Mar 20, 2023 · 1h 4m · capital-allocators
Colin Campbell – The Case for Environmental Markets (Climate Solutions EP.3, Capital Allocators EP.302)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Colin Campbell, partner and co-head of Partnership Strategies at Bain Capital, exploring the structural mechanics, asymmetric return profiles, and portfolio implementation strategies across global compliance and voluntary carbon markets.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 20% of the talking time here. How this is scored →
Ted as informed peer 4.3 Guest teaching 5.6 Guest disagreement 0.0 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 50:04 Acknowledgment of flawed voluntary offset market projects
In a uniformly collaborative episode, Colin candidly concedes the legitimacy issues raised by journalists, noting bad news is earned when dubious projects undermine credibility.
Hardest push from Ted ▶ 37:07 Ted challenges state boundary leakage in cap-and-tradeTed presses on the jurisdictional flaw of state-by-state regulation when emissions cross borders, pushing Colin to explain specific import adjustment rules.
Biggest teaching moment ▶ 27:18 Colin explains statutory price floor escalationColin provides a masterclass on how California CCA price guardrails create asymmetric upside through a mandatory 5% plus CPI annual escalation floor.
Ted holds their own ▶ 4:15 Ted articulates the structural problems with ESG nomenclatureTed demonstrates deep institutional knowledge by summarizing his published framework on how muddy benchmarks and conflicting ESG definitions necessitated a refocus on tangible climate solutions.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Climate Solutions Series Overview and Guest Colin Campbell | 5 | 0 | 0 | 0 | Ted introduces the Climate Solutions miniseries as a monologue, contextualizing the limitations and ambiguities of ESG before framing environmental markets. | |
| Capital Allocators Team Expansion and Hiring Announcement | 3 | 1 | 0 | 0 | Ted makes a brief hiring announcement for Capital Allocators before welcoming Colin, who shares his background transitioning from pre-law to Disney and Bain Capital. | |
| Transition to Managing Bain Capital's Partner Capital | 4 | 4 | 0 | 0 | Ted asks how Colin shifted from public equity stock picking to managing partner capital. Colin explains the mandate to diversify away from the heavy equity beta of Bain partners. | |
| Implementation Evolution: From LP Allocations to Direct Execution | 5 | 5 | 0 | 0 | Ted explores how fundamental equity research translates to manager evaluation. Colin details the progression from LP fund commitments to co-investments and direct execution. | |
| Targeting Niche, Nascent, and Uncorrelated Strategies | 4 | 6 | 0 | 0 | Ted asks about diversifying strategies. Colin outlines non-directional trading, niche markets like healthcare royalties and reinsurance, and the discovery of environmental markets. | |
| Discovering Environmental Markets and the Core Thesis | 4 | 7 | 0 | 0 | Ted asks how Colin originated the environmental thesis. Colin lays out a three-part thesis: global climate focus, the inflection from surplus to deficit, and growing allocator participation. | |
| Understanding Compliance Carbon Markets and Cap-and-Trade Systems | 4 | 8 | 0 | 0 | Colin gives a detailed breakdown of compliance markets like California CCAs and European EUAs, walking Ted through cap-and-trade mechanics and mandatory corporate compliance. | |
| Emissions Measurement Precision and Emitter Adoption | 5 | 6 | 0 | 0 | Ted presses on the precision of emissions accounting and whether emitters resist. Colin explains that measurement rules are standardized and emitter resistance has transitioned into compliance acceptance. | |
| Compliance Penalties, Shortages, and Statutory Price Guardrails | 4 | 7 | 0 | 0 | Ted asks what happens when emitters exceed allowances. Colin outlines compliance cycles, non-compliance penalties, and statutory price floor escalators (CPI + 5%) and ceilings. | |
| Investment Instruments, Physical Futures, and Market Scale | 4 | 6 | 0 | 0 | Ted inquires about investable instruments and market scale. Colin contrasts physical allowances and physically settled futures contracts across EUA and CCA markets. | |
| Volatility Characteristics, Skew, and Uncorrelated Return Profile | 5 | 6 | 0 | 0 | Ted probes short-term volatility versus long-term returns. Colin notes annualized volatility is comparable to single stocks (around 30s) but offers favorable Sortino and Sharpe ratios. | |
| Sponsor Message: Ridgeline Modern Investment Platform | 5 | 7 | 0 | 1 | Following a sponsor break, Ted raises the structural challenge of cross-border emissions leakage. Colin explains how regulatory designs explicitly tax power imports. | |
| Introduction to the Voluntary Carbon Market and Offsets | 4 | 7 | 0 | 0 | Colin contrasts voluntary offsets with compliance systems, breaking down removal versus avoidance credits and explaining why the lack of regulation creates a wild west dynamic. | |
| Market Decentralization, Registries, and Exchange Challenges | 4 | 7 | 0 | 0 | Ted asks about centralized exchanges. Colin explains that OTC bilateral trading dominates because offsets are highly heterogeneous compared to standardized compliance permits. | |
| Risk-Return Dynamics, Greenfield Development, and Impact | 4 | 6 | 0 | 0 | Ted asks about risk-return profiles in voluntary markets. Colin distinguishes between buying existing verified credits and funding greenfield reforestation developments. | |
| Navigating Media Scrutiny and Quality Diligence in Offsets | 5 | 6 | 0 | 0 | Ted asks about investigative media coverage on bogus offsets. Colin acknowledges quality variance, citing Guardian and John Oliver exposés, and stresses deep diligence. | |
| Portfolio Construction and Active Selection in Carbon Markets | 4 | 6 | 0 | 0 | Ted asks how to construct an environmental portfolio. Colin argues against a passive beta approach, advocating active cherry-picking across select compliance and voluntary markets. | |
| Operational Infrastructure, Regulatory Accounts, and Futures Access | 4 | 6 | 0 | 0 | Ted asks about operational barriers to entry. Colin outlines regulatory accounts, FCM broker relationships, and CFTC compliance required to trade directly versus fund investments. |
Statements from this episode (25)
Bain Capital Formed Partner Capital Group Around 2008 Financial Crisis
“And after doing that for about a decade, the firm was looking to start a new group in order to find investment opportunities for the personal capital of the partners at the firm. And I was invited to throw my hat in the ring for that opportunity. This was righ…”
Campbell: Bain Capital Internal Fund Focused on Uncorrelated Non-Equity Strategies
“We were all heavily, heavily exposed to equity risk, so it was no surprise that a lot of what we were craving was investments that are diversifying from equity risk, so strategies that are more in the absolute return and uncorrelated buckets, so either explici…”
Campbell: Manager selection relies on the same core process as stock picking
“When I moved over from stock picking to allocating, it ended up being quite a bit more similar than I thought, in the sense of, at the end of the day, you're interviewing teams about what they do in their day job, and then conducting research to try and build …”
Campbell: Healthcare royalty investors grew from single digits to dozens
“So over time that's included things like investing in healthcare royalties, which when we first started looking at it, there were a single digit number of investors and partners in that market. These days there's, you know, many dozens”
Campbell: Environmental markets lack institutional capital to reach fair value
“More recently, we've come across environmental markets in the last five years, which we think is another example of one of these nascent markets where there is not significant capital yet and move those markets to what we think is, is fair value as an example.”
Environmental commodity markets will face shortages and price inflections by mid-2020s
“And in the window of time we're in now, sort of mid decade, 20 twenties, we are likely to be flipping into an environment where we're going to be in shortage of many of these instruments. And that's likely to cause a significant price inflection.”
Oil companies' resistance to compliance carbon programs has sharply declined
“And while there was resistance, 10 and 15 and 20 years ago, you know, where you would see oil companies lobbying against these sorts of programs, what you've seen in the last half decade is More and more of them see the writing on the wall. They realize we're …”
Campbell: Bain Capital waited for emitter acceptance before entering carbon markets
“And again, back to our investment thesis, that's part of what we've been waiting for is seeing a point where even those entities being regulated are going, you know what, it's just the right thing for us to do.”
California's cap-and-trade program has achieved 100% emitter compliance to date
“In the program's History to date, there has been a hundred percent compliance as far as we know with this program, and that in part has been not that big of a lift for the emitters because the prices have been low, relatively low historically.”
Government-mandated price floors create positively skewed compliance carbon market investments
“The governments are often regulating price minimums and even escalating price minimums, which can create unique and interesting and positively skewed investment opportunities for investors.”
Campbell: The EU Allowance market is the world's largest compliance carbon market
“The largest compliance market in the world is the EUA market.”
California carbon futures trade tens of billions despite smaller underlying permit markets
“In California, the annual trading volume of the futures is in the tens of billions of dollars and even smaller Commodity market. And the underlying permits in California is single digit billions of dollars.”
Campbell: Compliance carbon prices will rise as permit shortages manifest
“So we see the size of these markets and the compliance side growing the volumes of actual permits come down over time, but we believe price will be growing as the shortages that we expect to take place. Start to manifest themselves in different markets.”
Campbell: Compliance carbon market returns are fundamentally uncorrelated with equities
“The more important time horizon that we use is focusing on the medium and long-term of what will drive prices in these markets, and that's the fundamentals of each of these individual markets, the supply, the demand, the regulatory changes that are occurring, …”
Compliance carbon instruments experience 30% annualized volatility, resembling single-stock equities
“If you look statistically at the annualized volatility of some of these instruments, I would think of it as, you know, while these are commodities, it's something like a modestly volatile single stock equity. So you're looking at annualized vol that could be i…”
California's compliance carbon market price floor escalates at 5% plus CPI annually
“The California market had very low volatility because for most of the last decade, the price was at the regulatory price floor where it basically the auction prices couldn't go down. The futures were trading right around this price floor. So you saw it really …”
Campbell: Investors must be wary of unstructured voluntary carbon markets
“So what we have seen is a very, very disparate set of opportunities in the voluntary markets, many of which are interesting, but many of which are also not interesting, both as actually doing good in the world, as well as an investment opportunities. And like …”
Campbell: Voluntary Carbon Market Operates Exclusively OTC Without Centralized Exchanges
“On the voluntary side, the answer is no, not yet. And there may never be, just given the natural decentralization of what this Market is we're using the word market to imply that there is one, but the reality is it's very much over the counter bilateral type r…”
Extreme heterogeneity among voluntary carbon offsets makes standardizing exchange-traded products highly unlikely
“In light of the underlying heterogeneity of different voluntary carbon offsets that are associated with many, many different projects in many, many different countries, it's very hard to have a standardized exchange traded standard That really captures all of …”
Campbell: Voluntary Carbon Markets Will Grow Substantially Over Next Decade
“And we do think over the next decade, the voluntary markets can be quite substantial. Because of the ubiquity of carbon emissions, it's just everywhere. So we think as more and more of the world actually say, you know what, we're going to start to figure out h…”
Compliance carbon policymakers explicitly designed markets to rely on investor price discovery
“On the compliance side, helping the policy makers achieve their objective of reducing emissions from their emitters by being part of that market and participating in that market, which is explicitly contemplated by the market design in order. They want investo…”
Campbell: Negative press will not derail voluntary carbon market trend
“And the negative news you would think is probably going to make the end users just take more time in assessing what to do and may slow down some of them from pulling triggers quickly. I don't think it significantly alters the secular theme or the trend that's …”
Campbell: Environmental markets reward active market picking over passive beta
“This is very much a sort of market pickers opportunity or sort of a stock pickers type opportunity where you want to cherry pick the markets that are the most interesting at current prices and given the current fundamentals and regulatory regimes.”