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Max Manturov

Max Manturov

Head of investment research regulated by CySec 10.02.2022

ETF Krane Shares: potential growth of 80.7% as carbon credit market develop

Ticker: KRBN.US

Entry price: $53

Target price: $100

Growth potential: 88.5%

Time Horizon: 12 months

Risk: Moderate

Position size: 5%

About the ETF fund

The Krane Shares Global Carbon Strategy ETF is comparable to the IHS Markit Global Carbon Index, which offers broad coverage of carbon credits by tracking the most traded carbon futures contracts.

Assets under management, AUM - $1.86bn

Expense Ratio - 0.78%

ETF return over the past six months - 47.62%

What's the idea?

By purchasing shares in the KRBN fund, KRBN earns money on the development of the carbon credits market, whose rising price is necessary to realise the goals of the Paris Agreement.

New challenges almost always generate new markets - the ongoing climate crisis and rising global emissions are no exception.

Renewed interest in carbon markets is a relatively new phenomenon. International carbon trading markets have existed since the Kyoto Protocols of 1997, but the emergence of new regional markets has triggered a surge in investment.

Historically important developments for the carbon credit market

  1. The United Nations Framework Convention on Climate Change, UNFCCC, is the first agreement, signed by over 180 countries, on common principles for national action on climate change. The Convention was solemnly adopted at the Earth Summit in Rio de Janeiro in 1992 and entered into force on the 21st of March 1994.
  2. The Kyoto Protocol is an international agreement negotiated to reduce greenhouse gas emissions into the earth's atmosphere to counteract global warming. It is a supplementary document to the 1992 United Nations Framework Convention on Climate Change (UNFCCC), the Protocol was adopted in Kyoto, Japan, on the 11th of December 1997 and entered into force on the 16th of February 2005. The main objective of the agreement: to stabilise greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the planet's climate system.
  3. The Paris Agreement is an agreement under the United Nations Framework Convention on Climate Change regulating measures to reduce carbon dioxide in the atmosphere from 2020. The agreement was drafted to replace the Kyoto Protocol during the Paris Climate Conference and was adopted by consensus on the 12th of December 2015 and signed on the 22nd of April 2016. The aim of the agreement (according to Article 2) is to "enhance the implementation" of the UN Framework Convention on Climate Change, in particular to keep global average temperature rise "well below" 2 °C and to "endeavour" to limit temperature rise to 1.5 °C

The 1997 Kyoto Protocol and the 2015 Paris Agreement were agreements that set international CO2 emission targets. As the latter have been ratified by all but six countries, they have led to the establishment of national emission targets and related regulations.

With these new rules coming into force, the pressure on businesses to find ways to reduce their carbon footprint is growing. Most of today's interim solutions involve the use of carbon markets.

Carbon credits, also known as carbon allowances, work like emission allowance receipts. When a company buys a carbon credit, it is allowed to produce one tonne of CO2. These credits have thus become a commodity these days.

Carbon credits are issued by national or international governmental organisations. Their amount is usually based on emissions targets. Often the credits are issued as part of a so-called Cap-and-Trade programme. Regulators set a limit on carbon dioxide emissions - Cap. Over time, the cap gradually decreases - making it increasingly difficult for businesses to stay within this permitted level.

The carbon market is fragmented. Globally, Cap-and-Trade programmes exist in some form in Canada, the EU, the UK, China, New Zealand, Japan and South Korea, and many other countries are considering them. The market is moving towards globalisation.

In this way, companies are given an incentive to reduce the emissions produced by their business operations in order to stay within their limits.

Why do we like KRBN?

Reason 1: investing in developed markets

The fund allocates means to the most liquid and mature carbon credit markets. It consists of European, California, Regional (Eastern states) as well as British quotas in the following proportions:

  • European Union Allowance (EUA) 2022 Future - 61.56%
  • California Carbon Allowance (CCA) Vintage 2022 Future - 19.11%
  • European Union Allowance (EUA) 2023 Future - 5.6%
  • UK Allowance (UKA) 2022 Future - 5.19%
  • Regional Greenhouse Gas Initiative (RGGI) Vintage 2022 Future - 4.62%
  • California Carbon Allowance (CCA) Vintage 2023 Future - 3.85%

Reason 2. Increased demand

The assumption is that a declining carbon allowance (different for each industry) will on the one hand increase companies' investment in technologies that will reduce carbon emissions from their own business cycle (see GS's Carbonomics report). On the other hand there will irreversibly be laggards who are forced to purchase credits, thereby driving the price up.

Reason 3. Reduced supply

The fund's large exposure relates to the European carbon market,

Market Stability Reserve is like a central bank for a country, only for European carbon credits.

They published the following on their website:

The total amount of emission allowances will be reduced by 2.2% per year from 2021, compared to 1.74% between 2013 and 2020. The reduction rate is in line with the 2030 target of at least 40% cuts in EU greenhouse gas emissions.

This quota policy is representative of the Cap-and-Trade programme. Quotas will become smaller, demand will increase due to decreasing levels set by states (Cap), and the price will follow the demand.

How to take advantage of the idea?

  1. Buy shares in the fund at $53.
  2. Allocate no more than 5% of your portfolio to buying. For a balanced portfolio, you can use our analysts’ recommendations.
  3. Sell when the price reaches $100.

How to Buy Krane Shares Global Carbon Strategy ETF?

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type KRBN.US (Krane Shares Global Carbon Strategy ETF ticker in the NASDAQ) in the search box, and select Krane Shares Global Carbon Strategy in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type KRBN.US (Krane Shares Global Carbon Strategy ETF ticker in the NASDAQ) and select Krane Shares Global Carbon Strategy in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.

Buy Krane Shares Global Carbon Strategy ETF >>

*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Europe Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance Europe Ltd. do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance Europe Ltd. and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.

  • Sources of information

  • Recommendation evaluation methodology according to Market Research Terms of Use
    Freedom Finance analysts perform a three-stage analysis. They select a promising industry based on the latest news, statistics and industry-specific metrics. They assess the supply and demand situation and its future development dynamics. Industry’s investment attractiveness is mostly affected by the forecasted market growth rates; total addressable market, player concentration level and likeliness of a monopoly formation, as well as the level of regulation by various entities or associations.

    The assessment is followed by the comparative analysis based on the selected sample. The sample comprises companies with a market capitalization of over USD 1 billion, but there is space for exceptions (when the suitable level of liquidity for company’s securities is available on the stock exchange). The selected companies (peers) are being compared against each other based on multipliers (EV/S, EV/EBITDA, PE, P/FCF, P/B), revenue growth rates, marginality and profitability (operating income margin, net income margin, ROE, ROA), and business performance.

    Having completed the comparative analysis, the analysts carry out a more in-depth research of the news about the selected company. They review company’s development policy, information about its current and potential mergers and acquisitions (M&A activity), and assess the efficiency of company's inorganic growth and other news about it over the past year. The main objective at this stage is to identify the growth drivers and evaluate their stability, as well as the extent of impact they have on the business.

    Based on all the data collected, the analysts determine the weighted forecasted figures of company’s growth rates and proposed business marginality, which are used to calculate the company’s multiplier-based estimated value. The said value enables setting the stock price target and stock value growth potential.

    The expected timing of the idea implementation is set depending on the current market situation, volatility level and available forecasting horizon for industry and company development. The forecasting period is normally set between 3 and 12 months.