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Financial Markets Focus on Climate

Data Insights

Financial Markets Focus on Climate

Authors

Steven W. Poser, Director NYSE Research

Karl Topel, Director ICE Equity Derivatives Sales


Published
September 23, 2021
As governments, corporations, and individuals focus more on human impact to the environment, international financial markets have responded with innovative products to help manage climate risk and invest in mitigating technologies. NYSE and its parent company, Intercontinental Exchange, are leaders in climate-related investment products and services. Investors can buy one of the numerous climate-oriented Exchange Traded Products (ETPs) listed on NYSE Arca. Issuers can benchmark ETPs, mutual funds or hedge funds against ICE Data Indices’ various climate focused and ESG indexes. Corporations and governments can manage their carbon exposure via futures on U.S., UK and EU carbon allowances contracts, or hedge exposure with futures based on equity markets climate indexes.

Exchange Traded Products

Share of Notional Volume of Exchange Traded Climate ETPs
(2021 YTD)

Climate and environmentally focused ETPs cover a wide range of technologies and strategies. There are ETFs based on clean water, renewable energy including water, wind and solar, carbon reduction, electronic vehicles, batteries, and green building construction.

There are also ETPs that are indexed to carbon-related futures listed on ICE exchanges. The table below shows the 10 most active NYSE Arca-listed ETPs with their average daily volume and total notional value traded in 2021 through mid-September.

ETP Share of AUM and Consolidated Volume
(by listing venue, 2021 YTD)

ETPs listed on NYSE Arca represent 62% of current AUM and account for 63% of total notional volume traded across all equity markets venues. NYSE Group exchanges captured 41.6% of exchange-traded notional volume this year.

This excludes trading off exchange, which accounts for 49.9% of notional value traded in these mostly less active ETPs.

Volume growth in climate-focused ETPs has been substantial, averaging less than one million shares per day in 2018 and 2019, growing to 4.6mn in 2020, and 13.2mn YTD. These products tend to be heavily retail-oriented1, with recent trading estimated to be nearly 38% retail. The chart below shows total and retail volume growth. High volatility earlier in the year may have temporarily slowed retail share of trading in these products.

Currently Active Climate-focused ETP CADV
(millions of shares)

Ten Most Active NYSE Arca Listed Climate-focused ETPs by Notional Volume (2021 YTD)

Ticker SymbolExchangeNameListing DateCADVYTD Notional
TANNYSE ArcaInvesco Solar ETF04/15/20081,822,180$30,487,145,117
LITNYSE ArcaGlobal X Lithium & Battery Tech ETF07/22/20101,018,302$12,762,913,179
PBWNYSE ArcaInvesco WilderHill Clean Energy ETF03/03/2005668,609$11,997,977,243
ACESNYSE ArcaALPS Clean Energy ETF06/29/2018122,470$1,751,227,162
KRBNNYSE ArcaKraneShares Global Carbon ETF07/30/2020279,061$1,737,254,940
LCTUNYSE ArcaBlackRock U.S. Carbon Transition Readiness ETF04/06/2021255,386$1,359,828,094
CNRGNYSE ArcaSPDR S&P Kensho Clean Power ETF10/22/201852,058$1,085,978,477
PBDNYSE ArcaInvesco Global Clean Energy ETF06/13/2007165,659$1,003,074,534
FIWNYSE ArcaFirst Trust Water ETF05/08/200767,093$985,882,333
FANNYSE ArcaFirst Trust Global Wind Energy ETF06/16/2008223,807$906,670,526

Futures and Options

ICE offers investors access to the most liquid environmental markets available, providing transparent price signals which allow customers to price and manage climate risk globally.

ICE hosts the four largest and most liquid carbon cap and trade markets in the world. ICE’s European Emission allowance market is the largest in terms of volume, followed by ICE’s California Carbon allowances. With the successful introduction of the UK carbon market in May 2021, ICE UK allowances now contend with Regional Greenhouse Gas Initiative (RGGI) allowances as the third largest carbon market.

ICE, the leading exchange for MSCI Index derivatives, partnered again with MSCI to launch a suite of ESG and Climate index derivatives.

Introduced almost two years ago, ICE’s index futures contracts enable market participants to:

  • Integrate ESG consideration into a portfolio thanks to the MSCI ESG Leaders Index Futures: Those contracts track the performance of indices that include only the highest rated companies in terms of environmental, social and governance factors.
  • Reduce Carbon exposure while limiting tracking error of a portfolio with the MSCI Low Carbon and MSCI Climate Change Index Futures. Those futures track indices that are designed to minimize exposure to those companies that are exposed to higher risk linked to the transition to a low carbon economy, while minimizing the tracking error to their relevant benchmarks.

The full complex, up to end of August 2021, has a notional OI pushing past the $1bln mark, with the MSCI World ESG Leaders NTR Index Futures having an OI of over $500m alone, making it the fourth largest ESG derivative globally. ICE’s World future is joined by the MSCI Emerging Markets ESG Leaders NTR Index Future and MSCI USA ESG Leaders Index Future to occupy two of the top five and three of the top 10 global Equity ESG futures positions.

ICE MSCI ESG Index Futures Series - Notional Open Interest
(millions)

ICE Climate Indices

ICE also offers multiple climate indexes that can be used as ETP, mutual or hedge fund benchmarks.

  • Global Government Carbon Reduction Indices - These indices weigh countries based on their carbon footprint based on CO2 per capita data.
  • ICE Carbon Futures Family Index - This family of indices is based on global carbon markets trading, including the EU Emissions Trading Scheme and U.S. regional greenhouse initiatives.
  • ICE BofA Green Index - Tracks fixed income securities that are issued for the purpose of promoting climate change mitigation or adaptation.

Conclusion

Market participants increasingly invest and trade climate-oriented ETPs, hedge carbon exposure, and incorporate climate-focused benchmarks into their strategies. Volume in climate-focused ETPs has grown nearly 1300% in the past three years, and open interest in the ICE Futures climate complex has surpassed $1bn. ICE and NYSE Group remain focused on innovation in climate-focused products and anticipate exciting new advances in the near future. As just one example, NYSE Group recently announced it is working with Intrinsic Exchange Group to launch Natural Asset Company listings to the US equity market, a new asset class focused on sustainability and land preservation.


  1. We estimate retail participation as the total OTC volume reported to FINRA for each symbol divided by consolidated volume.

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