Nature-Based Climate Solutions and the LSE Voluntary Carbon Market

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Climatologists now believe there is a 50% chance that the Earth’s average temperature will exceed 1.5 degrees Celsius above pre-industrial levels within the next 5 years. The Green Finance Institute estimates that the funding gap to meet the UK’s nature-related targets is at least £5.6 billion a year. Nature in the form of reforestation projects, seagrass meadows and kelp forests provides a nature-based solution to the emissions we generate in the form of natural carbon sequestration.

Various initiatives and organizations have highlighted the need to channel private capital into large-scale, high-integrity carbon removal projects, such as the Integrity Council for the Voluntary Carbon Market, the Green Finance Institute, and the Working Group on Scaling Voluntary Carbon Markets, led by Mark Carney, among others.

This amid an exponential increase in investor demand to deploy capital into climate and nature positive solutions, via carbon credits and impact funds, but there have been barriers to entry. . One such barrier has been the lack of a single, consistent framework to ensure market integrity across a range of carbon credit products. There remains a patchwork of insurers for the credits themselves.

On October 10, the London Stock Exchange issued a Market Notice along with a revised version of its Listing and Disclosure Standards which have been updated to include their Voluntary Carbon Market Standards.

Why did the London Stock Exchange create a voluntary carbon market?

The LSE has an important role to play in the decarbonisation of the global economy and recognizes that the regulatory framework for public procurement can be an invaluable tool for ensuring transparency through disclosure. The LSE sees its role as providing market access for businesses and investors, as well as allowing finance to flow into projects that help alleviate the climate crisis.

What is the voluntary carbon market?

This is a designation that can be requested by funds or operating companies that are admitted to the Main Market or AIM and are planning to invest in climate change mitigation projects (directly or indirectly) and should produce carbon credits.

What is it not?

  • It is not an exchange whereby carbon credits themselves can be traded (which many have requested), but eligible issuers can issue carbon credits as a cash dividend and sell the credits to companies for they use them as part of their net zero strategy. who will remove them from the register concerned.
  • There is no guarantee that the fund or operating company will produce carbon credits or that the fund or operating company will retain its designation.
  • Beyond the expected carbon sequestration, no other impact measures or data are to be reported to investors (for example, additional social, biodiversity or environmental benefits that could be granted to local communities).

Are there any other requirements?

Yes, the fund or operating company will only be permitted to obtain designation if the strategy and approach complies with Schedule 8 of the LSE’s Eligibility and Disclosure Standards, which only apply to the Voluntary Carbon Market designation.

The issuer must, as part of its investment policy (or by other means), adopt a transparent carbon credit policy setting out its intentions with regard to the resale of carbon credits and/or the distribution of credits to shareholders. The issuer must also disclose the minimum percentage of its gross assets to be invested in proposed and eligible projects and notify the market of changes thereto. There is no fixed percentage requirement yet, although this has been discussed in the LSE commentary.

Funds and companies must disclose the qualifying body whose standards their proposed projects seek to meet, as well as how much carbon is expected to be sequestered and whether the projects are expected to meet any of the United Nations Sustainable Development Goals .

Where an eligible issuer intends to withdraw credits on behalf of shareholders, it must be registered with a registry maintained in the name of a qualified organization that records registered projects and tracks the ownership and withdrawal of credits ( to ensure credits are only used once).

A qualifying issuer must have commenced investing in or financing a qualifying project within two years of receiving designation and there are various other ongoing disclosure requirements, such as maintaining information on a website.

Further requirements are set out in Schedule 8 of the Admissions and Disclosure Standards.

What registers, projects and qualification bodies will be included?

Eligible projects must be independently certified and listed by a qualified body.

Qualifying bodies will be determined by a voluntary carbon industry body, the International Carbon Reduction & Offset Alliance (“ICROA”) and the Integrity Council for Voluntary Carbon Markets (“ICVCM”). ICROA currently endorses a range of standard setters/registries, such as the UK Woodland Carbon Code, Gold Standard, Verified Carbon Standard and American Carbon Registry.

We expect the list of qualified organizations to expand over time to include other organizations, such as the Bog Code.

What will investors remember?

Investors will hold shares of the issuer with the voluntary carbon market designation (these shares may be continuously traded) and may subsequently receive carbon credits as an in-kind dividend to investors or, in some cases, receive a cash dividend.

Are general market concerns about additionality, permanence and leakage taken into account?

These risks have been identified and noted in Appendix 8 of the Revised Admissions and Disclosure Standards along with other risks. ICROA, IVCCM as qualifying bodies are expected to periodically review issues of additionality (or lack of additionality), permanence (or lack of additionality) and potential leakage .

Entities investing in a nominated issuer on voluntary carbon markets should review their own specific additionality, permanence and leakage requirements and ensure that they are satisfied that the underlying credits can meet these requirements, in particular when they pursue a scientific objective.

Who will invest in eligible issuers with a voluntary carbon market designation?

Entities seeking to offset unavoidable residual emissions pursuing a carbon reduction or net zero goal can invest in issuers that pursue a cash distribution strategy, where investors receive a carbon credit that they can withdraw from their residual emissions inevitable.

Speculative carbon credit traders are also expected to invest in issuers with voluntary carbon market designation with the intention of holding and subsequently trading the credits as the price of carbon rises. Given the approach of intermediate objectives that many companies and funds have set themselves, the demand for loans should increase.

What is the link with natural capital and nature-based solutions (“NBS”)?

The underlying projects will be a mix of NBS projects and technology solutions.

Emitters will provide a means to allocate capital to natural carbon sequestration projects. For example, the UK Woodland Carbon Code is endorsed by ICROA and UK-based projects independently certified by them would qualify as projects under the definitions set out in Annex 8. This could have a range of effects positive, such as expected carbon sequestration, biodiversity gains, potential water supply benefits, welfare and (if financially successful) pave the way for additional capital flows to other positive solutions for nature using private capital. Much of this may depend on the financial success of projects and the rising price of carbon credits.

This designation specifically covers the carbon sequestration aspect of NBS and does not attempt to provide support for scaling other aspects of NBS, such as biodiversity credits and nutrient credits, for which attendance is compulsory and based in the UK.

This represents an important step in scaling voluntary carbon markets, steering institutional capital flows towards positive climate outcomes and bringing together some of the currently disparate carbon credit registries. Provided issuers adopt high standards of integrity (as expected), this should over time build confidence in a relatively new and important asset class for investors.

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