Voluntary Carbon Markets: The Buyers

Ultimately, the world needs to get to net-zero to have a chance to combat the negative effects of global warming. However, decarbonization efforts take time and, for companies in some industries, perhaps it is not entirely possible.

Many countries who have made Paris Agreement commitments to become net-zero by 2050 also have commitments about reducing greenhouse gas emissions (GHG). Similarly, large corporations have also made pledges about reducing their carbon footprint and re-imagining their business processes and supply chains in a more sustainable way. Until a corporation can reach net-zero through their own initiatives and within their own supply chain, financing additional emissions – carbon offsets – are an option.

Currently on the sidelines as buyers, are financial investment bankers. While carbon credits do not yet have the status and transaction capability similar to that of the stock market, with the right systems in place such as accounting, fraud mitigation, and risk assessments to name a few, carbon credits have the potential to be transacted much the way stocks are. In fact, some markets around the world are adding carbon credits, such as the Japanese Stock Market’ J-Credits for trading.

Let’s take a look at large corporations’ and potential financial investment banks’ incentives and needs.

Large Corporations as Carbon Market Buyers

Large corporations may have their own emission reduction initiatives against their business activities and/or those of their suppliers.

However, there are scenarios in which certain types of businesses can’t easily meet their targets and/or certain regulatory requirements and, as such, they turn to credits to make up the differences. Sometimes, companies view making “beyond value chain” investments as it indicates they take environmental action seriously. Some of course, as we have seen in the press, only do it to avoid reputational damage.

In some cases, corporations have experienced negative impacts of climate change or foresee a future where their business will be impacted. Industries that rely on agriculture are a good example. The food and beverage industry would be negatively impacted by prolonged droughts. Forestry and the fishing industry are other examples.

In our article about  carbon credits in agriculture, we pointed to General Mills and Land O’ Lakes as two companies who realize the business impact of climate change and are using carbon credits and investing in other sustainable farming initiatives.

Regardless of their motivation, corporations need to know that their investment in carbon credits are actually removing or reducing CO2 emissions since they are called upon by investors and customers to report their sustainability activities.

Recent reports, including that from The Guardian, have called to question the validity of these carbon credits in actually reducing CO2. The investigation by The Guardian and their investigative partner, point out several VCM failings, all of which can be attributed to data integrity issues and a lack of proper accounting practices to ensure that credits are not double counted and taken off the market when they have ‘expired’.

For the carbon market to maximize its impact, buyers must prioritize quality over price which will eventually increase the overall standards of the carbon credits available in the market.

These same concerns are held by financial investment banks so let’s look at their incentives and needs.

Financial Investment Banks as Potential Carbon Market Buyers

As mentioned earlier, investment bankers see the opportunity to turn carbon credits into an investable asset for themselves and their clients. However, today the infrastructure is not in place – yet – for carbon credits to be easily transacted.

With the right accounting, fraud risk mitigation, and the ability to track performance and ownership throughout the carbon credit’s lifecycle, the carbon credit can have the necessary fiduciary responsibility and accountability.

In addition to sharing the same concern about data integrity and proper accounting practices in the Voluntary Carbon Market, investment bankers want public companies to report on how climate change can negatively impact their business, what efforts they are undertaking to mitigate that risk, the initiatives they have in place to reduce their CO2 emissions toward net-zero, and what steps they are taking today to offset their CO2 footprint. While the EU has implemented new regulations to address this, a similar effort for US companies is currently stalled within the SEC.

Related to reporting, investment bankers need a standardized way to analyze carbon credits as investments and to analyze corporation’s reporting of carbon credit activity.

Much like the financial investment community relies on ISIN (International Securities Identification Number) as a standardized code system for uniquely identifying a security globally for facilitating the clearing, reporting and settlement of trades, they need a similar taxonomy process for carbon credits.

There is a lot investment banks have to consider when watching how the carbon market and  carbon credits evolve. In short, investment bankers want standardization, regulation, and liquidity – exactly what the Voluntary Carbon Market needs. The potential is there and both Laconic and the carbon market industry recognize this opportunity.

Laconic’s Role With Buyers

Laconic saw the need for a technology solution to address the data accuracy and accounting issues of today’s VCM. Our solution is centered upon the Laconic SADAR™ platform and our Natural Capital Monetization product offering, The platform ingests environmental data from a variety of sources, normalizes it and scores it against its robust data pedigree process. Every hectare analyzed within the platform easily shows the environmental data, how recent the data is, how it was collected, and many more variables.

For carbon credit buyers, the platform is a transparent audit trail that tracks carbon credit issuance and expirations. It also tracks additionality of CO2 reduction/removal initiatives so that the carbon credit’s value is constantly updated.

To address the market’s need for a globally harmonized carbon credit identifier that ties carbon stock in a given area to its crediting issuance, Laconic has developed an identifier that uses the Laconic Universal Environmental Identification (LUEI) classification system. This system identifies and classifies all the data related to the carbon stock in a given area of interest and the issuance of a carbon credit and stores it in an immutable database.

Offered as an accessible, instrument master file, and as a single code upon registration/issuance, the master file serves as the high quality or golden record for carbon credit issuance and provides an audit trail that can be used for compliance purposes.

Next, we’ll explore the Supply Chain Providers in the VCM and what their incentives are.