Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. We've talked about how going green may actually create new opportunities for investors. Today I wanted to talk to a fund manager who's dealing with global carbon markets to find out exactly how it all works. As always, this is general information only and you should seek professional advice before making any investment decision. Luke Donovan is Partner, Global Carbon Markets at Apostle Funds Management. He's had a lot of experience in this space. Most recently, he was the Executive Director of Carbon Power Markets at Commonwealth Bank, responsible for the CBA's carbon emissions trading globally. Luke, welcome to Fear and Greed.

Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. We've talked about how going green may actually create new opportunities for investors. Today I wanted to talk to a fund manager who's dealing with global carbon markets to find out exactly how it all works. As always, this is general information only and you should seek professional advice before making any investment decision. Luke Donovan is Partner, Global Carbon Markets at Apostle Funds Management. He's had a lot of experience in this space. Most recently, he was the Executive Director of Carbon Power Markets at Commonwealth Bank, responsible for the CBA's carbon emissions trading globally. Luke, welcome to Fear and Greed.

Thanks very much for having me.

Thanks very much for having me.

Let's start at the beginning, a 101 for me. I want to get an understanding of how carbon markets work, and maybe we can use the safeguard mechanism here as a way of understanding that and what it means for higher emitting companies.

Let's start at the beginning, a 101 for me. I want to get an understanding of how carbon markets work, and maybe we can use the safeguard mechanism here as a way of understanding that and what it means for higher emitting companies.

Sure. So if we concentrate on, as you've said there, in the Australian market as it currently stands, the Australian government was the backstop buyer of carbon certificates in Australia, and there was a spattering of voluntary buyers as well who would make voluntary commitments to purchase carbon certificates. The recent passing of the safeguard mechanism has brought Australia's largest emitters now into that scheme, and they are now required to either reduce the emissions at their facilities or purchase ACCUs (Australian Carbon Credit Units), Australian carbon credit certificates, to comply with the scheme.

Sure. So if we concentrate on, as you've said there, in the Australian market as it currently stands, the Australian government was the backstop buyer of carbon certificates in Australia, and there was a spattering of voluntary buyers as well who would make voluntary commitments to purchase carbon certificates. The recent passing of the safeguard mechanism has brought Australia's largest emitters now into that scheme, and they are now required to either reduce the emissions at their facilities or purchase ACCUs (Australian Carbon Credit Units), Australian carbon credit certificates, to comply with the scheme.

Okay. So that's Australia. What's the way that most of the overseas jurisdictions are going? Is it something similar or is it more of a carbon trading mechanism?

Okay. So that's Australia. What's the way that most of the overseas jurisdictions are going? Is it something similar or is it more of a carbon trading mechanism?

Well, more globally, sometimes it's better to start, Sean, at a higher level than that. So there is two fundamental carbon markets. One is the voluntary carbon market and one is compliance carbon markets. So voluntary carbon markets, as I've sort of already alluded to in my previous answer, are a series of markets where corporates or individuals make voluntary commitments to purchase offsets in order to reduce their carbon footprint. And those offsets are traditionally accredited by non- government agencies, and there is an implied lack of credibility associated with those certificates because they are issued by those non- government entities. Compliance markets are markets that are regulated where certificates are accredited and issued by governments, and there is an obligation on the buyers to participate in those schemes, and as I said, either reduce their emissions or to purchase certificates. So the difference between the Australian market and some of the Australian compliance market that we've just had passed, and some of the more international markets are, in Europe, the creation of certificates is more of an allowance. And what it basically means is it allows you to emit a ton of carbon. So the government controls the supplier and creates those allowances and then auctions them off to the obligated entities in the scheme. And every year there is a declining volume of allowances. It's called a cap and trade scheme. So every year the cap or the volume of allowances that the government auctions becomes less and less and ultimately reduces supply. And the idea is that the price is then driven up and there is greater incentive to reduce your emissions at your facility.

Well, more globally, sometimes it's better to start, Sean, at a higher level than that. So there is two fundamental carbon markets. One is the voluntary carbon market and one is compliance carbon markets. So voluntary carbon markets, as I've sort of already alluded to in my previous answer, are a series of markets where corporates or individuals make voluntary commitments to purchase offsets in order to reduce their carbon footprint. And those offsets are traditionally accredited by non- government agencies, and there is an implied lack of credibility associated with those certificates because they are issued by those non- government entities. Compliance markets are markets that are regulated where certificates are accredited and issued by governments, and there is an obligation on the buyers to participate in those schemes, and as I said, either reduce their emissions or to purchase certificates. So the difference between the Australian market and some of the Australian compliance market that we've just had passed, and some of the more international markets are, in Europe, the creation of certificates is more of an allowance. And what it basically means is it allows you to emit a ton of carbon. So the government controls the supplier and creates those allowances and then auctions them off to the obligated entities in the scheme. And every year there is a declining volume of allowances. It's called a cap and trade scheme. So every year the cap or the volume of allowances that the government auctions becomes less and less and ultimately reduces supply. And the idea is that the price is then driven up and there is greater incentive to reduce your emissions at your facility.

So with the Australian system, if it's not cap and trade, are we going to be reducing the amount of carbon emissions? Individual companies may reduce, but they can buy carbon offsets. How do we make sure we're actually getting carbon out of the air?

So with the Australian system, if it's not cap and trade, are we going to be reducing the amount of carbon emissions? Individual companies may reduce, but they can buy carbon offsets. How do we make sure we're actually getting carbon out of the air?

Well, there's a couple of points to make there. First and foremost, carbon markets in and of themselves aren't the panacea to solve all of our carbon emissions problems. They're a key pillar in terms of driving the right behavioral change, but they're not the only policy required. Now, in Australia, you've rightly identified that yes, it's not the government that's issuing these certificates, it's actually a certificate is issued to someone who has sequestered or abated a ton of carbon. And for example, that might be where you have planted a series of trees that have sequestered carbon from the atmosphere, as trees do, and then you're accredited and issued an ACCU, an Australian carbon credit unit, that you can then sell to an entity, a large emitter, who's a liable entity. But what's important in terms of emissions reduction and what this change in legislation means for big emitters is that we now have a mechanism to price carbon, a robust framework, that means that when those large emitters go to make investment decisions around their facilities, there'll now be a big line item in the Excel spreadsheet that reads carbon. And having a mechanism such as the safeguard mechanism is the first step towards truly pricing carbon in Australia. And that's the most effective, efficient way to ensure that we do transition away from higher emissions technologies and practices.

Well, there's a couple of points to make there. First and foremost, carbon markets in and of themselves aren't the panacea to solve all of our carbon emissions problems. They're a key pillar in terms of driving the right behavioral change, but they're not the only policy required. Now, in Australia, you've rightly identified that yes, it's not the government that's issuing these certificates, it's actually a certificate is issued to someone who has sequestered or abated a ton of carbon. And for example, that might be where you have planted a series of trees that have sequestered carbon from the atmosphere, as trees do, and then you're accredited and issued an ACCU, an Australian carbon credit unit, that you can then sell to an entity, a large emitter, who's a liable entity. But what's important in terms of emissions reduction and what this change in legislation means for big emitters is that we now have a mechanism to price carbon, a robust framework, that means that when those large emitters go to make investment decisions around their facilities, there'll now be a big line item in the Excel spreadsheet that reads carbon. And having a mechanism such as the safeguard mechanism is the first step towards truly pricing carbon in Australia. And that's the most effective, efficient way to ensure that we do transition away from higher emissions technologies and practices.

Stay with me, Luke. We'll be back in a minute. My guest this morning is Luke Donovan from Apostle Funds Management. Okay, now this is the dumb question that I have to ask, and I have always wondered this, but probably not spoken to someone like you that could answer it. Are we really confident in our measurement? In terms of, we talk about sequestering carbon out of the atmosphere and that, we're quite able to measure that to make sure we are doing what we say we're doing?

Stay with me, Luke. We'll be back in a minute. My guest this morning is Luke Donovan from Apostle Funds Management. Okay, now this is the dumb question that I have to ask, and I have always wondered this, but probably not spoken to someone like you that could answer it. Are we really confident in our measurement? In terms of, we talk about sequestering carbon out of the atmosphere and that, we're quite able to measure that to make sure we are doing what we say we're doing?

That's not a stupid question at all. In fact, it's one that we get asked a lot. And it's important to note with these schemes that it isn't an exact science, it's not super specific. But what it is, is when you legislate markets like this and you have a government regulating them, it encourages scrutiny and structured review. And we've just seen that, where as soon as the federal government was voted into power last year, they had a complete review by an independent professional or academic, who went through and reviewed the scheme and made some suggested changes to that. And then of course, we'll no doubt have another regulated review of this scheme in perhaps two or three years time. And you need to acknowledge with these things, science improves over time. So what's acceptable in terms of community standards, scientific standards, and even policy standards now may not be acceptable in two or three years time, and we may need to review and change that. But what's important is not so much that we get the measurement exactly right, but we have the framework for which those measurements can sit. And as long as we're constantly scrutinizing those in a structured way, then we'll always get the best result for the environment.

That's not a stupid question at all. In fact, it's one that we get asked a lot. And it's important to note with these schemes that it isn't an exact science, it's not super specific. But what it is, is when you legislate markets like this and you have a government regulating them, it encourages scrutiny and structured review. And we've just seen that, where as soon as the federal government was voted into power last year, they had a complete review by an independent professional or academic, who went through and reviewed the scheme and made some suggested changes to that. And then of course, we'll no doubt have another regulated review of this scheme in perhaps two or three years time. And you need to acknowledge with these things, science improves over time. So what's acceptable in terms of community standards, scientific standards, and even policy standards now may not be acceptable in two or three years time, and we may need to review and change that. But what's important is not so much that we get the measurement exactly right, but we have the framework for which those measurements can sit. And as long as we're constantly scrutinizing those in a structured way, then we'll always get the best result for the environment.

Okay. So Luke Donovan, partner at a Apostle Funds Management. My next question is bringing it back to investors. We have the framework in place now. How can we think about it from an investing point of view? And that's obviously what you do every day. How do funds like yours invest in this whole program?

Okay. So Luke Donovan, partner at a Apostle Funds Management. My next question is bringing it back to investors. We have the framework in place now. How can we think about it from an investing point of view? And that's obviously what you do every day. How do funds like yours invest in this whole program?

So, again, when you have a regulated market, it really provides a really robust framework that gives the confidence to institutional investors to participate. And that's really important. And the reason they get that confidence is because they get the certainty that comes with having the governments regulate the market. And they also, these markets, as soon as they have legislation like we have recently passed, they scale much better. So you get the scale that warrants investment and you get the certainty that warrants investment. And ultimately, what institutional investment does is it increases liquidity in these markets and it increases price discovery, and that just enhances the efficient allocation of capital to ensure that we transition in the most efficient manner. And that's what the benefits or the environmental benefits of having institutional investors involved, from purely an investment perspective and the opportunity for an investor. I only turned my mind to the recent IPCC report that looked at how we are progressing towards some of the targets that were set as part of the Paris Accord. Now, whilst that report, it was fairly bleak to be perfectly honest, there was a lot of hope in there that there is still opportunity for us to achieve those targets. But what was key in there was that we have to rely on things like carbon markets to drive the right price outcome to achieve those targets. And ultimately, the underlying message from that is we need a higher carbon price because we need more urgency in the transition and that leads to a higher carbon price. So from an investor's perspective, participating in these markets and owning these certificates and ultimately being long carbon is a positive thing because the price appreciation is looking quite likely.

So, again, when you have a regulated market, it really provides a really robust framework that gives the confidence to institutional investors to participate. And that's really important. And the reason they get that confidence is because they get the certainty that comes with having the governments regulate the market. And they also, these markets, as soon as they have legislation like we have recently passed, they scale much better. So you get the scale that warrants investment and you get the certainty that warrants investment. And ultimately, what institutional investment does is it increases liquidity in these markets and it increases price discovery, and that just enhances the efficient allocation of capital to ensure that we transition in the most efficient manner. And that's what the benefits or the environmental benefits of having institutional investors involved, from purely an investment perspective and the opportunity for an investor. I only turned my mind to the recent IPCC report that looked at how we are progressing towards some of the targets that were set as part of the Paris Accord. Now, whilst that report, it was fairly bleak to be perfectly honest, there was a lot of hope in there that there is still opportunity for us to achieve those targets. But what was key in there was that we have to rely on things like carbon markets to drive the right price outcome to achieve those targets. And ultimately, the underlying message from that is we need a higher carbon price because we need more urgency in the transition and that leads to a higher carbon price. So from an investor's perspective, participating in these markets and owning these certificates and ultimately being long carbon is a positive thing because the price appreciation is looking quite likely.

Okay. What about things like investing in carbon capture and storage, those sorts of things? When you talk about the intergovernmental panel on climate change and you read that, and obviously the pricing of carbon is one thing, but what about the different technologies and that sort of thing? Is that an opportunity for investors?

Okay. What about things like investing in carbon capture and storage, those sorts of things? When you talk about the intergovernmental panel on climate change and you read that, and obviously the pricing of carbon is one thing, but what about the different technologies and that sort of thing? Is that an opportunity for investors?

Look, absolutely. The energy transition and the economy transition to a lower emissions sort of footprint presents an enormous opportunity to investors in a number of different ways. What we're doing here in carbon markets as part of the Apostle Carbon Credit Fund, is providing something that is scalable, liquid, and sort of transparent in the way that it works. When you're looking at things like technologies, you're moving more into sort of a VC world, which has its place in any portfolio management, but has a different place. We're looking at more, I guess, classifying ourselves as a very tangible liquid alt and putting ourselves in that place

Look, absolutely. The energy transition and the economy transition to a lower emissions sort of footprint presents an enormous opportunity to investors in a number of different ways. What we're doing here in carbon markets as part of the Apostle Carbon Credit Fund, is providing something that is scalable, liquid, and sort of transparent in the way that it works. When you're looking at things like technologies, you're moving more into sort of a VC world, which has its place in any portfolio management, but has a different place. We're looking at more, I guess, classifying ourselves as a very tangible liquid alt and putting ourselves in that place

And that market that you're investing in, just listening to you here, Luke, clearly that's going to grow. Forget particularly performance, it's just going to grow, it's going to be a bigger market.

And that market that you're investing in, just listening to you here, Luke, clearly that's going to grow. Forget particularly performance, it's just going to grow, it's going to be a bigger market.

Absolutely. Because you're already seeing an increase in participation from non- obligated entities, people that are seeing this as an asset class. And you only need to look at other commodities and how they've grown in their sophistication. Things like, for example, oil or agricultural, commodities, even things like gas more recently. And the development of those markets, where they start with the participants that are active, like physically active in there, and now where they move to more of an instrument in and of themselves. And carbon is definitely on that trajectory, and that will mean a growing in scale of these markets. And also, I think, a growing convergence of these markets globally that are sort of, at the moment, spatted across the world, that there's definitely a scope for them to converge.

Absolutely. Because you're already seeing an increase in participation from non- obligated entities, people that are seeing this as an asset class. And you only need to look at other commodities and how they've grown in their sophistication. Things like, for example, oil or agricultural, commodities, even things like gas more recently. And the development of those markets, where they start with the participants that are active, like physically active in there, and now where they move to more of an instrument in and of themselves. And carbon is definitely on that trajectory, and that will mean a growing in scale of these markets. And also, I think, a growing convergence of these markets globally that are sort of, at the moment, spatted across the world, that there's definitely a scope for them to converge.

And this is, I suppose, a global market. You just mentioned it then, and your fund goes well beyond Australia. It covers California, Europe, UK, New Zealand. This is definitely a global market, Luke.

And this is, I suppose, a global market. You just mentioned it then, and your fund goes well beyond Australia. It covers California, Europe, UK, New Zealand. This is definitely a global market, Luke.

Yeah, absolutely. And when we were devising the product, it was really key that we did have a global product, and that was for a number of reasons. Firstly, because we think, as part of our strategy, that carbon is a global issue. And so a ton of carbon, regardless of which continent or country or jurisdiction it comes from, is a ton of carbon. And so, we thought it was important to have that truly global reach and to give investors that true exposure to carbon, not just in one market, but across the world. Also, as well, being a global product as it is, the more markets that you're involved in help to reduce your overall volatility that you have exposure to. These markets, each of them in an individual sense, particularly because of where they're at in the development, can be, in the short term, quite volatile. And so, when you have the diversification across a number of markets, you help to reduce that volatility.

Yeah, absolutely. And when we were devising the product, it was really key that we did have a global product, and that was for a number of reasons. Firstly, because we think, as part of our strategy, that carbon is a global issue. And so a ton of carbon, regardless of which continent or country or jurisdiction it comes from, is a ton of carbon. And so, we thought it was important to have that truly global reach and to give investors that true exposure to carbon, not just in one market, but across the world. Also, as well, being a global product as it is, the more markets that you're involved in help to reduce your overall volatility that you have exposure to. These markets, each of them in an individual sense, particularly because of where they're at in the development, can be, in the short term, quite volatile. And so, when you have the diversification across a number of markets, you help to reduce that volatility.

Luke, thank you very much for talking to Fear and Greed.

Luke, thank you very much for talking to Fear and Greed.

Thanks very much for having me.

Thanks very much for having me.

That was Luke Donovan, Partner, Global Carbon Markets at Apostle Funds Management. This is the Fear and Greed daily interview. Remember, this is general information only and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's most popular business podcast. I'm Sean Aylmer, enjoy your day.

That was Luke Donovan, Partner, Global Carbon Markets at Apostle Funds Management. This is the Fear and Greed daily interview. Remember, this is general information only and you should seek professional advice before making investment decisions. Join us every morning for the full episode of Fear and Greed, Australia's most popular business podcast. I'm Sean Aylmer, enjoy your day.