As attention on sustainable finance issues has increased globally, exchange-traded products developer IncubEx has also moved into the spotlight thanks to its support of standardized environmental-based derivatives contracts.
"For years, many global environmental markets have been largely over-the-counter markets," said Daniel Scarbrough, president and chief operating officer of IncubEx. "And even today, many remain that way. Exchange traded products are often not available, or they're unregulated, or they have no clearing mechanism. Our mission is to develop products for opaque and largely bilateral markets and bring the benefits that you have on the most liquid, mainstream futures products to the environmental space at a time when they are very much needed."
The IncubEx team focuses on product research and development, working primarily with exchange partners European Energy Exchange and Nodal Exchange in North America to design, develop and build new financial products in the climate and climate risk markets. IncubEx then gets a revenue share from the environmental contracts that are traded on these venues.
"Our mission is to develop products for opaque and largely bilateral markets and bring the benefits that you have on the most liquid, mainstream futures products to the environmental space at a time when they are very much needed." - Daniel Scarbrough, IncubEx
"We are an incubator for exchange traded products, but our relationships with end-users are just as important as relationships with the exchanges," said Scarbrough. "Discussions with active and informed market participants help us create new products that meet a need or make important improvements to existing markets. We always take into account the stakeholders who have compliance obligations in markets like the Regional Greenhouse Gas Initiative in the US or the European Emissions Trading Scheme, or the traders who are actually putting on positions regularly in these markets day-to-day."
And right now, with both the private and public sector focused on sustainable finance issues, the market-driven solutions developed by IncubEx and others are increasingly in demand. Case in point: Scarbrough says that environmental contracts as a group have grown more than five-fold from 650,000 contracts of open interest in global environmental products across ICE, CME, EEX and Nodal exchange about a decade ago to 3.3 million across the complex at present. From the start of 2021, EUA futures and options open interest on EEX has risen from 140,787 to nearly 270,000 contracts today, while open interest on Nodal's environmental markets has grown 76% to more than 155,000 contracts in carbon, renewable energy certificates and renewable fuels futures and options contracts, according to EEX and Nodal statistics.
"There's definitely a tailwind on multiple fronts, from public sector environmental mandates to put a price on externalities to corporates making voluntary commitments to net-zero carbon emissions or 100% renewable energy," Scarbrough said. "And we only expect that trend to continue in the years to come as sustainability is sure to remain a top global priority."
Building on past successes
Scarbrough and his colleagues at IncubEx believe providing transparency and efficiency through standardized exchange-traded products is the best way to bring in a breadth of participants and build deep, liquid environmental derivatives markets. And while that's an admittedly ambitious mission, it's one that many of the leaders at IncubEx feel very strongly about -- and one they have succeeded at before.
That's because the firm boasts a number of alums from the Chicago-based Climate Exchange, a firm founded by derivatives industry icon Dr. Richard Sandor and one of the first venues to offer instruments like carbon credits and offsets for emissions. In addition to Scarbrough, who led business development at the Climate Exchange, other alums include IncubEx chairman Neil Eckert, who was co-founder and former CEO of Climate Exchange, Michael MacGregor, IncubEx CEO and former managing director at Chicago Climate Futures Exchange, and Dr. Michael Walsh, who co-founded the Chicago Climate Exchange and served as executive vice-president. The company's team is now roughly 25 strong, with offices in Chicago and London.
In 2010, Intercontinental Exchange purchased the Climate Exchange for roughly $600 million. But after a few years working within ICE as just a small piece of one of the largest derivatives exchanges on the planet, Scarbrough said he and other IncubEx leaders decided to strike out on their own once more and focus exclusively on building environmental derivatives markets. In 2016 IncubEx was founded, and they've been at it ever since.
"There's a lot of opportunity left to build on these past successes to create new products, or to standardize contracts in a way that provides market participants greater transparency, access to capital and deeper liquidity," Scarbrough said.
IncubEx marks major milestones in 2021
Since launching environmental markets with Nodal Exchange in 2018, IncubEx and Nodal have worked to list nearly 100 North American futures and options products on carbon, renewable energy certificates (RECs) and renewable fuel credits. In September IncubEx and Nodal added 10 new Renewable Energy Certificate futures contracts to help market participants trade the environmental attributes related to power generated from wind, solar and other renewable sources. And looking forward, Scarbrough says IncubEx is also eying expansion into new geographies that are seeing shifts in environmental policies, as well as products to support private-sector interest in market-based solutions to climate issues.
To support this growth IncubEx closed on an $11.8 million capital raise in May of this year, its largest to date. Prominent investors include: Michael Spencer, chairman of London-based private equity firm IPGL, Lance Uggla, chairman and CEO of market data and analytics firm IHS Markit, Carsten Kengeter of 7RIDGE, Lansdowne Partners, Orsted and others. The company also recently announced plans for an IPO on the London Stock Exchange to raise additional funds for growth, innovation and research into the next generation of environmental products.
"The only way you can stay on the forefront of these markets is to have the right expertise and make a commitment to talk to the right stakeholders," Scarbrough said. "We're building our team and listening carefully to our customers because we know even a small difference in contract specifications can mean the difference between a product that attracts liquidity and one that withers on the vine. Even when you get things right, some contracts still will take years to mature -- but we feel strongly we're on the right side of this long-term trend in sustainable finance and committed to making the standardized risk-management products that the market needs."
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