Sustainable Growth Podcast

Boosting transparency with a new voluntary carbon market framework

Episode 9, Season 7

As the first of its kind, what does the future hold for London Stock Exchange’s new Voluntary Carbon Market (VCM) framework, and how does it work? In this episode, we are joined by Richard Kelly, Co-founder of the Foresight Sustainable Forestry Company, and Claire Dorrian, Head of Sustainable Finance for the Capital Markets and Post-Trade Divisions of LSEG. Richard and Claire define what voluntary carbon market designations are, its main objectives, how the credibility of these carbon credits is verified, and what feedback the VCM designation has received. Claire also tells us how funds getting this designation may change in the future, and Richard explains how afforestation portfolios can create these credits and enhance biodiversity in the process.

Host: Jane Goodland, Global Head of Sustainability at LSEG

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  • Jane: [00:00:00] Welcome to the LSEG Sustainable Growth Podcast. I'm your host, Jane Goodland, and in today's episode, we're going to be having a fascinating conversation with Richard Kelly, who is the Co-founder of the Foresight Sustainable Forestry Company, and Claire Dorrian, who heads up sustainable finance for the Capital Markets and Post-Trade Divisions of LSEG and the topic of conversation today is all about the new voluntary carbon market designation, what it's about, what it does, how companies are going to be using it in the future, and the world of carbon credits and forestry. So it's really super interesting. Let's get straight to it.

    Jane: [00:00:40] Well, hello, Claire and Richard. It's so good to be here and be chatting with you and I think that this is going to be a super interesting conversation, because what you're doing here together is super fascinating, and I can't wait to get into it. So, before we get into the meat of the chat, let's just do a bit of intros just so we know who's here. So, Richard, perhaps we can come to you first. Richard, tell us who you are and a little bit about yourself.

    Richard: [00:01:05] Hi there, yes my name’s Richard Kelly. I work for Foresight Group, who are a sustainability lead investment manager. I've been with Foresight for about eight years, and for the last 4 to 5 years, I've been solely focused on natural capital, forestry and afforestation, and I co-founded that investment team within foresight. And in November 2021, I co-founded and now co-run Foresight Sustainable Forestry Company PLC, which is the London Stock Exchange's first natural capital focused investment company, and we invest in a portfolio of forestry and afforestation assets across the UK.

    Jane: [00:01:44] In a little while we'll dig into what that means in practice. But let's hear from Claire Dorrian, please tell us who you are and where you come from.

    Claire: [00:01:51] Thanks, Jane. So I'm Claire Dorrian, I head sustainable finance in our capital markets and post-trade divisions at the London Stock Exchange Group. And really very much responsible for driving our sustainable finance strategy for those divisions, and those are the areas that are focused on the relationships, and with corporate companies in capital markets. And post trade is the clearing business within the group. And we have particularly three big things that we're focused on in our team. One is about how we are evolving and developing our sustainability offering. So the green economy mark and the voluntary carbon market that we're going to talk about today and sustainable bond market. It's also the products and services, how we're going to the provision of data and how we utilize a lot of the fantastic data products and services we have in our wider group for the value of our clients in cap markets and post trade. And then also the policy and engagement and convening role that we have. And that is a big focus when it comes to sustainability because we all know this but a lot happening is of the UK, European and wider global landscape in terms of policy developments that needs a lot of input.

    Jane: [00:03:04] I've got to say I'm a bit kind of in awe of both of you at the moment because both your jobs are just like super cool and I'm sure I'm not alone in thinking about that, so I'm ready to hear more. So we're going to talk today about the voluntary carbon market and I think there's probably lots of perceptions and possibly misconceptions around what this is and what this isn't but the London Stock Exchange launched the voluntary carbon market quite recently. So perhaps before we start trying to understand that a little bit and understand how the Foresights guys come into this. Claire, can you just in a really simple headline way, talk us through what the voluntary carbon market designation is and what's the main objectives that it has?

    Claire: [00:03:53] Sure, yeah, definitely. I could talk about this for a long time, so I will try and keep this as short as possible. But essentially, we see our involvement in the London Stock Exchange Group in the voluntary carbon markets as a natural extension to the work that we're doing already in the group around climate and transition. Really as we have a world where we've got a backdrop of regulation that's happening and changes in TCFD and more climate reporting and transition plans becoming mandatory and more net zero strategies being set by corporates. Now the voluntary carbon markets absolutely has a role to play in that transition and decarbonization strategies that are being set. So we thought that what we could do and participate in this market was to look at not the trading of the carbon credits, which is what naturally people think about when they think of the voluntary carbon markets, but focus on what we do very well as an organization and the London Stock Exchange market is convening the capital and providing access to finance, which can scale because this is really sort of what the voluntary carbon markets needs is more supply of carbon credits into the market to meet that demand that is coming as a by-product of much of the regulatory points that I was just mentioning.

    Jane: [00:05:07] Just so I'm clear about it and everyone else can be. So this is a way to connect companies who might want to use carbon credits as part of their climate transition strategy where they can't reduce their own emissions, with projects that are kicking off carbon credits as a by-product, if you like, of their activity. So it's creating a kind of a bridge to get that flow more efficiently between those two and scaling up finance towards those projects. Is that right?

    Claire: [00:05:37] Yeah, absolutely. I mean, really, it's about using the power of the public markets to scale the voluntary carbon markets. So you've got renewable energy funds that are listed on our market. So what we have done with the designation is a set of admission and disclosures that sit in addition to the listing rules and the admission rules as well that enables the listing of a fund or an operating company, that’s prime focus is about investing in climate mitigation projects that could potentially generate carbon credits in the future. So an investor can purchase into the fund or operating company, own an equity share, and then in time receive potentially a dividend in specie in the form of a carbon credit, or you could take a cash dividend, but then that is the value to the investor is that they have the opportunity to potentially retire a credit and receive that credit in the future, retire it against their emissions, trade it or hold it. But you've also seen the value on the other side, is that actually finance is being channelled from the global north to the global south, where many of these projects take place. So it’s had a key benefit here in terms of scaling and making a difference to the projects that are happening on the ground.

    Jane: [00:06:52] Now Richard, can we come to you because like you so rightly said, Foresight is the first designation on the voluntary carbon market in London, which is super exciting. It's always good to be first. I'm kind of keen to hear more from your side. So you're the project side, right? So just give a bit of extra flavour about what does this look like in practice? What are you actually doing? How are you creating the credits and also, why do you think this works for corporates and companies? Why is this better?

    Richard: [00:07:24] Okay well, maybe just start with what we're doing, first of all. So the fund invests in a mix between 40 and 50% into afforestation assets, and afforestation just refers to where we take bare land, typically sheep grazing land and pasture land in rural parts of Scotland, Wales and Northern England. We acquire it unconsented and then we put it through a development program where we secure planning permission, consents, permits, grants and also register it with the Woodland Carbon Code, which is the issuer of voluntary carbon credits and then we physically plant these sites up with, with literally millions of trees. Our current portfolio of afforestation assets is on track to see about 9 million trees planted over the next 2 to 3 years. And so when we register a scheme with the woodland carbon code, they look at this new forest over the next 100 year time frame and they have a defined methodology about how many tonnes of carbon this new forest will additionally sequester from the atmosphere, and for every tonne, they will issue us with one voluntary carbon credit and upon completion of planting they physically come to the newly planted forest and they verify that what we've planted aligns with what we've applied for. And if to align, they issue us with pending issuance units which recognized the future expected carbon that's going to be sequestered. And then every five years those same independent reviewers come back to the forest, and they then measure how much carbon has actually been sequestered. And there's a conversion of those pending issuance units into verified carbon units. And it's those verified carbon units that can be used by corporates, if they're retired, then they can be used to offset emissions elsewhere in their supply chains.

    Jane: [00:09:05] I've got a couple of questions, in fact, lots. But in terms of the types of trees you plant, obviously there's a bit of a biodiversity angle here, isn't there, in terms of, it's not a case of any old tree will do. So tell me a bit about that. How do you choose what trees you should be planting?

    Richard: [00:14:24] Yeah, so it's a highly bespoke approach. The right mix of trees is dependent on the specific characteristics of the land in question and there's any number of different factors which we consider from aspect, soil types, even landscape considerations close to locally populated areas. But we have a progressive view, and we look to plant a sort of a biodiverse mix of both commercial trees. So Conifers which are harvested every 35 to 40 years, but also Native Broad Leaves which are never harvested. And they're managed and they continue to grow. We get we receive carbon credits for both. And slightly counterintuitively actually we conifers and commercial trees sequester carbon much faster than native broad leaves. And that's because these conifers grow at a fundamentally faster rate. And so we do target a mix, we target a mix of commercial and broad leaves, and we're also planting many rare and endangered trees. At a fund level, we have three targets, we have a financial target, a carbon target, but we also have a biodiversity target. So to protect and enhance the biodiversity across our entire portfolio. And we've planted thousands of critically rare and endangered trees as part of our contribution that we're making to enhance biodiversity across our portfolio.

    Jane: [00:10:40] I think that's like a whole other podcast, isn't it. Talking about the biodiversity metric of a forest because, biodiversity is so topical right now in terms of how you measure it. So yeah, maybe another one, Richard, for another day, because that could take us down a whole different angle. But I mean it's really, really fascinating. And one of the questions I have is, when you buy the land unconsented in the first place, is there ever a chance that you might not get consent for the forest? Presumably it is. And what do you end up doing with that piece of land then?

    Richard: [00:11:13] Before we acquire any piece of land, we do extensive due diligence. So there's sort of two phases to that. The first is a sort of a desktop review where we look at something like 30 different map-based criteria and we're only pursuing opportunities from a desktop view that we believe have a very strong chance of securing consent and being approved for planting. We then always go and physically inspect these sites again before we've even acquired them. And what we're looking to do is verify what's physically there aligns with what our various maps suggest is there, you know, there could be some additional constraints, some archaeology, there could be some sensitive habitat. For example, we may need to revise or revise our designs and revise the price that we're willing to pay the landowner. But yes, this is a development. The afforestation part of our business is development. We're buying the land owned consented. So there is in theory, risk that we would not receive consent. I think the chance of that happening, we're buying sites where we believe there is a very, very low risk of that happening. I think what's more likely is that there could be when after we've acquired the land, we then do further surveys. So birds and mammal surveys, there could be a discovery at that point, which may mean we need to revise the design. And that could mean that we can, you know, we could either increase the level of planting that we'd assumed, or it may only we need to tone it back. So I think the greater risk is that we might lose a proportion of the area that we're going to plant. But I think it's very unlikely or it's a very low risk that any one scheme would completely fail to see any trees planted.

    Jane: [00:12:44] Okay, good phew. So coming to you, Claire now, obviously, we've just heard from Richard about, how kind of rigorous the selection is and how thoughtful the planting is, etcetera. Thinking about those three metrics, it does kind of raise to the surface the question around the credibility of carbon credits. And that's something that's been. Kind of grabbing some headlines in recent times around as we see kind of an increase in the use of offsets and going through the process of bringing the voluntary carbon market to the point where it is now, obviously it's not a case of any credit will do. It really is about kind of making sure that those carbon credits are credible. So how does the London Stock Exchange Voluntary carbon market designation, really make sure that we're going for the best of breed?

    Claire: [00:19:37] Good question. As you say, really topical as well at the moment. And something that came up when we were undergoing our public market consultation. There was a question as to, you know, are we going to, as the London Stock Exchange monitor and verify? But actually importantly, that's not our role. We don't have to opine on that or monitor or verify the projects. There are bodies that are already out there in the marketplace that do that. So there are recognized, reputable industry bodies that set the standards for those projects. So we require what we set out in the emission disclosure standards is to say the issuer of the fund or the operating company needs to apply one of the standards to their projects. And in the case of Richard and Foresight is the UK Woodland Carbon code. And then they need to report against key matters on an annual basis. So, it's the standards that they set out, the methodologies, the due diligence and the verification. And so the advantage really that approach is that the standards are set and they're verified by independent, independent bodies and then the investors can understand the quality of the carbon credit based on those standards that are known in the market. So, for example, what we have said in the emission disclosure standards is that we would recognize funds and companies that are listed that have projects that are recognized by ICROA, which is sort of the umbrella industry. Some of the standard bodies like Fera and Gold Standard and American Carbon Registry will roll up into record recognition under ICROA. And then ICVCM as it becomes online and developed more in the future. So we have some flexibility around that and I think that's important that we're leveraging what's happening already in the marketplace. But then also to your point in terms of confidence in standards, the fact that we're putting this all wrapped around a public market regulatory framework that's got all the admissions protections and processes through the FCA or regulation, it's got disclosure obligations, emission, you've got the market abuse regime and ongoing disclosure obligations. We've leveraging the protection of the existing market framework transparency and disclosure.

    Jane: [00:15:46] Seems like a sensible way to go, right? So I think in short, what we're hearing is that actually there's some really robust standards going on here. So, The London Stock Exchange BCM is applying those best practices standards, which is great. Turning back to you, Richard, why do you think this approach that we're talking about here is perhaps a better version of what's kind of existed previously?

    Richard: [00:16:10] I think if we look at the options that have been available, if you're a corporate and you've made a net zero pledge, the focus is on decarbonizing your activities by 90%. And then for the unbeatable emissions, the final sort of 10% you're looking at, you've really got until now you've had two options. One is to go and do a climate mitigation project yourself. So, for example, if you're a company, you could go and buy some land yourself and then establish your own afforestation scheme as an example. I think the challenge with that for many companies is it's so far removed from their core competency. Many companies wouldn't know the first thing about how to approach that. What's the right part of land? How do you develop it? And also, it's a highly illiquid investment you're tied into for many, many years. So that's one option. The other option is to go and purchase voluntary carbon credits. And I think the challenge with that is that there's no centralized exchange for carbon credits at the current time. You're into bilateral negotiations with landowners, and again, that's a long way from the core competency of many corporates. This is a long way from what they do day to day. And so what this provides is a way for companies to buy shares in a VCM designated investment company. And with FSF, we have given our investors the option to elect to receive voluntary carbon credits, as in specie dividends. And we've confirmed a time frame for when the current portfolio of about a million credits will be distributed. And what that enables these companies to do is firstly, it enables them to secure their supply of voluntary carbon credits. And that is really important because there is a forecast shortage of voluntary carbon credits coming down the line. We've seen a sort of an exponential increase in the number of science-based net zero pledges over the last couple of years and all of the demand that's coming down the track for that means that if you've made a pledge, you may not be able to, as a company source a sufficient number of credits when the time comes. The other component related to that is the cost. Given this shortage of supply that's forecast, the cost of credits is forecast to increase by a staggering number somewhere between a 7-fold and a 31- fold increase in the cost of these credits by 2030. So even if you can get your hands on carbon credits, the cost could be prohibitive.

    Jane: [00:18:27] Yeah, certainly from an LSEG PLC perspective, we've been buyers of carbon credits in the past and continue to do so. And I think that you mentioned kind of some of the characteristics of the existing model. And I certainly think that the price and efficiency elements of this kind of new approach are certainly attractive I'd say from a buyer’s perspective.

    Richard: [00:18:50] Companies will never have certainty about how many credits they will need in the future. And so flexibility is the key. And with the VCM, adjusting your future carbon credit requirements is as easy as buying or selling a share on the London Stock Exchange. And these shares are traded intraday and there's deep pools of liquidity available, and that level of liquidity just has not existed in voluntary carbon markets to date.

    Jane: [00:19:13] I think sometimes it's easy to forget when something's been kind of bubbling along for a while and it's through a consultation and then it launched. It's actually only kind of when you stop and look back and you think, this is really cool, this is something really different.

    Richard: [00:19:28] This is a breakthrough. This is a breakthrough in voluntary carbon markets and our fight against climate change. And just picking up on your point about what the LSE has done around carbon credits, historically for many companies like the LSE, it's a cost. You buy credits and you retire them and that's it. It's a one way cost but actually the VCM has completely turned that upside down. And now companies can invest in VCM designated investment companies, they can receive a supply of voluntary carbon credits with a high degree of certainty of delivery. But in addition, they can generate a positive, attractive, risk adjusted return on their investment. That's underpinned by in our case, it's the capital appreciation that we're able to achieve by converting relatively cheap sheep grazing and pastureland into much more valuable commercial forestry at the same time. So it turns carbon offsetting from a cost into actually a positively contributing way of generating a return, but also securing a supply and hedging away future carbon credit risk in a completely flexible way.

    Jane: [00:20:35] And also in the case of what you're doing, speaks to some of the biodiversity issues and challenges that are also kind of becoming really top of mind for a lot of stakeholders. Loving it, ticking laser boxes. Claire, can we come to you? Because actually one of the things I'm keen to explore is obviously this is really early days and the Foresight of the First organization with the designation. But tell me where this could go in future? So should we expect just more of the same natural capital organizations or what going forward, if this is really successful, what could this look like in terms of the range of designations or the range of companies who are and funds or whatever that are actually getting this designation?

    Claire: [00:21:17] Well you won't be surprised to hear we've got a big vision for this. And I think Richard did a great job then explaining all the value and in kind of the excitement that's behind this because yes, we are the first exchange to approach the scaling of voluntary carbon markets this way. And as Richard said, it has really turned it on its head. It has is bringing much more transparency and disclosure into the market. But I think we also just recognize that this is early, it's innovative, so therefore this is going to take time to develop. But, you know, success, what does success look like? I think really it is about having multiple different funds that are listed on the market that could be sort of a mix of nature based projects. And we have some technology carbon capture projects because we know that the needs of corporates as those investors predominantly into the funds, are changing and evolving. Some of them have chosen to follow nature-based solution projects at the moment, perhaps want to tilt that slightly in the future and might want to be involved in sort of a mix of projects that are in different jurisdictions that are close to where they operate as businesses, or they might have a preference for investing in solar or cookstove or forestry afforestation. So I think blended funds and multiple different funds is really how we would define what success looks like and for it to be something that is a global market offering as well. We're not talking about this just needs to be accessible by UK investors. This is really genuinely a global opportunity.

    Jane: [00:22:51] And probably another one for another podcast. I mean, literally the list keeps on coming. I'd love to explore the extent to which ocean biodiversity could ever find its way into something like this, because I know that's an area with huge potential, but yet, it's almost like we really haven't kind of scratched the surface of that. Like we said, it's early days, but just to wrap up, I'm really keen to hear about what the kind of reception and the feedback has been like from the funds who are looking at a designation, but also from corporates looking at this as a buying opportunity. Tell me what's the mood music so far?

    Claire: [00:23:34] I'll start off, but I know Richard, I know you've got some views there as well. Based on the conversations you've been having with corporates. But I think the mood music is very positive. But what we are doing is making sure that we are connecting all the different parts of sort of the ecosystem here because you've got project developers on the one hand that are more used to working in the voluntary carbon markets, not in the capital markets. You've got the fund managers more used to being in the capital markets, not the voluntary carbon markets. And then you've got investors that are at different stages of their decarbonization strategy and offsetting views. So really, we're trying to make sure that we connect all of these different conversations that are happening to help in building this pipeline and it's looking good for 23, 24, notwithstanding what's happening in a wider macroeconomic view. I think there is genuinely a lot of interest in bringing together the project developers and fund managers, and we've got some pretty positive live conversations that are happening at the moment that I do believe will result in transactions on the market.

    Jane: [00:24:30] And Richard, from your perspective?

    Richard: [00:24:32] We’ve received a huge amount of inbound PR and media interest directly as a result of the VCM designation. So it's given us a fantastic sort of profile boost in terms of conversations we're focused on to two areas talking to sort of climate and net zero consultancies. So these are advisors to companies about how they can achieve net zero. And we've had a fantastic reception with those with those companies. And then we've also been talking to end companies, and these are big blue chip names, household names. And we're having we've got a pipeline of conversations that we've had and we're having with the, it's typically the head of chief sustainability officer ahead of sustainability at these businesses and the reception is, wow, this is brilliant. This really solves a problem. I think the time it will take some time. This is not something that will just overnight result in a flood of inbound investment. I think any decision is part of a consideration of what is this business is overall net zero strategy. And so what we're trying to do is make sure that we're tabling this as an option early in that decision-making process. And then and then we're going through the due diligence process with various companies. So, look, I think it's early days. We're very much in education mode, but we're very excited about the prospects. And I would maybe back it back to the London Stock Exchange and Claire, I know they were considering using the VCM potentially for their own net zero ambitions. And I was keen to ask Claire how that those conversations are going over there.

    Claire: [00:25:59] I think as Jane said we have set our own ambitious net zero targets we offset already. And I think it's something that we recognize as a group is becoming more of a financial function. And it's typically been procured through Jane's team in sustainability. Or when we look at other corporates through their procurement teams or marketing teams. But we're absolutely on it in terms of working out what our emissions requirements would be and the options that we could use. And I think definitely the fund route could be something that we'd want to explore in the future.

    Jane: [00:26:34] I think, Richard, you've kind of got to the point whereby it's like we actually, as the VCM was being crafted, there was lots of conversations internally about, well, would you use it is this something you would use? And the answer is yes, it is. But like you say, it's not kind of just buying carbon credits. It's not sort of equivalent to popping down to the supermarket. You have to think through the ongoing need and then kind of match your investment required. So it's a cycle. So that's why what I would like to do is, if I may, is I'd like to be able to have this conversation or an update conversation in a year's time to see how it's doing and to see kind of how the kind of the range of funds with the designation of grown, but also how, Richard, your trees have grown. I want to hear all about your forests. I would like to come and see your forest at some point as well.

    Richard: [00:27:28] We'd love to have you. We'd love to show you around some of our some of our newly planted forests.

    Jane: [00:27:32] Yeah, that'd be great.

    Claire: [00:27:33] Brilliant. Yeah. Field trip?

    Jane: [00:27:35] Yeah, absolutely. It has been a pleasure talking to both of you. Thank you so much. I feel actually, I've increased my knowledge hugely. I'm excited and actually, dare I say, a little bit proud of what we've managed to bring to the market it's truly innovative. And I just really hope that it kind of grows exponentially from here. So thank you so much. I'll twist your arm and hopefully speak to you in a year's time, and we'll see how it's going. But thank you for your time, and all the best.

    Jane: [00:28:07] So that's it for this week's episode of the LSEG Sustainable Growth Podcast. If you're not already following us, then do give us a follow and rate us on Spotify, Apple Podcasts, or wherever you get yours. If you've got questions, comments, or you want us to talk to someone in particular, then drop us a line at,  see you next time.

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