London Stock Exchange’s Voluntary Carbon Market designation

Addressing climate change has become an unprecedented challenge for the financial ecosystem. One of the most pressing priorities is how to finance a ‘just’ transition to net zero.

Carbon markets have the potential to channel capital at scale into climate change mitigation projects and technologies worldwide, that can also deliver wider social and environmental benefits. Robust governance and financial market infrastructure is needed to unlock that potential, increase voluntary action by companies and support the growing adoption of these approaches into policy and markets.

The public markets are uniquely positioned to stimulate the scaling of the global voluntary carbon market through the provision of capital and increased visibility through disclosure. London Stock Exchange launched its Voluntary Carbon Market designation to facilitate financing at scale into projects that mitigate climate change.

The London Stock Exchange’s Voluntary Carbon Market designation (“VCM designation”), seeks to identify funds and operating companies that are admitted to Main Market or AIM and which are investing in climate change mitigation projects that are expected to generate carbon credits. The VCM designation’s eligibility criteria cover a wide range of climate change mitigation activities, such as nature-based carbon sequestration, clean energy access and new climate technologies. The requirements are set out in the Admission and Disclosure Standards.

Funds and operating companies that have obtained the VCM designation can choose to offer shareholders carbon credits as a dividend in-specie. By providing the ability to hold shares that yield carbon credits, the VCM designation creates a new way for eligible companies seeking to offset their emissions on their net-zero journey and need a long-term supply of carbon credits to access the carbon market. It also enables investment exposure for institutional and impact investors to this asset class.

The VCM designation is applied to funds or operating companies (“issuers”) that are admitted to the Main Market or AIM and invest, or intend to invest in climate change mitigation projects that are expected to yield carbon credits. These investments must meet the eligibility criteria and the issuer must meet the disclosure requirements set out in the London Stock Exchange’s Admission and Disclosure Standards.

Eligible issuers may finance projects directly or indirectly (for example through off-take agreements), and can choose to issue carbon credits as a dividend in-specie, retire them on behalf of shareholders, or sell the carbon credits. This can be instead of, or in addition to, a financial dividend. The associated policy, terms and conditions must be made clear to investors. This option provides a solution for corporates seeking access to a long-term supply of carbon credits and for issuers seeking greater access to capital from corporate investors.

To receive the VCM Designation, issuers must invest in eligible projects, demonstrate relevant expertise and make additional disclosures, including the project types, expected carbon credit yield, implementation milestones achieved, and details of any claims relating to the wider environmental and social ‘co-benefits’ of projects such as support for meeting UN Sustainable Development Goals.

Funds or operating companies that have obtained the VCM Designation may invest in or generate revenues from non-voluntary carbon market activities. However, all investments must map to FTSE Russell’s Green Revenues Classification System (Tier 1 and Tier 2 microsectors), which identifies the products and services that contribute to the green economy.