COP 26 brought a powerful surge of attention towards the climate crisis. With the finance sector asserting itself as a key lever for change, and as corporations move ahead of regulation to voluntarily pursue net-zero, the market for carbon offsets has taken off.
Carbon Growth Partners is an investment manager that was established to help grow the sector, and its impact. The firm was only founded at the start of this year, and in two consecutive funding rounds they were able to blow past expectations to raise $US50 million in each round.
Founder and CEO of the company, Rich Gilmore, explained that it was demand from other investors for access to carbon offset investments, that pushed them to launch a formal fund.
“We started out last year, investing in the carbon market with our own money, mainly because we saw carbon as one of the most mispriced assets that anybody could invest in at that time, and it’s probably still true now.” Rich says.
“And so we just started investing our own money and then other people started investing alongside us and we thought, we should formalise this. So we set out to raise $US10 million in July this year, and ended up raising $US50 million. The fund was performing really well, and did everything we’d hoped for in the first couple of months, and so we decided to do a one-off capital raise prior to Glasgow. And again, we expected to raise maybe 10 or 20 million in that raise, but ended up raising another $US50 million. So it’s been great that the investors have backed our thesis and backed the team.”
Carbon Impact Model
Carbon offsets come in many shapes and sizes, and the market for them is nascent. Investors need to develop their own models for analysis and pricing, and they need to be acutely aware that not all offsets are created equal.
“In terms of the factors we look for in projects, we look for unimpeachable additionality, community co-benefits, free-prior-and-informed consent of local communities, robust governance, all of those things that we think make sure that the project is delivering the best and most robust impact, which will eventually deliver the best and most robust returns.” Rich says.
“And so that’s why we invest so much, I’d say more than most, in our due diligence in projects. Because we really want to make sure that the emissions reductions that we’re investing in, are delivering real meaningful impact to the planet.”
As the market evolves, investors have the opportunity to find their own place within it. To assess where their skills lie, and where best their capital can be allocated for the most sustainable impacts.
“In this fund, we take fairly limited project risk. So we’re not doing project origination, or investing equity in projects. We’re providing finance to projects to either complete their issuances, or just acquire credits when they’ve been issued, and through a forward offtake agreement. And some limited purchases of credits in the secondary market.” Rich says.
“But principally, we’re allocating capital to projects so that they can recycle that capital to acquire credits, and to create more impact, as the fund matures, we’ll think about moving further upstream. But at this stage, we’ve found a bit of a gap in the market for providing finance at scale, to give security to projects, so they can recycle their capital, fund community initiatives, restore degraded forest and farmland and mangroves, whatever it is.”
Ensuring Market Integrity
Like wine, credits come in various different vintages, and so too their quality varies. There are often concern cited about the inclusion of Kyoto-era credits, called CDM’s, which had start dates around 2013, offering little in terms of emissions abatement. But as Rich explains, the volume is small, and they’re not designed for trading.
“I don’t think the Kyoto-era CDM credits are going to be an issue. The UNFCCC assessment shows they represent about 173 million tonnes in total, meanwhile, getting to net zero means reducing emissions by 50,000 million tonnes a year, every year forever! So, 173 million tonnes, it’s not going to break the market. They’ll mostly be used by countries because CDM credits are very difficult to trade. They’re only supposed to be sold for retirement. So they’ll be absorbed into the system, and then we’ll just be left with Paris-era credits.” Rich says.
“Yes the market would benefit from better transparency and, and better liquidity and less information asymmetry. But I’m less concerned about those factors holding back the carbon market than others are. Because of two key factors, investors in this market are already sophisticated, and need to be able to deal with that complexity. But also new exchanges, new technologies, new blockchain initiatives are going to bring that transparency and liquidity and, and produce that information asymmetry and do it quickly. So, I’m actually it’s less of an issue than perhaps people make it out to be.”
Future Growth Potential
The current suite of registries, that certify projects and register their carbon credits, are making steady progress in developing their processes, well aware that the integrity of the offsets is central to the long-term sustainability of their operation.
Rich explains that for him, it’s actually a question of scale, and demand is currently far-outstripping supply.
“I’ve got confidence in the big registries, having the robustness in their systems and processes to ensure that real emissions reductions are occurring and credits being issued. I think one of the barriers to scale at the moment is just the volume of interest in the market, the number of new investors, the number of new projects trying to start, and the limited capacity of the registries to manage that demand.” Rich says.
“Right now, it takes weeks, months, years, to get projects registered and operating in the voluntary market. And that’s just a people supply constraint. As much as a financial supply constraint. The carbon market is understaffed, by maybe 10,000 people, perhaps even 100,000. So I’ve got confidence that there’s a base level of robustness and integrity in the carbon market. But we always need to be doing more to sustain that and improve.”
COP26 and Article 6 Clear the Way for Future Growth
The challenge of Article 6 had been haunting negotiators since the Paris Agreement in 2015. The article related to the rules and management of carbon markets between countries. There was a lot at stake at Glasgow, and it was with a sigh of relief that it was finalised.
“And so there’s a number of operative clauses inside Article Six, and there’s still lots of policy nuances to be worked out over the next several months and even years. But the headline for the industry out of COP is that, for the first time, there’s now no doubt that carbon markets, both at the government level and the corporate level, are going to be a vital part of the solution to climate change going forward.” Rich says.
“In the lead up to Glasgow, they had been an issue that had been unresolved for six years, it’s now been resolved at that strategic level, so carbon markets are a thing, and they’re going to be a part of the solution going forward, at scale.”