Henrik Hasselknippe, head of markets at Xpansiv, told Environmental Finance: “Environmental commodities—such as carbon credits and differentiated fuels—represent the environmental impact of a given commodity. In two or three years’ time, I think everyone will have moved away from referring to them as ‘ESG commodities’ and that will just be the way the market views all commodities.
“An environmental footprint can best be represented in a number of ways, such as the production method, carbon dioxide (CO2) released, and methane and water intensity. For instance, cotton and rice production have a larger environmental impact on water usage rather than CO2. So, how do you express that? That’s really what we’re working on: quantifying the embedded, environmental impact within global commodity markets.
“I’m not a big fan of the term ‘ESG commodity’ because all commodities must eventually be valued by these impact factors.”
CME Group will extend the range of contracts covered by its CBL Nature-based Global Emissions Offset (N-GEO) futures contract to the year 2027, following an increase in traded volumes in recent months. Liquidity has grown in the futures contract, which is widely seen as the frontrunner to become the VCM’s biggest price benchmark.
“The way that commodities trade now is probably not the way they’re going to trade in the future,” says Ben Stuart, Xpansiv chief commercial officer. “The attributes around their generation, and how they’re produced, are going to have a pricing impact.”
This includes the methane emissions associated with the production of natural gas. Xpansiv has a product that provides detailed environmental data about oil and gas production that allows more efficient producers to market their lower carbon footprint. “If they have less impact at the point of production, and therefore, having less impact on the environment, then that information needs to be priced into those commodities,” says Stuart.
As for the quality of carbon credits. Stuart emphasises that Xpansiv acts as the infrastructure provider, market platform and registry for parties trading these carbon credits. It leaves the crediting process to independent third parties such as American Carbon Registry and government agencies such as Australia’s Clean Energy Regulator.
Globally, companies are driving changes to their emissions profile, both through direct impacts to their operations, but also drawing on mechanisms like the VCM to complement their activities.
The VCM has already evolved into a robust market framework that supports the needs of these participants with respect to price transparency, ability to manage risk through hedging and use of benchmarks, and the stability of independent standards bodies to assure that the associated offsets are well-understood and fulfill integrity requirements.
While all markets — established and new — require constant scrutiny to assure they are robust, the VCM has all the elements in place that enable companies to act in confidence using this mechanism.
CBL provides a platform for corporates not keen to spend too much time on paperwork as well as a network of major offset buyers and sellers. It also operates several futures contracts in partnership with CME Group that are increasingly seen as the sector’s benchmark.
Several exchanges have created new futures contracts in recent months, but have so far failed to garner sufficient liquidity to compete with CME/CBL.
Xpansiv has onboarded more than 125 participants this year as the market infrastructure platform for environmental commodities expects further growth in carbon offsets and new commodities such as digital fuels.
Henrik Hasselknippe, Xpansiv Head of XMarkets, told Markets Media: “For the first time in environmental markets, we offer the full integration of a trading market, registry operator, and market data provider for environmental commodities such as renewable energy certificates.”
Xpansiv views itself as an infrastructure provider for environmental commodities, which Hasselknippe argued is a differentiator. The platform operates a spot exchange and registries, portfolio management systems, a marketplace and a market data business.