Companies that create and sell carbon credits are considering options from public listings to the business model used by the precious metals industry to attract investment to the market.
Credits, each of which are supposed to represent a tonne of carbon avoided or removed from the atmosphere and are generated by environmental projects such as tree planting, can be bought by companies to offset emissions.
In early December, London-listed investment group Foresight Sustainable Forestry Company, which is developing carbon credit projects, became the first to receive the London Stock Exchange’s new “voluntary carbon market” label — in reference to offsets bought voluntarily rather than to meet legal emissions targets.
Funds and companies can list in London using this designation, raising money to fund carbon removal projects, and providing investors with carbon credits or cash dividends derived from the sale of credits. The LSE is in talks with various groups about listing in London using its new label.
As well as trading and using carbon credits, some investors want more long-term involvement in the market, while carbon credit project developers are turning to capital markets to help finance new offsetting schemes.
The business model used by parts of the mining industry is attractive for specialist investors that want to gain long-term exposure to carbon credits without having to directly manage projects, which are governed by complicated rules and are often located in remote places.
Under the model, companies provide upfront funding for projects in return for the right to purchase precious metals, or carbon credits, in future at a favourable price.
Jo Anderson, director of credit project developer Carbon Tanzania, said many new entrants to the carbon market were looking to secure a long-term supply of credits that could be used as “an asset base for a stock market IPO”.
The market for voluntary carbon credits is still small — it was worth $2bn in 2021 — but is starting to attract large financial institutions. In September, insurance broker Marsh announced that US clients could pay some fees with carbon credits, transferring them to Bank of America, which then pays the cash value of the credits to Marsh.
Stewart MacDonald, co-founder of investment manager Natural Carbon Capital, said he was aiming to raise £150mn or more for a London-listed fund that would provide upfront capital to carbon credits projects in return for a pre-agreed share of the offsets that it would then sell.
MacDonald said he expected that by 2030 the fund would have received more than 20mn credits, and hoped it would “expand to a $1bn-plus fund”.
Interest in investing directly in projects that generate carbon credits has grown alongside concerns about supply. “There is a widely forecast shortage in the supply of voluntary carbon credits as soon as 2028,” said Richard Kelly, a managing director of Foresight Group, an investment fund that manages Foresight Sustainable Forestry Company.
Numerous carbon credit groups have outlined plans that would significantly increase the pipeline of credits. Canada-listed Carbon Streaming — which provides cash for projects in exchange for the right to sell the credits and take a cut of the revenues — said it was in talks with developers about investments worth up to $1bn in about 100 projects over several years.
The company said it expected to be receiving 20mn credits a year by the end of this decade. An average of almost 150mn credits a year were generated by all projects globally between 2016 and 2021, according to the Berkeley Carbon Trading Project, which tracks the market.
Businesses looking to increase the long-term pipeline include Green 14, a joint venture between investment banking group Bacchus Capital and conservation organisation Space for Giants. The group said it was hoping to raise hundreds of millions of dollars to fund the development and operation of 20 or more projects in Africa.
“We estimate we’ve got about 100mn tonnes of credits we can bring to the market over the next 25 years,” said Max Graham, chief executive of Space for Giants.
However, the market remains lightly regulated and fragmented. Credit rating agency BeZero warned of the risk that carbon credit projects may underdeliver: it found that 20 per cent of 208 projects it tracked had issued less than half of the credits the developers had forecast issuing in total. The median issuance was 80 per cent of the forecast credits.
Organisations, such as Verra, that provide carbon offset accreditation are also inundated with applications. That has created a backlog and delayed the approval of new projects and the issuance of credits, according to Verra.
Meanwhile, efforts to secure land to develop carbon credit projects have created tensions in some places, including the Brazilian Amazon.
MacDonald said plans to list a fund this year had been thrown off track by the economic downturn, and the group was now waiting for IPO conditions to improve. The team was in talks with a potential “cornerstone investor” that had experience in commodity trading, he added.
If capital markets have been less volatile this year, said Justin Cochrane, chief executive of Carbon Streaming, “I think you would have seen much bigger entry into market [by financial institutions] . . . As you look out the next three to five years there’s going to be a material shift: more capital [coming] into this [industry].”
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