The London Stock Exchange is planning to develop a new market offering to support publicly traded carbon funds focused on investing in climate mitigation projects. This consultation examines the transparency, regulation and requirements for this new market. Sylvera agrees with these priorities and suggests some additional considerations specific to voluntary carbon markets.
Sylvera welcomes the opportunity to submit views on the development of the London Stock Exchange’s Voluntary Carbon Market. We fully support the view that the VCM is an essential component of a smooth, rapid net zero transition, and that the channelling of funds to wider climate change mitigation is an important complement to within-value chain mitigation.
However, there are well documented issues related to the environmental integrity of carbon credits that are undermining the market, even while demand grows significantly as businesses push towards net zero. This leaves buyers exposed to serious reputational risks and limits the climate impact of the market. Currently, the value of any carbon credit is inextricably linked to the viability of the project that issued it, creating a significant dispersion of quality in the offset market. The uncertainty regarding where any single project sits in this dispersion renders credits non-fungible, undermining the liquidity and expansion of the VCM.
Sylvera was founded to address these issues and support scaling of VCMs by improving market transparency and integrity. We produce independent, comprehensive ratings of carbon credits, initially focussed on nature-based projects but rapidly expanding coverage across other project types. These ratings are free from conflicts of interest, as we do not financially benefit from carbon market transactions or receive funding from project developers.
Our ratings are a composite of a comprehensive, bottom-up, factor-based evaluation and, in the case of nature-based projects, a quantitative analysis of the actual biomass change over time, and a re-evaluation of additionality and baselines. Our quantitative analysis is derived from machine learning models which interpret satellite data, allowing us to remotely infer spatially-explicit changes in carbon stocks. These models are trained with high accuracy biomass data, collected using our world leading multiscale lidar methodology. The ongoing development of these innovative methodologies is facilitated through our collaborations with organisations such as NASA JPL, UCLA and University College London.
Our wide coverage of the market, our partnerships with leading market players, and participation in industry initiatives have given us unique insights into average and project-specific quality across the VCM.
Question 2: Are there other standards bodies which provide investors with a good level of confidence that should be considered?
It is important to note that voluntary reporting standards define which carbon credits (in terms of project type, location, vintage, etc.) can meet their associated label (e.g. SBTi net zero, ISO Carbon Neutrality Label). Also, in the absence of a generally-agreed framework, voluntary buyers started using CORSIA-eligible carbon credits as they are considered to be of high quality. This would shape voluntary demand for carbon credits and thus, investors might be interested in investing in those funds that will issue credits that comply with the above-mentioned requirements.
Question 3: Are there any other requirements which you believe would support investor confidence in respect of the expected quality of Carbon Credits?
An additional source of data to instil confidence in investors, other than standards bodies, is the data provided by carbon credit rating agencies. Rating agencies such as Sylvera already provide data to existing exchanges, including CBL Xpansiv and CIX, and have the potential to do the same for projects under a fund.
While the landscape of initiatives and frameworks around the integrity of the VCM develops, they lack specific and project-relevant data. Inevitably they must generalise requirements in order to suit the full range of project methodologies. Thus ratings are able to capture the full spectrum of quality found across different crediting projects. For Sylvera, this results in ratings from AAA to D (analogous to an S&P or Moody’s credit rating), in comparison to the binary nature of most standards which simply set a quality floor.
The nature of rating agencies also means they are able to conduct a more rigorous analysis of projects, including using proprietary data, making the assessment more reliable and independent.
The London Stock Exchange may therefore consider utilising independent carbon credits rating information for curating the funds to be listed in the exchange. In addition, ratings could be displayed for investors in the exchange for investors to make informed investment decisions.
Question 5: From an investor perspective, is there any additional disclosure that would enhance transparency?
As discussed, the variable quality of carbon credits presents a significant risk to investors. Funds should therefore be required to disclose the due diligence work they have undertaken, including if they have engaged with any third party data providers such as credit rating agencies.
Question 7: From an investor perspective, are there any ongoing disclosures, in addition to the normal regulatory disclosure obligations, which would support transparency?
As well as credit quality, investors may also seek reassurance that due diligence has been conducted on wider market risks relevant to specific projects, such as from regulatory or policy changes. A common fear from investors is the carbon credits ownership risk. While many countries are willing to transfer the right to generate mitigation outcomes/carbon credits to private entities, this is not always the case. For example, some countries, like Ecuador, have established that all rights to ecosystem services belong to the state. In addition, an increasing number of countries (e.g. Indonesia) are considering intervening in the VCM or in projects hosted in the country. Funds should therefore disclose what due diligence they have conducted on these wider market risks.
Similarly, investors might request information about the likelihood of a “voluntary” carbon credit being subject to corresponding adjustments (CAs). Most governments and carbon standards do not require Article 6 rules to apply in cases of voluntary use of carbon credits, though some are considering its application based on whether corporates use credits to voluntarily offset their emissions. The details of when to apply a CA and the process of doing so are yet to be determined by the countries that indicated they will use CAs .