The 1997 Kyoto Protocol set in place targets for the reduction of CO2 emissions by participating countries by the year 2012. Following this, Europe developed a system whereby individual companies within each participating country have been allocated emission reduction targets based on historical benchmarks.
Companies with emissions exceeding their benchmarks are short emission credits and have to source the shortfall in the market. Companies that under emit are free to sell these credits to other market participants. This mechanism is known as the Cap and Trade and has proved to be an efficient way of assigning the cost of pollution within an economy.
Since these credits are tradeable, the buying and selling of credits between businesses has given rise to a new market, the emissions market. As with any other market, trades are facilitated by intermediaries and liquidity providers. One of the largest players in today’s global market is CF Partners, a specialised environmental advisory and investments firm.
The founders of CF Partners are Jonathan Navon and Thomas Rassmuson. With more than 17 years’ experience in the US and European financial markets – most notably with Goldman Sachs, Deutsche Bank and Merrill Lynch – Jonathan’s main area of expertise is providing corporate borrowers with financial and liability risk management advice. This includes financial analysis, capital structure advisory, and risk management execution.
Thomas’s background is in investment banking and fund management. Before establishing CF Partners five years ago, he worked at Merrill Lynch managing the Nordic fixed-income business. Thomas also managed a $1bn trading portfolio as a chief trader at AGA, an industrial trading company, responsible for a large derivatives and hedging book for rates and FX. He was also part of setting-up NAC Capital, a $3bn credit hedge fund and partner at the venture capital firm MVI.
Thomas Rassmuson says, ‘Prior to establishing CF Partners, we had both principally focused on the client and origination side of the fixed-income markets. From this perspective, we could see there was a need for a carbon advisory and trading firm, focusing on the demand side of the emissions market.’
Jonathan Navon says, ‘We see CF Partners as an advisory and trading business with a focus on risk management. Our aim is to help corporates understand their carbon exposure and work with them to help mitigate this exposure which may, given the nature of the Cap and Trade system, be either an asset or a liability.’
CF Partners acts as an adviser to many buyers of carbon credits, such as sovereigns, utilities and industrial companies. The firm also structures and trades OTC transactions among other buyers and traders of emission credits such as funds, banks and trading houses.
The company has four principal businesses: Emissions Advisory and Trading, Corporate Finance, Capital Markets and Fund Management.
I) Emission Advisory and Trading
CF Partners advises companies on ways to reduce hedging costs by sourcing carbon credits directly from Clean Development Mechanism (CDM) and Joint Implementation (JI) projects; projects approved under the Kyoto Protocol to generate carbon credits. In order to achieve this, the firm draws on its in-depth CDM and JI knowledge, its strong global origination network, provides documentation and negotiation expertise, and works only on select mandates that offer high levels of transparency.
CF Partners also provides risk management services such as evaluating CDM/JI portfolios, devising procurement strategies for sovereigns and corporates, and advising clients on the sale of carbon-related assets. To achieve these objectives, the firm ensures it has strong relationships with end-buyers of carbon credits and financial investors that seek exposure to this new asset class. In addition, CF Partners has worked on several landmark transactions in the emissions market, and has demonstrated expertise in structuring risk solutions for optimal compliance management.
II) Corporate Finance
CF Partners has leveraged off these relationships and expertise to provide corporate finance advisory services including mergers and acquisitions, strategic business review and asset divestures to clients across many industrial sectors, but with a general focus on the energy and renewables market.
III) Capital Markets
Recently, the firm has expanded its capabilities to arrange alternative funding solutions for project based transactions and offers innovative investment opportunities for investors seeking exposure to the emissions and renewable energy markets.
IV) Fund Management
In 2009, CF Partners launched CF Carbon Fund II which is the firm’s principal investment vehicle for participating in both the primary and secondary carbon markets. To date, the fund has invested in 49 CDM projects totalling a contracted volume of 35 million of carbon credits. The fund trades a variety of carbon credit instruments such as EUAs, CERs, ERUs, AAUs, VER and CRTs, and has become a market maker in futures, options and swaps. In addition, CF Carbon Fund II is offering innovative funding structures such as repos and asset backed financing.
CF Partners was named Best Carbon Market Fund Manager and Best Carbon Markets Management Services for Northern Europe in the World Finance Carbon Markets awards 2011. CF Carbon Fund II has seen an increase in trading volumes through providing its clients with a secure trading platform which mitigates credit risk and provides the ability to pre-screen the carbon credits traded over the platform prior to settlement. In today’s difficult trading conditions, CF Partners has continued to prosper. Mr. Rassmuson says, ‘Whereas market trading has recently declined overall, our client base and market share has increased. This is because we offer a high degree of transaction visibility. As carbon trading specialists we give our clients the reassurance that we have the experience to best cater for their trading needs.’
Whereas the carbon markets are buoyant when compared with other sectors, they have nonetheless faced difficulties in recent years. According to an article published in the Financial Times in January this year, cyber-thieves have stolen as much as Euro 30m in carbon allowances from the EU’s emissions trading system (ETS), the largest carbon-trading scheme in the world, with an estimated turnover of some €90bn.
Jonathan Navon says, ‘Whereas these thefts have impacted investor confidence, we should remember that it is still a nascent market, and there will always be teething troubles. Transparency, accountability and internet security are still an issue, but these will improve as the markets mature. Putting it into perspective, the fraud committed in the carbon markets has not resulted in anywhere near the losses experienced in other more established markets, such as the credit card market.’
Thomas Rassmuson adds that carbon trading and renewable energy are some of the solutions to address energy security and are leading to a more sustainable world. “We should not forget that carbon trading has been an overall success in transferring technology and financing to the developing world has led to an increased cooperation between countries, and has enhanced the understanding of the importance of the environment and conserving resources.”
Looking at grass-roots technology, the market is developing fast. Wind farms, solar and hydro power are some of the solutions to long-term energy issues, and these projects are becoming increasingly backed by institutional investors and governments worldwide. To cater for this growth, CF Partners is developing new products such as fixed-income instruments and tradeable bonds linked to carbon and renewables, with the aim of opening up the market to new participants.
All told, there have been some initial concerns surrounding the carbon markets. However it must be remembered that, compared to other established markets, carbon remains a relatively new asset class, but one with long-term ambitions and strong growth opportunities. And in contrast to many other asset classes, the carbon markets are actually delivering on their promises.
