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What’s the role of credit rating agencies in carbon markets?

February 23, 2023

Ambitious collective action to drive systemic change is required to achieve the goals of the Paris Agreement: to limit the increase in the global average temperature to well below 2°C above pre-industrial levels and pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels.” 

Progress and action are not only needed from governments, but the private sector also plays a crucial role. As it is not yet technologically or economically feasible to avoid 100% of emissions globally, carbon credits are an essential solution to meet net zero targets. 

Carbon offsetting, however, is largely scrutinized and rightly so. It is difficult to find credits that deliver real climate impact. To address this challenge and offer greater transparency to credit quality and risk, carbon credit agencies have emerged. 

What’s a carbon credit rating agency? 

Based on independent and objective analysis, a carbon credit rating agency issues ratings - often in the form of letter grades - to assess the likelihood that a carbon project delivers real climate impact. Like debt ratings, carbon credit ratings help buyers understand the risk associated with a specific credit. For example, a low carbon credit rating would indicate the project is high risk (i.e. likely not delivering the claimed avoided or removed emissions).

The need for carbon markets to enable net zero  

A growing number of companies have stepped up to the challenge by setting and investing in net zero targets to decarbonize company operations and value chains. Today, organizations covering more than 90% of global GDP have made net zero commitments. 

However, most of those net zero targets are for 2030 and 2050. Very few companies have set interim targets to facilitate immediate climate action, and even fewer have defined consequences for what happens when targets are missed.

It is imperative companies mobilize direct decarbonization of Scope 1, 2, and 3 emissions at rates in line with 1.5°C pathways, but it is not yet possible to avoid 100% of emissions globally. Technology to decarbonize with speed and scale is not readily available, particularly in sectors like aviation, construction, mining and agriculture. 

While exposure to climate risk is not evenly distributed across industries, urgency applies to all. High-quality carbon credits can and should be used to fill the gap to cover residual emissions and compensate for yearly emissions in the near term. 

At Sylvera we are strong believers in pulling all the available levers we have to halt and avoid the worst impacts of climate change. SBTi also endorses and encourages the use of high-quality carbon credits, both avoided emissions and removals. 

In a world facing the catastrophic impacts of global warming, we must move towards a “yes and” or “both and” paradigm. In other words, we need to leverage all available solutions today. Investment in carbon credits is an essential complement to ambitious emissions reductions and net zero pathways. 

Just as one diligently makes deposits into their retirement account to take advantage of compounding interest, so too must we invest in deep decarbonization and emissions compensation today. Otherwise, the path to 1.5°C becomes a lot steeper and much more expensive if we drag our feet. 

To help eliminate friction in the decarbonization journey, carbon credit rating agencies enable buyers to better navigate and invest in carbon markets.  

The role of credit rating agencies

Agencies, like S&P or Moody’s, emerged to create a global language and understanding of credit ratings that unlocked value in the debt markets. 

Based on independent and objective analysis, these credit rating agencies issue grades to assess the likelihood that a debt issuer will be able to meet their obligations. These grades provide investors with the necessary data to manage risk and returns.

The absence of a shared language and unified understanding of quality for carbon credits has created space for ambiguity that has ultimately inhibited growth and integrity in carbon markets. Ratings for carbon credits can be a lighthouse within the opacity of carbon markets, providing transparency and analysis buyers can rely on. 

Carbon credit ratings agencies like Sylvera, BeZero, Calyx and Renoster have emerged to help bring clarity and confidence to carbon credits. Today, each agency has a different approach to evaluating the quality and risk of carbon projects, and there is no universally agreed upon definition of “high-quality credit.” Work must be done to calibrate scales and educate buyers about different assessment approaches.

Transparency and data demonstrating the relationship between price and quality will help the market grow, stabilize, and deliver capital to projects that genuinely and effectively reduce emissions or remove carbon. Therefore, carbon credit ratings data is required for investors to ensure the legitimacy of their investments, manage risks and fulfill their fiduciary obligations.

To learn more about the complexities of VCMs and how to best navigate them, download our guide for sustainability stakeholders

The Sylvera difference 

In the same way financial markets benefited and became more reliable and transparent for buyers with the emergence of rating agencies in the early 1900s, carbon markets need robust, independent, up-to-date data providing clarity on project design and ongoing performance to build trust and scale. 

Sylvera's carbon credit ratings give nuanced insight into the quality and risks of individual carbon projects. This is what makes our ratings the most accurate and reliable-

Project-type-specific and peer-reviewed proprietary frameworks

Taking a bottom-up approach, we build rigorous frameworks and production systems to accurately test project design, carbon accounting, and climate impact claims. This means for each project category (i.e. REDD+, ARR, RES, IFM, Biochar etc), we develop and apply different frameworks, as it is the only way to accurately assess quality across fundamentally different activities. 

Simply put, if you evaluate a REDD+ project and a Renewables project with a generic framework, the results will be inaccurate. 

Unlike other credit ratings agencies, Sylvera’s frameworks are peer-reviewed by a committee of experts and carbon market stakeholders – including project developers & registries – to ensure scientific consensus and that our ratings reflect the parameters for a market-defined high-quality credit. In the spirit of transparency, we publish our frameworks, so buyers understand exactly what we test and how we do it.

Scores for Carbon Accounting, Additionality, Permanence, and Co-Benefits

Sylvera ratings are derived from the holistic analysis of a project's carbon accounting, additionality and permanence. Each project we rate receives a discrete letter rating (AAA-D) and an in-depth report. 

For co-benefits, we produce a separate score based on our examination of the project activities’ impact on local biodiversity and communities. Corporate buyers are increasingly interested in understanding the co-benefits of carbon projects. A crucial dimension of carbon credits, strong co-benefits can often have a strong impact on price.

Unparalleled depth & accuracy

Sylvera is the only carbon credit rating agency that has invested millions of dollars and thousands of hours conducting field research; synthesizing optical, radar and LiDAR data to validate emissions reductions claims; and building and calibrating machine learning models to reconstruct individual carbon, strength of baseline, and financial additionality models in order to validate emissions reductions or removals claims and to evaluate project economics. 

Independent data validation

Our expert analysts leverage advanced machine learning (ML) technology, verified, independent data, and proprietary field data to test the accuracy of credit issuances and claims.Comparing independent data specific to each project against the data reported in the project's documentation is the cornerstone of high-quality due diligence. For example, we use market-leading geospatial ML models when rating nature-based solutions.

The world’s largest dataset of carbon stored in trees 

Sylvera is LiDAR scanning forests to build the world’s largest dataset of carbon stored in trees and above-ground biomass. By collecting vast quantities of this data around the world in different biomes, it means that Sylvera can estimate both biomass and carbon stocks for forests at an unprecedented accuracy using satellite data.

Building legitimacy in the carbon markets

Sylvera engages with several initiatives, like the Integrity Council for the Voluntary Carbon Market (IC-VCM), that are focused on building integrity and clarity in carbon markets. The IC-VCM is built on a simple principle: build integrity and scale will follow.

Sylvera engages with both supply-side and demand-side initiatives:

  • on the supply-side to ensure that investments in carbon credits are channeled to effective climate solutions
  • on the demand-side to give buyers and the wider public confidence in the integrity of the market

Sylvera also supports supply-side integrity as a member of Verra’s digital MRV working group. The multi-stakeholder advisory committee identifies opportunities for the application of digital technologies within carbon project standards and methodologies to increase not only accuracy and efficiency but also the impact of projects. 

Sylvera ratings are a complementary solution to integrity-building initiatives. We will continue to engage with market initiatives to ensure carbon markets have the biggest and most positive impact on the climate, nature, and local communities. 

Companies engaging with carbon markets can often find themselves in the crosshairs of greenwashing claims from the press and other stakeholders. Sylvera’s in-depth carbon ratings give buyers access to reliable and accurate information so that companies understand risks to their portfolio before a project is called out for not meeting its climate obligations; moreover, our comprehensive ratings enable companies to easily invest in and build a high-quality carbon credits portfolio, which means confidently delivering on climate action commitments while managing reputational risks.

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About the author
Senior Technical Climate Consultant

Annalise Downey is a Senior Technical Climate Consultant at Sylvera, helping market participants define their carbon strategy and navigate the voluntary carbon markets. Annalise was brought in during the early days of Sylvera as a member of the ratings team, analyzing carbon projects and helping to develop project-type frameworks including REDD+ and ARR. Annalise brings experience in commercialization and new product development as co-founder of a subsea remote sensing company. She is passionate about bridging disciplines to develop data-driven and scalable solutions to tackle climate change.