LSEG Insights

Infrastructure, integrity and innovation: how to bring the voluntary carbon market to scale

Adrian Rimmer

Director, Sustainable Finance & Investment, Capital Markets, LSEG

The voluntary carbon market (VCM) can play an important role in delivering a net zero global economy. It can enable companies to compensate for ongoing greenhouse gas emissions as they decarbonise and provide a vital source of finance for climate projects and technologies that avoid, reduce or remove emissions and require carbon credit income to make them commercially viable.

But to meet this potential, the market needs to scale. It faces challenges in both supply and demand: while the market’s potential is high, it is currently small, lacks investment-grade infrastructure and is poorly understood by investors. This makes it difficult for carbon credit project developers to raise finance.

Meanwhile, the corporate buyers of carbon credits struggle to navigate a complex, unregulated secondary marketplace with opaque and volatile pricing, or face the prospect of taking high and concentrated risks that are outside their core expertise, by investing directly into projects.

To help address these challenges, LSEG has launched a series of solutions that can reduce barriers to engagement from buyers and investors. We are working with partners across the finance and corporate sectors that are committed to supporting market integrity and development. As a trusted provider of financial market infrastructure, we can deliver the tools and services to make the market more accessible, enable due diligence and bring public markets governance to this growing asset class.

The scale of the challenge – and opportunity

Market commentators anticipate enormous growth in the VCM. In 2022, the total traded value was around £2 billion, according to data from LSEG Commodity Research. A recent report from Barclays estimated that the market could grow to some $250 billion by 2030, and $1.5 trillion by 2050. A few years ago, launching a task force charged with scaling the voluntary carbon markets, former Bank of England Governor Mark Carney called for a “$50-100 billion per annum market” as an “imperative” to help reduce emissions.  

It is clear that the market has significant potential for growth. There is enormous demand from companies for carbon credits to help them compensate for their emissions on their pathways to net zero, supported by frameworks and calls to action from, among others, Oxford University (the Oxford Principles) and the Science Based Targets initiative (Beyond Value Chain Mitigation). And there is no shortage of projects and countries around the world seeking finance in order to deliver emission reductions and carbon credits.

Buyers face challenges

Large and small companies around the world are active buyers of voluntary carbon credits. Some are seeking to compensate for all of their emissions on their pathway to net zero. Others are seeking to offset smaller percentages of their emissions, in line with the Voluntary Carbon Markets Initiative Claims Code. Many of these buyers, however, have only purchased a fraction of their likely need. And, for every buyer active in the market, there are dozens who remain on the sidelines.

There are three main factors holding buyers back. The first is the long-term nature of carbon offset commitments, and the challenges companies face in securing a long-term credit supply at a known and affordable price. Most companies are on a multi-decade transition towards net zero. Pricing in the voluntary carbon market tends to be volatile, with limited liquidity and few tools to manage and hedge purchases over the long-term.

The second challenge is understanding what they are buying and how best to procure. Given the VCM’s lack of regulation to date, there are legitimate questions about the monitoring and measurement of emissions reductions delivered by some types of projects. There are reputable market standards in place, but these are not always easy to navigate. Companies are justifiably concerned about the reputational exposure – not to mention the financial impact – from buying carbon credits that subsequently face scrutiny.

The third is the evolving regulatory landscape. Many buyers anticipate that they might, in future, be increasingly expected by regulators to offset their emissions, or that expectations about the types of offsets that are acceptable might change. They are concerned that their requirements may evolve, necessitating changes to their offset portfolios.

A new solution for market access and investment

The Voluntary Carbon Market designation, launched in 2022 by LSEG, goes a long way towards addressing these issues. Companies or investment funds that intend to invest in climate mitigation projects that yield carbon credits can list on the London Stock Exchange and apply for the VCM Designation, which increases visibility and awareness to institutional and corporate investors in return for following a specific set of admission and disclosure standards.

Developed in close consultation with corporate buyers, project developers and civil society, the designation requires the listed entity to adhere to defined eligibility criteria such as: the types of activity and standards bodies that will generate credits; demonstrating relevant expertise and risk management; ongoing disclosures relating to the projects they are financing; and evidencing claims around wider sustainable development impacts.

Funds and companies with the VCM designation can offer investors a dividend of carbon credits, as well as, or instead of, a financial dividend. This opens the investor universe to those that want access to the underlying credits to meet their offsetting commitments. For those seeking capital, it offers the potential to attract an investor base that may help to ‘crowd-in’ institutional and impact investors.  A listing on the Exchange enables raising further capital via the public markets as new acquisitions for the portfolio are pursued.

For corporates, a listed equity vehicle provides an innovative new way of accessing carbon credits that offers a number of unique benefits: investment opportunities in projects managed by experts, oversight by the independent board of directors, combined with regulatory oversight and secondary market liquidity in equity shares that enables corporates to adjust holdings according to their evolving needs. It locks in an anticipated stream of credits and provides a way to hold future carbon assets on balance sheet with a daily value via the equity vehicle and its share price. This supports the desire of corporates to move procurement and management of carbon exposure to their treasury and finance teams.

The benefits of LSEG’s VCM designation to both buyers and sellers is one of the reasons that Mizuho and LSEG have agreed to collaborate to support growth in the carbon credit market as part of their wider strategic partnership, which includes a focus on sustainable finance and investment.

Mizuho and LSEG recently announced that they will work together to increase access to the London Stock Exchange’s Voluntary Carbon Market for Mizuho clients through listed investment funds and companies that have been, or are due to be, listed with the VCM designation. Additionally, Mizuho and LSEG will engage in associated activities such as providing market information to Mizuho clients.

Convergence between the voluntary, international policy and compliance markets

There remains a lack of clarity about if and how voluntary markets will dovetail with regulated and policy-driven markets, including those created under Article 6 of the Paris Agreement. This will allow for the international trading of emission reductions but remains a work in progress after countries were unable to reach an agreement at COP28 last December.

However, as key jurisdictions put in place carbon pricing policies, many are using VCM standards and credits. This is happening in emerging markets, such as Brazil, Indonesia and South Africa, and developed economies that are piloting international trading, such as Japan and Switzerland.

This is one of the reasons why LSEG’s global carbon research team, which covers all of the major global compliance markets, also provides dedicated VCM coverage. Similarly, we are creating a significant carbon credit data pool, with analytical tools that allow LSEG Workspace users to deep-dive into the details of project and credit supply.

We see convergence underway between the voluntary and compliance markets in ways that will benefit both. Our capital raising capabilities for VCM-designated companies and funds, research and data tools all play a role here, helping to bridge the gap between net-zero aimed policies and the ambition of companies seeking to mitigate climate risk of their investment case as quickly as possible.

Read more about

Stay updated

Subscribe to an email recap from:

Legal Disclaimer

Republication or redistribution of LSE Group content is prohibited without our prior written consent. 

The content of this publication is for informational purposes only and has no legal effect, does not form part of any contract, does not, and does not seek to constitute advice of any nature and no reliance should be placed upon statements contained herein. Whilst reasonable efforts have been taken to ensure that the contents of this publication are accurate and reliable, LSE Group does not guarantee that this document is free from errors or omissions; therefore, you may not rely upon the content of this document under any circumstances and you should seek your own independent legal, investment, tax and other advice. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon.

Copyright © 2024 London Stock Exchange Group. All rights reserved.