Industry Voice: The London Stock Exchange's Voluntary Carbon Market - a vital new role for listed investment funds

clock • 5 min read
Industry Voice: The London Stock Exchange's Voluntary Carbon Market - a vital new role for listed investment funds

Over time, we have seen the funds market innovate. Now, they have a renewed role in helping save our planet. The listed fund structure and the disciplines of public markets lie at the heart of the innovative voluntary carbon market being developed by the London Stock Exchange. The global economy needs to reach net zero sooner rather than later, and this new solution accelerates the availability of finance for climate mitigation projects that will support a just transition to a low carbon economy.

The goal of the London Stock Exchange's Voluntary Carbon Market designation is to address two major challenges:

  1. Providing access to capital at scale for new climate mitigation projects worldwide; and
  2. Providing primary market access to a long-term supply of high-quality carbon credits for investors.

In doing so, this development will help companies manage currently unavoidable and residual carbon emissions in parallel to their own direct decarbonisation strategies.

The challenge

There has been a growing need for a solution that can deliver a rigorous, market-based approach for investment in activities that reduce greenhouse gas emissions and remove carbon from our atmosphere. The voluntary carbon market is a proven mechanism for directing capital flows into high-quality climate mitigation projects. Each carbon credit represents one tonne of CO2 (or equivalent greenhouse gas) reduced or removed that has been independently verified against robust accounting methodologies. However, these projects must be genuinely additive and not economically viable without the value of the voluntary carbon credit.

Demand for carbon credits - and the capital required for the projects that will create them - will continue to grow as we progress towards 2050. 62 percent of the FTSE 100 by market capitalisation have already pledged to Race to Zero, aligning to the Paris Agreement's target of limiting warming to 1.5 degrees Celsius and many are likely to look to carbon credits to help manage their unavoidable carbon emissions as they seek to decarbonise their businesses.

The current voluntary carbon market ecosystem, which has evolved over 20 years, features credible standards bodies supported by international NGOs and is used by experts in the private-sector and non-profit companies to finance climate mitigation projects. It remains relatively small and fragmented in comparison to the compliance carbon market. The procurement model has been largely OTC from small entities, and as such, it lacks the market infrastructure and access to institutional investment that will enable it to scale.

And it does need to scale. Voluntary carbon markets are set to become a much more important part of the net-zero transition as companies are increasingly pledging to reach net-zero by mid-century or before (with 2030 as a key milestone), which means they are effectively committing to some sort of carbon offsetting to complement their decarbonisation strategies.

Transforming the way voluntary carbon markets work

The London Stock Exchange's Voluntary Carbon Market aims to help transform the way the voluntary carbon markets work.

Rather than providing a market for the trading of carbon credits, the London Stock Exchange is seeking to provide issuers with capital to direct into high-quality climate mitigation projects to ensure supply meets demand. This will take the form of a designation that will sit in addition to the existing funds markets, with additional rules and disclosure requirements to provide transparency across the voluntary carbon market value chain. Funds provided with the designation will either pay dividends in cash or in specie - in this case, in carbon credits.

These publicly listed funds would be brought within the UK's existing regulatory regime and disclosure standards, including market abuse regulation. Therefore, they would benefit from other structural advantages of listed investment funds - their long-term investment horizons, the presence of an independent board of directors, and intra-day liquidity.

Benefits for companies, investors, and project developers

The London Stock Exchange anticipates that corporates and other investors with long-term needs for carbon credits will be the key investors. By investing in these listed funds, they will be able to augment credible net-zero transition strategies by directly financing new projects to offset unavoidable carbon emissions during their path to net-zero. Companies will be able to access a sustainable and diversified source of carbon credits from projects in a broad range of regions, sectors, and technologies - and with full disclosure on their source.

By combining the governance and rigour of public markets with best practice in carbon markets, this will support and incentivise higher standards and facilitate transparency. In turn, this additional governance will create greater confidence for corporates and institutional investors.

The London Stock Exchange's Voluntary Carbon Market also offers a real opportunity to transform access to capital for project developers, particularly in the Global South where capital flows are currently limited and inconsistent. Additional financing for climate mitigation projects will ultimately give rise to an increased supply of carbon credits while also enhancing the integrity of voluntary carbon markets.

Promoting a disciplined and transparent market

The London Stock Exchange continues to innovate to address the challenge of a rapid reduction in global emissions. This broadening of our cross-asset sustainable finance offering aims to direct capital into climate mitigation projects via publicly listed funds through a disciplined, transparent market. These projects will drive outcomes that benefit everyone on the planet, and we welcome your feedback in helping us deliver.

If you're interested in finding out more, read more about the Voluntary Carbon Markets solution and you can contact the Investment Funds team at [email protected].

This post is funded by London Stock Exchange Group

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