s expected to reach $2 trillion. The rising cost of energy is expected to impact the setting up of new green power projects.
In addition, the war in Ukraine has disrupted supply chains and driven energy prices up. having a significant impact on the price of commodities. As a result, European countries are seriously rethinking their energy security strategies. Accelerating the transition to renewables is a real option and will likely contribute to the upward price pressure key energy-transition-related commodities are seeing. Simultaneously, investing in nature-based solutions are on the rise and expected to deliver promising returns over the coming decades.