Hannah Gilkes https://alpha-week.com/ en Demystifying the Carbon Credit Market for Private Equity Firms https://alpha-week.com/demystifying-carbon-credit-market-private-equity-firms <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--title--features.html.twig x field--node--title.html.twig * field--node--features.html.twig * field--title.html.twig * field--string.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'core/modules/node/templates/field--node--title.html.twig' --> <span>Demystifying the Carbon Credit Market for Private Equity Firms</span> <!-- END OUTPUT from 'core/modules/node/templates/field--node--title.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--created--features.html.twig x field--node--created.html.twig * field--node--features.html.twig * field--created.html.twig * field--created.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'core/modules/node/templates/field--node--created.html.twig' --> <span>Mon, 05/23/2022 - 14:05</span> <!-- END OUTPUT from 'core/modules/node/templates/field--node--created.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--body--features.html.twig * field--node--body.html.twig * field--node--features.html.twig * field--body.html.twig * field--text-with-summary.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-body field--type-text-with-summary field--label-hidden field__item"><p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>The voluntary and compliance carbon credit markets are taking the world by storm, as </span></span><span lang="EN-US" xml:lang="EN-US">corporations and organisations across the globe look to offset their emissions through the sale and purchase of carbon allowances<span>. This market is growing at a rapid pace; according to data from Ecosystem Marketplace, “</span></span><span><span><span>the voluntary carbon market topped $1 billion in 2021</span></span></span><span lang="EN-US" xml:lang="EN-US"><span>.<span>” </span>Over the next two decades, the<span> carbon credit market </span>is expected to <span>become a “</span></span></span><span><span><span>multi-trillion-dollar market.”</span></span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>As the market grows, more and more private equity firms are pursuing the carbon credit market, amid increased pressure to illustrate their environmental, social, and governance (ESG) credentials to investors and regulators alike. But the increased activity and interest in carbon credits among private fund firms raise three nagging questions:  How, and how effectively, is this relatively new space being regulated? Are</span></span><span lang="EN-US" xml:lang="EN-US"> carbon offset investments really delivering on their promise to combat climate change? And, what are their broader social impacts?  </span></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US"><span>The Carbon Credit Market and Current Regulatory Landscape </span></span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>When considering carbon credit investments, it’s first critical to understand the market itself, as well as the regulatory landscape.  </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>In the compliance carbon market (CCM), </span></span><span lang="EN-US" xml:lang="EN-US">carbon allowances are traded and regulated by mandatory national, regional, or international regimes, whereas, in <span>the voluntary carbon credit market (VCM), carbon credits are traded by companies and individuals, driven by commercial, sustainability and marketing considerations. Despite the obvious differences, the premise behind trading carbon credits remains the same across both categories: in theory, </span>carbon credits are a means of responsible investing and incentivizing pollution reduction, all while offering an opportunity to meet ESG investment goals. </span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>The </span></span><span lang="EN-US" xml:lang="EN-US">first regulatory step, the 2015 Paris Agreement, aimed to limit the rise in global temperatures caused by the accumulation of greenhouse gases in the atmosphere to 1.5°C compared to pre-industrial levels. It was pivotal in the quest to combat climate change because it establishes an important framework for monitoring, reporting, and enhancing countries’ individual and collective climate goals.</span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>In the fall of 2021, global leaders met in Glasgow, Scotland, for COP26 and agreed on “</span></span><span><span><span>general principles for projects that generate carbon credits, which include initiatives as diverse as re-forestation, renewable power installation or measures to help household energy efficiency</span></span></span><span lang="EN-US" xml:lang="EN-US"><span>.” The guidelines now require projects that generate credits by claiming to remove carbon emissions must not have been done otherwise; and reductions must be long-term and not lead to polluting elsewhere. COP26 also agreed to the creation of a registry to track credits and the use of proceeds from their issuance.</span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span><span>However, the regulatory landscape in the </span></span></span><span lang="EN-US" xml:lang="EN-US"><span>VCM, in particular,<span> remains fragmented, primarily consisting of private-sector standards that are implemented by </span>independent<span> auditors</span>. There is significant variation between the standards, but there are two key and common problems: the manipulation of baseline calculations — impacting the forecasted and subsequent reduction in CO2 emissions that are directly attributable to the relevant project; and a failure to fully assess non-emissions risks such as financial crime, governance and broader human impact.</span></span></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US"><span>Environmental Greenwashing, Financial Crime and Social Impact Sacrifice</span></span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US">Reflecting this, in the VCM space specifically, there is a healthy degree of investor skepticism around the credibility of carbon credit investments because their quality and legitimacy cannot always be independently validated. In fact, according to Compensate, <span>a Finnish non-profit that manages a carbon capture portfolio, less than 10 percent of the 100 projects certified with leading industry standards, which it reviewed last year, “</span></span><span><span><span>met its criteria on ensuring that projects didn’t inflate carbon savings, weren’t already planned, and other factors including human rights</span></span></span><span lang="EN-US" xml:lang="EN-US"><span>.” These are clear warning signs that could delegitimise any carbon credit investment or project. </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US">These scenarios are common, which is what makes the job of scrutinising the investments to ensure legitimacy so onerous and complex. Coupled with the lack of VCM regulatory standards, the risk of greenwashing can proliferate, which undermines carbon offsetting objectives and can deter investors from participating in the market altogether. <span>Additionally, a host of fraudulent activities have often been associated with carbon credit purchases — tax evasion, bribery and corruption, money laundering, and consumer fraud — to name a few.  </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>On the social impact side, a lack of regulatory oversight raises the risk of poor human impacts. Carbon offset projects are frequently located in complex international markets and lack of appropriate auditory oversight on social, community and governance issues raises the potential for serious potential reputational damage down the line. </span></span></span></span></span></p> <p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US"><span>Using Intelligence Gathering to Evaluate Offset Projects </span></span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>Understanding the reality of the environmental benefits, </span></span><span lang="EN-US" xml:lang="EN-US">and of the social impact<span> of these investments is a complicated and onerous process, thanks to a fragmented regulatory environment and opaque project structures. Proper risk evaluation requires specialised skills, including knowledge of the emerging carbon credit market, and expertise focused on gathering the right information when conducting due diligence. </span></span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US">Some positive changes are pending. A consortium of climate experts from the private sector have banded together to build a framework that helps ensure VCMs are indeed making a real difference in combating climate change. According to non-profit public policy organization Brookings Institution, “</span><span><span>voluntary carbon markets need to be verified and produce valid emissions data (or in the case of forests, the amounts of forest mass from which captured carbon can be measured) from each exchange participant</span></span><span lang="EN-US" xml:lang="EN-US">.”</span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US">However, Brookings’ research has shown that “VCMs have fallen short in assuring the contracts and trading lead to real global emission <em>reductions.</em>”<em> </em>This is referred to as the “additionality” problem. To be sure, VCMs now include fastidious rules and regulations to verify carbon credits, though spending a lot on verification does not ensure additionality. For example, one study suggests that less than 20 percent of the credits sold in the California forest offset program led to additional carbon capture beyond what the forests would have accomplished anyhow (Haya 2019).” </span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US">Clearly, this level of verification alone is not enough to validate the impact of these types of offset projects. Particularly because impact investing does not happen in a vacuum <span>—</span> in addition to the environmental impact, investors must take into account the social and governance impact from the project. Impact-focused intelligence is necessary to help authenticate these complex investments, and determine the full range of commercial, reputational and consumer / investor implications of moving forward with carbon credit investments. </span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US">This is particularly important at the project level. It is imperative to determine: if a project is sustainable; the human impact of its activities and supply chain supply chain; and whether the investment meets a broader sustainable investing mandate. </span></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US">Some of the most important issues and questions to address in an intelligence gathering exercise would include: </span></span></span></span></p> <ul><li><span><span><span><strong><span lang="EN-US" xml:lang="EN-US"><span>Supply chain</span></span></strong><span lang="EN-US" xml:lang="EN-US"><span> – What is the human impact of the supply chain? How are goods and services are sourced? Which types of companies are in the supply chain? Is there any evidence to suggest that any part of the supply chain relies on poor working conditions or abuse of labour rights?</span></span></span></span></span><br />  </li> <li><span><span><span><strong><span lang="EN-US" xml:lang="EN-US"><span>Labour rights</span></span></strong><span lang="EN-US" xml:lang="EN-US"><span> – Is there any indication of forced labour (i.e., child labour); a history or commonality of poor labour practices more broadly; unions and grievance mechanisms; and adherence to labour standards? What's the broader context of the relevant regulatory environment and jurisdiction? How do these impact attitudes towards worker rights?</span></span></span></span></span><br />  </li> <li><span><span><span><strong><span lang="EN-US" xml:lang="EN-US"><span>Community and Land Rights</span></span></strong><span lang="EN-US" xml:lang="EN-US"><span> – What is the impact on a community, vulnerable groups, land and water access, and community safety and environment? Has there been any increase in hazardous waste or water quality? Any impact on biodiversity that has affected food sources? </span></span></span></span></span></li> </ul><p><span><span><span><strong><span lang="EN-US" xml:lang="EN-US"><span>The Bottom Line</span></span></strong></span></span></span></p> <p><span><span><span><span lang="EN-US" xml:lang="EN-US"><span>Through the use of impact-focused intelligence, private equity firms can more thoroughly vet carbon credit investments to ensure they legitimately combat global warming and climate change as intended, as well as validate that these investments align with the overall ESG goals set forth in their investment strategy. </span></span></span></span></span></p> <p>**********</p> <p><em><span><span><span><span lang="EN-US" xml:lang="EN-US"><span><strong>Hannah Gilkes</strong> is </span></span></span></span></span><span lang="EN-US" xml:lang="EN-US"><span><span><span>Director, ESG Intelligence, <strong><a href="https://www.riskadvisory.com/">The Risk Advisory Group</a></strong></span></span></span></span></em></p> <p><em><span lang="EN-US" xml:lang="EN-US"><span><span><span>***</span></span></span></span></em></p> <p><em>The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, <a href="https://thesortinogroup.com/">The Sortino Group</a></em></p> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-tags--features.html.twig * field--node--field-tags.html.twig * field--node--features.html.twig * field--field-tags.html.twig * field--entity-reference.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-field-tags field--type-entity-reference field--label-hidden field__items"> <div class="field__item"><a href="/private-equity-guest-articles" hreflang="en">Private Equity Guest Articles</a></div> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <drupal-render-placeholder callback="flag.link_builder:build" arguments="0=node&amp;1=9368&amp;2=bookmark" token="OZnM9jdh4BnwxreL5RiM_Ata3jerrG7GyxOKQKH2bas"></drupal-render-placeholder> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-author--features.html.twig * field--node--field-author.html.twig * field--node--features.html.twig x field--field-author.html.twig * field--entity-reference.html.twig * field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field--field-author.html.twig' --> <a href="/author/hannah-gilkes" hreflang="en">Hannah Gilkes</a> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field--field-author.html.twig' --> <!-- THEME DEBUG --> <!-- THEME HOOK: 'field' --> <!-- FILE NAME SUGGESTIONS: * field--node--field-content-role--features.html.twig * field--node--field-content-role.html.twig * field--node--features.html.twig * field--field-content-role.html.twig * field--list-string.html.twig x field.html.twig --> <!-- BEGIN OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> <div class="field field--name-field-content-role field--type-list-string field--label-above"> <div class="field__label">Content role</div> <div class="field__item">Public</div> </div> <!-- END OUTPUT from 'themes/gavias_vinor/templates/fields/field.html.twig' --> Mon, 23 May 2022 13:05:09 +0000 AlphaWeek Staff 9368 at https://alpha-week.com