1 00:00:04,110 --> 00:00:06,510 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean 2 00:00:06,510 --> 00:00:10,650 Sean Aylmer: Aylmer. We've talked about how going green may actually create 3 00:00:10,710 --> 00:00:13,920 Sean Aylmer: new opportunities for investors. Today I wanted to talk to 4 00:00:13,920 --> 00:00:16,890 Sean Aylmer: a fund manager who's dealing with global carbon markets to 5 00:00:16,890 --> 00:00:19,619 Sean Aylmer: find out exactly how it all works. As always, this 6 00:00:19,620 --> 00:00:22,229 Sean Aylmer: is general information only and you should seek professional advice 7 00:00:22,230 --> 00:00:26,370 Sean Aylmer: before making any investment decision. Luke Donovan is Partner, Global 8 00:00:26,370 --> 00:00:30,150 Sean Aylmer: Carbon Markets at Apostle Funds Management. He's had a lot 9 00:00:30,150 --> 00:00:32,370 Sean Aylmer: of experience in this space. Most recently, he was the 10 00:00:32,370 --> 00:00:37,050 Sean Aylmer: Executive Director of Carbon Power Markets at Commonwealth Bank, responsible 11 00:00:37,050 --> 00:00:40,560 Sean Aylmer: for the CBA's carbon emissions trading globally. Luke, welcome to 12 00:00:40,560 --> 00:00:41,340 Sean Aylmer: Fear and Greed. 13 00:00:42,150 --> 00:00:43,260 Luke Donovan: Thanks very much for having me. 14 00:00:44,280 --> 00:00:47,220 Sean Aylmer: Let's start at the beginning, a 101 for me. I 15 00:00:47,220 --> 00:00:50,580 Sean Aylmer: want to get an understanding of how carbon markets work, 16 00:00:50,640 --> 00:00:53,730 Sean Aylmer: and maybe we can use the safeguard mechanism here as 17 00:00:53,730 --> 00:00:56,460 Sean Aylmer: a way of understanding that and what it means for 18 00:00:56,460 --> 00:00:57,420 Sean Aylmer: higher emitting companies. 19 00:00:58,410 --> 00:01:01,530 Luke Donovan: Sure. So if we concentrate on, as you've said there, 20 00:01:01,530 --> 00:01:05,760 Luke Donovan: in the Australian market as it currently stands, the Australian 21 00:01:05,760 --> 00:01:10,140 Luke Donovan: government was the backstop buyer of carbon certificates in Australia, 22 00:01:10,140 --> 00:01:12,720 Luke Donovan: and there was a spattering of voluntary buyers as well 23 00:01:12,720 --> 00:01:17,730 Luke Donovan: who would make voluntary commitments to purchase carbon certificates. The 24 00:01:17,730 --> 00:01:23,009 Luke Donovan: recent passing of the safeguard mechanism has brought Australia's largest 25 00:01:23,010 --> 00:01:27,120 Luke Donovan: emitters now into that scheme, and they are now required 26 00:01:27,120 --> 00:01:32,100 Luke Donovan: to either reduce the emissions at their facilities or purchase ACCUs (Australian Carbon Credit Units), 27 00:01:32,100 --> 00:01:36,720 Luke Donovan: Australian carbon credit certificates, to comply with the scheme. 28 00:01:37,470 --> 00:01:40,050 Sean Aylmer: Okay. So that's Australia. What's the way that most of 29 00:01:40,050 --> 00:01:44,250 Sean Aylmer: the overseas jurisdictions are going? Is it something similar or 30 00:01:44,250 --> 00:01:47,460 Sean Aylmer: is it more of a carbon trading mechanism? 31 00:01:48,330 --> 00:01:51,240 Luke Donovan: Well, more globally, sometimes it's better to start, Sean, at 32 00:01:51,240 --> 00:01:53,730 Luke Donovan: a higher level than that. So there is two fundamental 33 00:01:53,730 --> 00:01:56,490 Luke Donovan: carbon markets. One is the voluntary carbon market and one 34 00:01:56,490 --> 00:02:00,180 Luke Donovan: is compliance carbon markets. So voluntary carbon markets, as I've 35 00:02:00,180 --> 00:02:02,580 Luke Donovan: sort of already alluded to in my previous answer, are 36 00:02:03,540 --> 00:02:08,280 Luke Donovan: a series of markets where corporates or individuals make voluntary 37 00:02:08,280 --> 00:02:12,239 Luke Donovan: commitments to purchase offsets in order to reduce their carbon 38 00:02:12,240 --> 00:02:17,070 Luke Donovan: footprint. And those offsets are traditionally accredited by non- government 39 00:02:17,070 --> 00:02:21,720 Luke Donovan: agencies, and there is an implied lack of credibility associated 40 00:02:21,720 --> 00:02:24,570 Luke Donovan: with those certificates because they are issued by those non- 41 00:02:24,570 --> 00:02:30,389 Luke Donovan: government entities. Compliance markets are markets that are regulated where 42 00:02:30,389 --> 00:02:35,040 Luke Donovan: certificates are accredited and issued by governments, and there is 43 00:02:35,040 --> 00:02:38,340 Luke Donovan: an obligation on the buyers to participate in those schemes, 44 00:02:38,580 --> 00:02:41,940 Luke Donovan: and as I said, either reduce their emissions or to 45 00:02:41,940 --> 00:02:46,740 Luke Donovan: purchase certificates. So the difference between the Australian market and 46 00:02:46,740 --> 00:02:49,620 Luke Donovan: some of the Australian compliance market that we've just had 47 00:02:49,620 --> 00:02:52,650 Luke Donovan: passed, and some of the more international markets are, in 48 00:02:52,650 --> 00:02:59,070 Luke Donovan: Europe, the creation of certificates is more of an allowance. 49 00:02:59,070 --> 00:03:02,310 Luke Donovan: And what it basically means is it allows you to emit 50 00:03:02,310 --> 00:03:06,060 Luke Donovan: a ton of carbon. So the government controls the supplier 51 00:03:06,060 --> 00:03:10,440 Luke Donovan: and creates those allowances and then auctions them off to 52 00:03:10,770 --> 00:03:14,730 Luke Donovan: the obligated entities in the scheme. And every year there is 53 00:03:14,730 --> 00:03:18,300 Luke Donovan: a declining volume of allowances. It's called a cap and 54 00:03:18,300 --> 00:03:21,149 Luke Donovan: trade scheme. So every year the cap or the volume 55 00:03:21,150 --> 00:03:24,630 Luke Donovan: of allowances that the government auctions becomes less and less 56 00:03:24,840 --> 00:03:30,180 Luke Donovan: and ultimately reduces supply. And the idea is that the price is then driven 57 00:03:30,180 --> 00:03:33,359 Luke Donovan: up and there is greater incentive to reduce your emissions 58 00:03:33,360 --> 00:03:34,200 Luke Donovan: at your facility. 59 00:03:35,130 --> 00:03:38,160 Sean Aylmer: So with the Australian system, if it's not cap and 60 00:03:38,160 --> 00:03:42,210 Sean Aylmer: trade, are we going to be reducing the amount of 61 00:03:42,210 --> 00:03:47,010 Sean Aylmer: carbon emissions? Individual companies may reduce, but they can buy 62 00:03:47,010 --> 00:03:49,560 Sean Aylmer: carbon offsets. How do we make sure we're actually getting 63 00:03:49,560 --> 00:03:50,670 Sean Aylmer: carbon out of the air? 64 00:03:51,600 --> 00:03:53,670 Luke Donovan: Well, there's a couple of points to make there. First 65 00:03:53,670 --> 00:03:56,670 Luke Donovan: and foremost, carbon markets in and of themselves aren't the 66 00:03:56,670 --> 00:04:00,570 Luke Donovan: panacea to solve all of our carbon emissions problems. They're 67 00:04:00,570 --> 00:04:03,570 Luke Donovan: a key pillar in terms of driving the right behavioral 68 00:04:03,570 --> 00:04:06,810 Luke Donovan: change, but they're not the only policy required. Now, in 69 00:04:06,810 --> 00:04:11,010 Luke Donovan: Australia, you've rightly identified that yes, it's not the government 70 00:04:11,010 --> 00:04:15,150 Luke Donovan: that's issuing these certificates, it's actually a certificate is issued 71 00:04:15,690 --> 00:04:20,159 Luke Donovan: to someone who has sequestered or abated a ton of 72 00:04:20,160 --> 00:04:24,570 Luke Donovan: carbon. And for example, that might be where you have 73 00:04:24,900 --> 00:04:27,990 Luke Donovan: planted a series of trees that have sequestered carbon from 74 00:04:27,990 --> 00:04:31,380 Luke Donovan: the atmosphere, as trees do, and then you're accredited and 75 00:04:31,410 --> 00:04:34,800 Luke Donovan: issued an ACCU, an Australian carbon credit unit, that you 76 00:04:34,800 --> 00:04:38,520 Luke Donovan: can then sell to an entity, a large emitter, who's 77 00:04:38,520 --> 00:04:42,270 Luke Donovan: a liable entity. But what's important in terms of emissions 78 00:04:42,270 --> 00:04:46,620 Luke Donovan: reduction and what this change in legislation means for big 79 00:04:46,620 --> 00:04:50,099 Luke Donovan: emitters is that we now have a mechanism to price 80 00:04:50,100 --> 00:04:55,380 Luke Donovan: carbon, a robust framework, that means that when those large 81 00:04:55,380 --> 00:04:59,130 Luke Donovan: emitters go to make investment decisions around their facilities, there'll 82 00:04:59,130 --> 00:05:02,130 Luke Donovan: now be a big line item in the Excel spreadsheet 83 00:05:02,130 --> 00:05:05,640 Luke Donovan: that reads carbon. And having a mechanism such as the 84 00:05:05,640 --> 00:05:09,900 Luke Donovan: safeguard mechanism is the first step towards truly pricing carbon 85 00:05:09,900 --> 00:05:14,220 Luke Donovan: in Australia. And that's the most effective, efficient way to 86 00:05:14,220 --> 00:05:19,440 Luke Donovan: ensure that we do transition away from higher emissions technologies 87 00:05:19,440 --> 00:05:20,580 Luke Donovan: and practices. 88 00:05:21,120 --> 00:05:22,680 Sean Aylmer: Stay with me, Luke. We'll be back in a minute. 89 00:05:28,950 --> 00:05:31,770 Sean Aylmer: My guest this morning is Luke Donovan from Apostle Funds 90 00:05:31,770 --> 00:05:35,220 Sean Aylmer: Management. Okay, now this is the dumb question that I 91 00:05:35,220 --> 00:05:36,900 Sean Aylmer: have to ask, and I have always wondered this, but 92 00:05:36,900 --> 00:05:39,000 Sean Aylmer: probably not spoken to someone like you that could answer 93 00:05:39,000 --> 00:05:42,420 Sean Aylmer: it. Are we really confident in our measurement? In terms 94 00:05:42,420 --> 00:05:45,450 Sean Aylmer: of, we talk about sequestering carbon out of the atmosphere 95 00:05:45,450 --> 00:05:48,089 Sean Aylmer: and that, we're quite able to measure that to make 96 00:05:48,089 --> 00:05:50,040 Sean Aylmer: sure we are doing what we say we're doing? 97 00:05:50,640 --> 00:05:52,799 Luke Donovan: That's not a stupid question at all. In fact, it's 98 00:05:52,800 --> 00:05:54,990 Luke Donovan: one that we get asked a lot. And it's important 99 00:05:54,990 --> 00:05:58,830 Luke Donovan: to note with these schemes that it isn't an exact 100 00:05:58,830 --> 00:06:02,790 Luke Donovan: science, it's not super specific. But what it is, is 101 00:06:02,790 --> 00:06:06,060 Luke Donovan: when you legislate markets like this and you have a 102 00:06:06,060 --> 00:06:13,380 Luke Donovan: government regulating them, it encourages scrutiny and structured review. And 103 00:06:13,380 --> 00:06:15,870 Luke Donovan: we've just seen that, where as soon as the federal 104 00:06:15,870 --> 00:06:19,350 Luke Donovan: government was voted into power last year, they had a 105 00:06:19,350 --> 00:06:24,029 Luke Donovan: complete review by an independent professional or academic, who went 106 00:06:24,029 --> 00:06:26,969 Luke Donovan: through and reviewed the scheme and made some suggested changes 107 00:06:26,970 --> 00:06:29,370 Luke Donovan: to that. And then of course, we'll no doubt have 108 00:06:29,370 --> 00:06:32,700 Luke Donovan: another regulated review of this scheme in perhaps two or 109 00:06:32,700 --> 00:06:35,760 Luke Donovan: three years time. And you need to acknowledge with these 110 00:06:35,760 --> 00:06:40,740 Luke Donovan: things, science improves over time. So what's acceptable in terms 111 00:06:40,740 --> 00:06:46,080 Luke Donovan: of community standards, scientific standards, and even policy standards now 112 00:06:46,080 --> 00:06:48,359 Luke Donovan: may not be acceptable in two or three years time, 113 00:06:48,360 --> 00:06:51,390 Luke Donovan: and we may need to review and change that. But 114 00:06:51,390 --> 00:06:54,210 Luke Donovan: what's important is not so much that we get the 115 00:06:54,210 --> 00:06:58,080 Luke Donovan: measurement exactly right, but we have the framework for which 116 00:06:58,080 --> 00:07:01,050 Luke Donovan: those measurements can sit. And as long as we're constantly 117 00:07:01,050 --> 00:07:05,700 Luke Donovan: scrutinizing those in a structured way, then we'll always get 118 00:07:05,700 --> 00:07:07,140 Luke Donovan: the best result for the environment. 119 00:07:07,680 --> 00:07:10,710 Sean Aylmer: Okay. So Luke Donovan, partner at a Apostle Funds Management. My 120 00:07:10,710 --> 00:07:14,880 Sean Aylmer: next question is bringing it back to investors. We have 121 00:07:14,880 --> 00:07:19,470 Sean Aylmer: the framework in place now. How can we think about 122 00:07:19,470 --> 00:07:22,140 Sean Aylmer: it from an investing point of view? And that's obviously 123 00:07:22,140 --> 00:07:25,770 Sean Aylmer: what you do every day. How do funds like yours 124 00:07:25,890 --> 00:07:28,620 Sean Aylmer: invest in this whole program? 125 00:07:29,790 --> 00:07:34,800 Luke Donovan: So, again, when you have a regulated market, it really 126 00:07:34,800 --> 00:07:39,450 Luke Donovan: provides a really robust framework that gives the confidence to 127 00:07:39,450 --> 00:07:43,890 Luke Donovan: institutional investors to participate. And that's really important. And the 128 00:07:43,890 --> 00:07:46,200 Luke Donovan: reason they get that confidence is because they get the 129 00:07:46,200 --> 00:07:49,440 Luke Donovan: certainty that comes with having the governments regulate the market. 130 00:07:49,830 --> 00:07:52,800 Luke Donovan: And they also, these markets, as soon as they have 131 00:07:52,800 --> 00:07:56,310 Luke Donovan: legislation like we have recently passed, they scale much better. 132 00:07:56,310 --> 00:07:59,520 Luke Donovan: So you get the scale that warrants investment and you 133 00:07:59,520 --> 00:08:03,900 Luke Donovan: get the certainty that warrants investment. And ultimately, what institutional 134 00:08:03,900 --> 00:08:08,220 Luke Donovan: investment does is it increases liquidity in these markets and 135 00:08:08,220 --> 00:08:13,890 Luke Donovan: it increases price discovery, and that just enhances the efficient 136 00:08:13,890 --> 00:08:17,370 Luke Donovan: allocation of capital to ensure that we transition in the 137 00:08:17,370 --> 00:08:21,630 Luke Donovan: most efficient manner. And that's what the benefits or the 138 00:08:21,630 --> 00:08:27,150 Luke Donovan: environmental benefits of having institutional investors involved, from purely an 139 00:08:27,150 --> 00:08:31,650 Luke Donovan: investment perspective and the opportunity for an investor. I only 140 00:08:31,650 --> 00:08:35,730 Luke Donovan: turned my mind to the recent IPCC report that looked 141 00:08:35,730 --> 00:08:38,550 Luke Donovan: at how we are progressing towards some of the targets 142 00:08:38,550 --> 00:08:41,550 Luke Donovan: that were set as part of the Paris Accord. Now, 143 00:08:41,640 --> 00:08:45,569 Luke Donovan: whilst that report, it was fairly bleak to be perfectly 144 00:08:45,570 --> 00:08:48,390 Luke Donovan: honest, there was a lot of hope in there that 145 00:08:48,390 --> 00:08:51,750 Luke Donovan: there is still opportunity for us to achieve those targets. 146 00:08:52,020 --> 00:08:54,300 Luke Donovan: But what was key in there was that we have 147 00:08:54,300 --> 00:08:57,510 Luke Donovan: to rely on things like carbon markets to drive the 148 00:08:57,510 --> 00:09:02,429 Luke Donovan: right price outcome to achieve those targets. And ultimately, the 149 00:09:02,429 --> 00:09:04,949 Luke Donovan: underlying message from that is we need a higher carbon 150 00:09:04,950 --> 00:09:08,400 Luke Donovan: price because we need more urgency in the transition and 151 00:09:08,400 --> 00:09:10,770 Luke Donovan: that leads to a higher carbon price. So from an 152 00:09:10,770 --> 00:09:16,020 Luke Donovan: investor's perspective, participating in these markets and owning these certificates 153 00:09:16,320 --> 00:09:19,860 Luke Donovan: and ultimately being long carbon is a positive thing because 154 00:09:20,040 --> 00:09:23,309 Luke Donovan: the price appreciation is looking quite likely. 155 00:09:23,700 --> 00:09:28,530 Sean Aylmer: Okay. What about things like investing in carbon capture and 156 00:09:28,530 --> 00:09:31,110 Sean Aylmer: storage, those sorts of things? When you talk about the 157 00:09:31,110 --> 00:09:35,130 Sean Aylmer: intergovernmental panel on climate change and you read that, and 158 00:09:35,280 --> 00:09:37,530 Sean Aylmer: obviously the pricing of carbon is one thing, but what 159 00:09:37,530 --> 00:09:40,559 Sean Aylmer: about the different technologies and that sort of thing? Is 160 00:09:40,559 --> 00:09:42,090 Sean Aylmer: that an opportunity for investors? 161 00:09:42,720 --> 00:09:47,160 Luke Donovan: Look, absolutely. The energy transition and the economy transition to 162 00:09:47,160 --> 00:09:51,599 Luke Donovan: a lower emissions sort of footprint presents an enormous opportunity 163 00:09:51,600 --> 00:09:54,720 Luke Donovan: to investors in a number of different ways. What we're 164 00:09:54,720 --> 00:09:58,050 Luke Donovan: doing here in carbon markets as part of the Apostle 165 00:09:58,050 --> 00:10:02,910 Luke Donovan: Carbon Credit Fund, is providing something that is scalable, liquid, 166 00:10:03,270 --> 00:10:05,610 Luke Donovan: and sort of transparent in the way that it works. 167 00:10:05,610 --> 00:10:08,069 Luke Donovan: When you're looking at things like technologies, you're moving more 168 00:10:08,070 --> 00:10:11,040 Luke Donovan: into sort of a VC world, which has its place 169 00:10:11,040 --> 00:10:14,910 Luke Donovan: in any portfolio management, but has a different place. We're 170 00:10:14,910 --> 00:10:18,420 Luke Donovan: looking at more, I guess, classifying ourselves as a very 171 00:10:18,809 --> 00:10:22,050 Luke Donovan: tangible liquid alt and putting ourselves in that place 172 00:10:22,470 --> 00:10:25,470 Sean Aylmer: And that market that you're investing in, just listening to 173 00:10:25,470 --> 00:10:29,520 Sean Aylmer: you here, Luke, clearly that's going to grow. Forget particularly 174 00:10:29,520 --> 00:10:31,500 Sean Aylmer: performance, it's just going to grow, it's going to be 175 00:10:31,500 --> 00:10:32,189 Sean Aylmer: a bigger market. 176 00:10:33,120 --> 00:10:37,469 Luke Donovan: Absolutely. Because you're already seeing an increase in participation from non- 177 00:10:37,470 --> 00:10:40,230 Luke Donovan: obligated entities, people that are seeing this as an asset 178 00:10:40,230 --> 00:10:43,920 Luke Donovan: class. And you only need to look at other commodities 179 00:10:43,980 --> 00:10:46,800 Luke Donovan: and how they've grown in their sophistication. Things like, for 180 00:10:46,800 --> 00:10:51,839 Luke Donovan: example, oil or agricultural, commodities, even things like gas more 181 00:10:51,840 --> 00:10:54,780 Luke Donovan: recently. And the development of those markets, where they start 182 00:10:54,780 --> 00:10:58,350 Luke Donovan: with the participants that are active, like physically active in 183 00:10:58,350 --> 00:11:00,719 Luke Donovan: there, and now where they move to more of an 184 00:11:00,720 --> 00:11:03,540 Luke Donovan: instrument in and of themselves. And carbon is definitely on that 185 00:11:03,540 --> 00:11:06,270 Luke Donovan: trajectory, and that will mean a growing in scale of 186 00:11:06,270 --> 00:11:10,470 Luke Donovan: these markets. And also, I think, a growing convergence of these markets 187 00:11:10,470 --> 00:11:13,380 Luke Donovan: globally that are sort of, at the moment, spatted across the 188 00:11:13,380 --> 00:11:16,770 Luke Donovan: world, that there's definitely a scope for them to converge. 189 00:11:17,190 --> 00:11:20,699 Sean Aylmer: And this is, I suppose, a global market. You just mentioned it 190 00:11:20,700 --> 00:11:22,770 Sean Aylmer: then, and your fund goes well beyond Australia. It covers 191 00:11:22,770 --> 00:11:26,880 Sean Aylmer: California, Europe, UK, New Zealand. This is definitely a global 192 00:11:26,880 --> 00:11:27,690 Sean Aylmer: market, Luke. 193 00:11:28,470 --> 00:11:31,800 Luke Donovan: Yeah, absolutely. And when we were devising the product, it 194 00:11:31,800 --> 00:11:34,590 Luke Donovan: was really key that we did have a global product, 195 00:11:34,590 --> 00:11:37,800 Luke Donovan: and that was for a number of reasons. Firstly, because 196 00:11:38,040 --> 00:11:41,820 Luke Donovan: we think, as part of our strategy, that carbon is 197 00:11:42,120 --> 00:11:44,970 Luke Donovan: a global issue. And so a ton of carbon, regardless 198 00:11:44,970 --> 00:11:47,640 Luke Donovan: of which continent or country or jurisdiction it comes from, 199 00:11:47,640 --> 00:11:49,830 Luke Donovan: is a ton of carbon. And so, we thought it 200 00:11:49,830 --> 00:11:53,490 Luke Donovan: was important to have that truly global reach and to 201 00:11:53,490 --> 00:11:56,640 Luke Donovan: give investors that true exposure to carbon, not just in 202 00:11:56,640 --> 00:12:00,120 Luke Donovan: one market, but across the world. Also, as well, being 203 00:12:00,120 --> 00:12:03,030 Luke Donovan: a global product as it is, the more markets that 204 00:12:03,030 --> 00:12:06,750 Luke Donovan: you're involved in help to reduce your overall volatility that 205 00:12:06,750 --> 00:12:09,750 Luke Donovan: you have exposure to. These markets, each of them in 206 00:12:09,750 --> 00:12:12,690 Luke Donovan: an individual sense, particularly because of where they're at in 207 00:12:12,690 --> 00:12:16,050 Luke Donovan: the development, can be, in the short term, quite volatile. 208 00:12:16,620 --> 00:12:19,380 Luke Donovan: And so, when you have the diversification across a number 209 00:12:19,380 --> 00:12:21,600 Luke Donovan: of markets, you help to reduce that volatility. 210 00:12:22,260 --> 00:12:24,420 Sean Aylmer: Luke, thank you very much for talking to Fear and Greed. 211 00:12:25,320 --> 00:12:26,400 Luke Donovan: Thanks very much for having me. 212 00:12:26,790 --> 00:12:29,970 Sean Aylmer: That was Luke Donovan, Partner, Global Carbon Markets at Apostle 213 00:12:29,970 --> 00:12:32,730 Sean Aylmer: Funds Management. This is the Fear and Greed daily interview. 214 00:12:32,730 --> 00:12:35,160 Sean Aylmer: Remember, this is general information only and you should seek 215 00:12:35,160 --> 00:12:38,819 Sean Aylmer: professional advice before making investment decisions. Join us every morning 216 00:12:38,820 --> 00:12:40,950 Sean Aylmer: for the full episode of Fear and Greed, Australia's most 217 00:12:40,950 --> 00:12:44,309 Sean Aylmer: popular business podcast. I'm Sean Aylmer, enjoy your day.