To date there has been little discussion about commodity futures within ESG frameworks - neither the Organization for Economic Cooperation and Development (OECD) nor the UN Principles for Responsible Investment (UNPRI) provides comprehensive guidance on commodity futures. We have researched this and will be sharing a comprehensive white paper “Commodity Investing in the Age of ESG and Inflation”. This month’s blog summarizes one of the white paper’s core considerations, that futures offer exposure to commodities with zero environmental impact.
Commodity Futures – Lowest Impact Commodity Exposure
Consider that the equity and bonds of a company make up its capital stock. If one purchases the equity or bonds of a company, it is directly involved in its financing and is entitled to various rights associated with the financing. For a resource company, purchasing equity or bonds directly finances the production of a resource. A company’s capital stock at any given point in time is finite and can be directly tied to its carbon footprint.
This relationship does not hold with futures, and there are no associated rights. Futures investments do not require physical extraction to back, as is the case with traditional equities and bonds, and they do not link to the environmental impact from resource extraction, an inherently invasive process. There is a clear difference between the ownership of a company versus having exposure to a commodity risk factor.
“what ultimately matters for carbon accounting is who ‘owns’ a company. All the owners of a company together provide the capital that enables its economic activities and emissions.”(1)
Consider a large energy producer that has completely hedged its production through short positions in energy futures. If futures have a carbon footprint, and the producer has hedged its price risk through short positions in futures, are they carbon neutral? What about an investor who has a stake in the company’s equity or bonds and an equivalent stake in an offsetting short futures position -is that a carbon neutral investment?
The answer to these questions should be an unequivocal no. Futures do not affect consumption or production – they affect exposure to risk, and these are fundamentally different. The ability to invest in an instrument that’s value is affected by nothing other than the underlying price of the commodity itself is undeniably the lowest impact method of attaining valuable commodity risk exposure.
Broadly less than 5% of commodity futures contracts are taken to delivery(2). In the case of CTA funds and futures backed commodity ETFs, this number if effectively zero. Delivery of physical commodities often is explicitly prohibited by the investment policy statements of these funds. With no delivery there is no increase or decrease in production, no financing, and importantly, no consumption.
Considered alongside diversification benefits and societal and governance considerations, CTA funds and futures backed commodity ETFs may offer the most compelling solution for responsible investors seeking exposure to commodities. To request an advance copy of the upcoming white paper, please email info@auspicecapital.com.
REFERENCES
2. https://www.thebalance.com/taking-delivery-of-commodities-via-the-futures-market-4118366
IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results are not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.
QUALIFIED INVESTORS
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.
For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, or Auspice One Fund “AOF”, is only available to “Accredited Investors” as defined by CSA NI 45-106.