A trio of financial industry veterans has invested in environmental derivatives platform IncubEx in the latest sign of the growth of trading in instruments such as carbon contracts that let companies offset their pollution.
Entrepreneurs Michael Spencer and Lance Uggla and former Deutsche Börse head Carsten Kengeter have invested in an $11.7m fundraising by IncubEx, a developer of financial contracts on environmental markets, ahead of an expected float in London this year.
Spencer, who founded interdealer broker ICAP, and financial data company Markit co-founder Uggla, have joined Kengeter and Lansdowne Partners, the hedge fund, in the capital raise. The fundraising values IncubEx, a five-year-old company, at $161m.
IncubEx was developed by the management team that founded Climate Exchange, which operates a carbon trading platform, and was sold to US operator Intercontinental Exchange for £395m in 2010.
Derivatives related to climate change have had a patchy record, with investors having largely shunned it as a traded asset after a flurry of interest a decade ago.
But IncubEx’s ambition has been fuelled by growing demand to trade carbon-related contracts. Pressure is growing on companies from governments and their investors to drastically reduce their emissions over coming decades. Countries have committed to cutting their emissions in the Paris agreement on global warming.
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The price for carbon dioxide allowances has more than doubled in the EU compared with pre-pandemic levels on the bloc’s flagship carbon trading platform, in part because traders expect supply will tighten in the coming years.
IncubEx designs contracts related to climate change that would allow companies to buy and sell carbon. It has designed many of the environmental-related futures and options contracts for EEX, owned by Deutsche Börse. They include the EU and California emissions trading markets.
It is also behind more niche futures and options contracts, such as ones that will allow companies to meet European wood pellet industry and US cross-state air pollution rules.
IncubEx chair Neil Eckert, formerly chief executive of Brit Insurance and founder of Climate Exchange, said environmental commodities had the potential to develop into one of the largest traded asset classes in the world.
“The starting point is legislation. The real trigger is policy agreements set by Paris. It’s incredibly helpful that America has recommitted to Paris,” he told the Financial Times. “Only about 5 per cent of the world’s carbon footprint are in carbon trading schemes. Shipping and aviation are the two latest ones to get picked up by legislation. Then it will be transportation.”
IncubEx has a revenue-sharing agreement with EEX, based on the amount of trading in its contracts.
Eckert also said the company was considering listing on London’s junior stock market. “We’re looking at all the options but the most likely is an Aim listing later this year,” he said.
Trading on ICE’s carbon platform has doubled in the past five years to 2020 and last year it handled more than 12m lots of carbon emissions futures and options, equivalent to 12bn allowances or 12 gigatonnes of carbon.
Earlier this year, CME, which operates the Chicago futures exchange, began trading the world’s first future contracts linked to the price of water in California.