Change of climate for carbon credit notes?
IF INVESTORS ARE increasingly paying attention to environmental issues, then the JSE’s only genuine “green” listing – the Sterling Waterford Carbon Credit Note (CCN) – is certainly not confirming such a trend (yet). Trade in the CCN is scarce and Sterling Waterford had a tough job getting the instrument listed despite its first note (which launched in April 2005 and matured in June 2008) spinning an enviable return of 250% in rand and 140% in US dollars.
Sterling Waterford director Greg Paterson-Jones notes: “Our timing was awful, with our marketing coinciding with the onset of the global financial crisis. With the market refusing to take any risk, we really battled to close investors – especially among institutions. Our road show took place in the same week Lehman collapsed.”
Sterling Waterford’s second CCN attracted investment of only around R80m on listing in late 2008 – which would rank the instrument, in terms of size, alongside some of the small investments on the JSE’s AltX market.
Paterson-Jones says while Sterling Waterford’s first CCN attracted a few institutions, the take-up of the second CCN was mainly by smaller hedge fund specialists and specialised investment companies. The slack demand for the CCN is quite ironic – especially in a time of market turmoil. The instrument isn’t correlated to market movements and – for local investors – it offers a rand hedge, because the underlying investment is priced in euro.
On paper, the CCN is the perfect foil for market turmoil. Paterson-Jones reckons the market hasn’t quite cottoned on to CCNs. “Local investors, for the most part, simply don’t understand CCNs. There’s also an overriding sense of conservatism in the market. At times like these, people tend to avoid anything with an ‘exotic’ connotation.”
Is it perhaps a case of being too far ahead of the curve? Paterson-Jones says there’s considerable value in Sterling Waterford being “first to market” with CCNs on the JSE. “SW has established a brand… perhaps even stolen a march on possible competitors.” He notes there’s great longer term potential – pointing out trading value in all European Emissions Instruments (or “carbon,” as the market calls it) are equivalent to around 50% of the JSE’s total trading value.
But Paterson-Jones concedes that until SA has a deregulated power generating market and a regulated domestic capping of emissions, there’s limited scope to build more interest in carbon instruments. “At the moment we only have a few local companies, such as Sasol, Omnia and Sappi that have their own emission reduction projects. It’s not top of mind for the rest of the market, as it is in Europe.”
Despite sluggish interest in the second CCN, Paterson-Jones stresses Sterling Waterford will be looking at continuing to issue new notes. “In a bull market, listing a CCN is very viable for the issuer, as the volume that can be placed is larger. In a bear market it’s marginal for the issuer, despite the positive return profile. However, as long as the notes continue to provide good returns and a useful market hedge, we’ll continue to offer them.”
Naturally, demand for upcoming issues could be determined by the performance of the maturing CCN (it matures at yearend 2012). With regard to the current CCN listing, Paterson-Jones says while performance has been flat there’s every chance of an up-tick near the end of the note’s fouryear term on the back of physical demand from companies at the end of the compliance period.