As corporations work to decarbonize, procuring environmental commodities and managing price risk is increasingly challenging and complex. On one hand, environmental commodities are becoming more differentiated regarding quality, function, geography, usability, and integrity. Conversely, a growing consensus about the need for- and inevitability of- carbon price growth threatens the durability and affordability of decarbonization commitments. This cost exposure threatens corporations' ability to meet their decarbonization targets, prompting stakeholders to question long-term commitment to climate goals.
Emerging Price Risk in Environmental Markets
Environmental markets are evolving rapidly, with increasing decarbonization commitments leading to rising prices across many commodities. With this bullish trend expected to continue, companies committed to achieving net zero emissions face the risk of long-term price escalation and increasing costs. Most environmental commodities markets such as the North American and European compliance carbon markets and the North American and European REC markets have now experienced this rising price phenomenon. Consistent with aggressive goals and recognizing the need for adequate price signals, policymakers in leading jurisdictions have established long-term price support mechanisms to ensure that prices rise above inflation.
Californian carbon allowance auctions have roughly doubled in last 8 years
Historical pricing across European GoO and North American REC and compliance carbon markets are proof of these trends. In short, they show will certainty that environmental commodities will appreciate over time, and it will become increasingly costly for corporations to achieve their climate commitments.
Price evolution of Renewable Energy Certificates, Tier 1
Our HedgeZero Solutions
Hedging against price risk is a common practice among institutions that are exposed to volatile commodities. Like dollar cost averaging in a retirement investment portfolio, corporations can employ hedging tools and strategies to reduce costs over time, mitigate price uncertainty, and protect against volatility.
For structured products, STRIVE by STX has designed HedgeZero Solutions: personalized and systematic hedging strategies catering to the distinctive demands of each organization. These comprehensive solutions safeguard our clients’ financial interests against price risk, market volatility, and the limited liquidity of environmental commodity markets. Clients are empowered to shape a hedging strategy that resonates with their prerequisites while ensuring a simplified procurement process. This approach addresses commercial needs while fulfilling companies’ environmental sustainability goals.
- Fixed Price Hedging: A company locks in a predetermined price for a future transaction, protecting against price fluctuations. It provides price certainty, suitable for stable markets, but may miss out on potential savings if prices decrease.
- Floating Price Hedging: This approach involves adjusting prices based on market fluctuations. It allows a company to benefit from price decreases but exposes them to potential cost increases. Common in volatile markets, it offers flexibility but lacks price predictability.
- Forward Ratable Hedging: A combination of fixed and floating hedging, it involves gradually locking in prices over time for multiple future transactions. This minimizes the impact of sudden price changes, providing a balance between price certainty and flexibility.
STRIVE by STX's hedging solutions assist clients in sustaining their net zero commitments long-term while keeping program costs manageable and predictable. With mature trading systems and analytics platforms across the full range of global environmental products, we provide unparalleled expertise that enables a comprehensive approach to managing the rising risk of long-term liabilities due to increasing environmental commodity prices. We aim to simplify the experience for our clients, enabling them to navigate environmental markets with professional hedging tools and financial management strategies.