Voluntary carbon market: supporting direct investment on the path to net zero

By: Julia Hoggett - CEO, London Stock Exchange plc

I always say that capital markets exist to bring together those who have capital with those who need capital in service of an objective. There can be no more pressing objective in our lifetimes than the just transition to net zero. To mobilise the financing needed to get there, we cannot presume that we can just keep doing the same things we have been doing. We need to innovate, and we need to find ways of encouraging capital flows to move down a different path.

One such change is the evolution of the voluntary carbon markets, which are becoming an increasingly crucial tool to finance a rapid reduction in global emissions. They are also a way for companies to augment their own direct action in their supply chains and production processes with investment that further supports climate action. First and foremost, companies must act to directly reduce their own emissions, but we must recognise that the strategies for the final few miles may not be directly available to them yet. voluntary carbon credits that are high quality, trusted and transparent can address this gap.

Creation of the London Stock Exchange’s Voluntary Carbon Market

At the COP26 climate conference last November, we announced the intention to develop a new market offering to support publicly traded carbon funds focused on investing in climate mitigation projects. Our focus is on solving the foundational problem first, that of increasing the supply of quality credits worldwide. The consequence of this will be to increase the flow of financing into projects that will directly act to reduce the carbon in our atmosphere. To do so, we are providing the relevant market infrastructure and rules to support the listing of designated funds on the London Stock Exchange. 

In many ways, we are already too late. Arguably, we should have been building a scaled voluntary carbon market many years ago. To make up for lost time, we deliberately chose to convene industry experts to discuss how best to design the rules for this designation – rather that designing it in a conference room ourselves.

The consultation is the output of that engagement and provides the market with its first view of the rules. We believe we all have to work together to address this problem and we therefore seek everyone’s engagement with our proposal to maximise the efficacy of the market. Ultimately, the objective is to provide the best environment for capital to be directed into projects helping to reduce the level of carbon in our atmosphere. In all the minutiae of rule-sets, we must never lose sight of this purpose.

A proven mechanism for climate impact

Voluntary carbon markets are one mechanism to help companies manage currently unavoidable and residual carbon emissions in parallel to their own direct decarbonisation strategies. Each carbon credit represents one tonne of CO2 reduced or removed, which has been independently verified against robust accounting methodologies. It is important to outline what voluntary carbon credit projects do. They must be genuinely additive: in other words, they cannot be projects that are economically viable on a standalone basis without the value of the voluntary carbon credit. They would therefore be extremely unlikely to garner the investment required without the large-scale financing that a market like ours can provide. In addition, these projects often provide social and environmental co-benefits to the communities in which they are developed.

Voluntary carbon markets, as we have said, are not a substitute for individual organisations undertaking the ‘hard yards’ of directly decarbonising their production processes and supply chains, but a valuable way of augmenting all of our efforts and speeding our path to the transition to a low carbon economy.

The voluntary carbon market ecosystem has evolved rapidly over the last 20 years and features credible standards bodies, supported by international NGOs, and is now used by both the private-sector and public-sector to finance climate mitigation projects. However, the market remains illiquid, fragmented and opaque. This affects confidence and as a result has limited the level of participation by the corporates and investors that will enable it to scale and deliver to its full potential. We believe that the discipline and transparency of public markets can help to address this.  With this consultation, we are going a step further and marrying current and evolving voluntary carbon credit standards to those of tried-and-tested public markets. The transparency, regulatory scrutiny and ease of access that public markets provide, will bring much needed trust and scale into the voluntary carbon markets.

How it will work

The London Stock Exchange’s Voluntary Carbon Market will be a designation for closed-ended investment funds that are listed or admitted to the Exchange’s markets. It will enable investors and market participants to readily identify those funds which have committed to invest in carbon credit projects that meet internationally recognised standards.

Whilst the designation is not intended to denote assurance on matters such as the fund’s investment strategy or its successful implementation, it is expected that the existing UK regulation of public markets, which includes disclosure, governance, and protections against market abuse, will provide a robust framework to maintain integrity.

Just the start

At present, the London Stock Exchange has the broadest range of markets focused on climate change of any global stock exchange and we regard our Voluntary Carbon Market as a natural extension to our offering.

Since announcing our intention, we have seen significant interest in our plans from across the market and have had extremely productive discussions with corporates and investors, fund managers and project developers. In doing so, we listened to the needs of the market and responded with a solution built in partnership with market participants. We hope the publication of our rules will provide a framework to support the scaling of voluntary carbon markets.

We are pleased to take the next step towards achieving this by commencing a market consultation and welcome your feedback in helping us shape the London Stock Exchange’s Voluntary Carbon Market.

There is so much at stake, we must get this right.

Julia Hoggett

Julia Hoggett

CEO, London Stock Exchange plc

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