Our industry to do list
“The single biggest thing that we can do to help the carbon markets is to help people to know what questions they should be asking”
(Head of Sales, US Fund manager)
To grow demand or to service demand?
Faced with a myriad of industry issues that limit our confidence in and processing efficiency of voluntary carbon credits, it is difficult to know where to begin and which challenges to address first.
Based on our survey, it appears that there are two core action plans. In order to grow demand (and facilitate the entry of the firms that are still standing on the sidelines of the market today), we need to provide greater investor education. In order to service demand (and unlock new, incremental volumes from existing participants), we need to focus on market structure and standardisation.
Education to drive demand
Many respondents cite the need to “stop the bad news” around the voluntary carbon markets at a retail and public level. Today’s markets have many detractors, ranging from those who cite extensive media coverage around greenwashing and fraudulent projects to those who question whether the voluntary carbon markets have any impact at all on preventing further climate change. These issues are a clear problem for commercial banks and investment advisors in particular, who struggle to secure management and customer support in “putting the carbon markets on the agenda”.
The required solutions here are two fold. At a market level, 50% of respondents believe the definition of carbon neutrality as a measurable objective should be the centre of our investor education plan. With regulations such as the European Commission’s Corporate Sustainability Reporting Directive (“CSRD”) due to provide significant transparency on companies sustainability disclosures from January 1st 2024, there should be much less scope for fraudulent or highly subjective disclosures on the part of companies. In turn it will increase pressure on companies to verify and ensure that all of their credits are legitimate and delivering. Transparency will help to remove greenwashing risk and improve the credibility of credits.
At a micro-level, there is also a pressing need to develop firms’ ability to understand, size and manage due diligence risks around voluntary carbon credits. With significantly varying degrees of expertise across the industry today, the structuring and treatment of projects is creating a trend towards personalisation and away from standardisation. Initiatives such as Carbonplace, TSVCM and ICVCM can all play a role in helping firms to educate each other and ensure alignment, instead of divergence.
“We have a massive credibility gap in the market today. When credits are fraught with greenwashing risk and media coverage, there is a very negative perception around (voluntary) carbon credits. We can never stop trying to close this gap”
(COO, Leading Carbon marketplace)
Standards and market structure to unlock incremental volumes
Our survey highlights that the ability to standardise and automate due diligence data and contracts would allow more than 30% of current market participants to double their credit trading activities. This journey has several steps:
“We need to turn voluntary carbon credit pricing from an art-form to a science”
Registries at the heart of the solution
As the guarantors of quality in the voluntary carbon markets, registries have two core levers with which to drive confidence. The first is their traditional strength of project verification and methodology – where evolution continues. But as this survey highlights, the key enabler of buyer confidence and scale lies not in their methodology but in the industry operating model that they underpin.
Registries are seen by two-thirds of the market as being uniquely placed to empower the operational efficiency of credit trading. They alone can drive the standardisation in the products that they hold, in the data that describes them and in the availability of that data across multiple platforms. Through standardisation they can enable automation and connectivity, which accelerates due diligence, increases price transparency and reduces transaction costs. In doing so they can address the fundamental confidence issues that undermine our industry today and help to put the world’s voluntary carbon markets on scalable growth path.
In the same way as securities depositories have facilitated scale and access to liquidity in the world’s listed securities markets, registries today have the power to help over 30% of firms to double their trading volumes today and to help exponentially more players to enter the voluntary carbon markets. Most of all, they have the power to set the standards that the markets will follow.
“Market infrastructures will have to take the lead in growing the carbon markets. Through their policies they will end up setting and enforcing standards by design – for the rest to follow”
