The session addressed opportunities in carbon credit–generating assets, and the future outlook for Brazil/UK bilateral opportunities in the voluntary carbon market.
The panel discussion was moderated by Simon Davies, entrepreneur and head of the Financial Services Committee at the Brazilian Chamber of Commerce; and featured Ciaran Kelly, CEO of carbon offset provider Go Balance; Alexandre Leite, co-founder and CEO of UK-based climate fintech start-up NaturAll Carbon; and Henry Waite, COO of institutional debt finance software provider Kumo.
Ken Rivlin, A&O Shearman’s co-head of the environmental and climate law group, co-head of the international trade group, and board member, closed the panel with remarks on Brazil’s potential leadership on carbon credits and shifts to U.S. climate policy.
Here is a summary of the key themes.
1. Corporate demand for high-quality voluntary carbon credits today is driven by a mix of compliance, reputation and genuine sustainability commitments.
Compliance and voluntary carbon markets are two routes to reduce greenhouse gas emissions. The former are mandatory and regulated, driven by legal obligations under government policies such as emissions trading schemes. The latter are optional, enabling participants to buy credits to offset their emissions to meet corporate climate goals such as net zero targets.
Future regulatory frameworks, such as CORSIA (a global market-based carbon market program for international aviation created by the International Civil Aviation Organization to offset emissions growth) and Article 6 of the Paris Agreement (which allows countries to cooperate voluntarily to achieve emission reduction targets by transferring carbon credits) are influencing strategic interest, with trading houses positioning for potential compliance-driven markets.
Currently, most businesses make decisions to purchase carbon credits through their sustainability offices—rather than their treasury teams—thus limiting their scale.
At the same time, our experts also felt that carbon credits must become mandatory for demand to grow significantly. Until then, CFOs and treasury teams are more likely to see them as a potential risk.
2. Buyers are demanding higher quality and more demonstrable impact from carbon credits
Corporate buyers of carbon credits are seeking immediate and tangible climate benefits as well as long-term impact and high-quality partnerships. Due diligence processes are becoming longer and more detailed, even in the case of voluntary credits. Sustainability departments are pushing for quality and longevity, including to protect against reputational risk.
CFOs and finance departments, for their part, are seeking reassurance that they can book credits as an asset. Being able to demonstrate co-benefits (positive outcomes beyond the primary goal of a policy or action, such as improvements to public health, economic growth like job creation), energy security, biodiversity, and community well-being) is a strong selling point here.
3. Successful carbon projects require genuine community buy-in and must deliver tangible co-benefits.
In markets such as Brazil, it is impossible to carry out high-quality, high-integrity climate projects without buy-in from local communities. For example, the Trocano project—which aims to prevent deforestation across 1.3 million hectares of the Amazonas region—is nine times the size of Greater London, and includes 10,700 residents living in 100 different communities.
While achieving buy-in takes longer, following the lead of local people with first-hand knowledge of an area enables providers to deliver solutions to real problems while also developing incentives such as income-generation potential. However, some buyers are focused on targeting the lowest-priced assets that provide the greatest climate impact—which are likely be the cheapest to deliver and therefore not involve as many co-benefits. One route to offer the best co-benefits is to price this element into the carbon itself, which by its nature is more easily measured than environmental benefit.
Some members of the panel felt that buyers should remain focused on the primary goal of reducing emissions, meaning therefore that the community angle is less relevant. However, another highlighted that engaging with communities through nature-based initiatives such as afforestation, reforestation and restoration (ARR) and REDD+ (a framework that financially rewards developing countries for preventing deforestation and forest degradation, with the goal of converting these actions into carbon) offer longer-term benefits than technologies that remove carbon.
4. Quality assurance in carbon credits is complex and time-consuming, requiring robust certification and verification.
To determine the quality and integrity of a carbon credit, it’s important to consider who is promoting the underlying project and which group is certifying it. In Brazil this process is time-consuming, and in the case of agricultural land management (ALM) can take two years from first discussing an opportunity with a farmer until the carbon credit is registered and verified.
The first step is to find out whether the relevant land was part of a native forest in the last ten years—if so, the project cannot proceed. Then the parties must determine whether the project is completely new (a requirement) and would create additionality (a benefit that would not have happened otherwise, or a measure of the value added), given that Brazil is home to a sophisticated agricultural sector.
Once the land, the forest and the process are verified, the project design must be audited and certified before buyers can begin due diligence. From there, it usually takes another 12 months to sell the credit.
5. A lack of standardization and the proliferation of registries are obstacles to scaling the market.
Because of this complexity, it is hard to standardize the process, meaning that only specialist players—or buyers’ clubs (coalitions of companies that pool their resources to purchase carbon removal credits collectively)—may be able to afford to conduct due diligence.
Another perspective is that there are two types of voluntary carbon credits: avoidance (the prevention of new greenhouse gas emissions) and removals (the extraction of existing carbon dioxide from the atmosphere), which could each be considered a form of standard. There are various categories of typical avoidance projects, and buying this type of credit tends to be cheaper than purchasing removals. Key to creating demand is providing clarity on quality and price.
The number of verifying bodies, all of which provide different levels of standardization, and the difficulty of transferring from one registry to another, are further obstacles to increased corporate investment in voluntary credits. Additionally, lenders and buyers tend to join a limited number of registries, meaning they can only access the projects listed there.
Northern Trust was highlighted as a registry that may seek to set an industry standard—if successful, this would enable money to flow and bankers to find innovative ways to create products such as credit derivatives and securitization. Following a correction in 2021, more trustworthy methodologies will also contribute to a more functional, pragmatic market—even if this doesn’t deliver the ultimate goal of cross-registry standardization.
6. Technology is improving transparency but must be applied carefully.
Emerging technologies can provide better data, which in turn leads to higher-quality carbon credits. For example, the Brazilian geospatial system has provided extremely accurate deforestation data for ten years, while the European Space Agency is open source and thus more affordable. Developing risk maps would enable buyers to make their own judgement of a project, in addition to using a professional verification report.
Other technologies likely to contribute to standardization include satellites, blockchain and artificial intelligence.
Geospatial technology works better for REDD+ because of the need to monitor, modify, and model carbon, but there is no technology able to measure carbon in the soil. The best strategy is to develop proven methodologies – something that can take years—before trying to run on technology.
7. Order and progress: how Brazil can position itself as a global leader in supply and carbon credits
Many banks are considering funding projects in Brazil, thanks to its well-structured policy frameworks for carbon. The country is also well-positioned to be a leader in the voluntary carbon market because its climate commitments are written into law. Recent high-profile deals—such as the Brazil-UAE climate partnership, the Brazil-California climate agreement, Standard Chartered’s plans to turn rainforest protection into climate finance, and Brazil announcing a USD1 billion investment in a tropical forest facility—provide confidence for financiers and corporates.
It can learn from other jurisdictions by balancing regulatory integrity with market efficiency, maintaining strong enforcement, and ensuring long-term certainty for investors.
8. Despite significant policy headwinds in the U.S., the voluntary carbon market is expected to continue growing globally.
While U.S. carbon markets are facing obstacles amid the federal government’s policy shift on decarbonization, large U.S. companies continue to buy carbon credits, and more than 70% of Fortune 500 companies still invest in offsets. Legal and compliance teams at financial institutions with a presence in the U.S. are navigating how best to enter and remain in emissions credit investments, amid a fragmentation of global environmental and ESG rules.
One potential driver of growth is a U.S. General Accounting Office (GAO) report on emissions credit and voluntary trading, which hints at ways to expand the market in a more challenging political climate. It also covered cross-jurisdictional approach to promoting transparency and preventing fraud in carbon investing.
Despite the federal government’s stance, the panel felt that voluntary trading would continue to grow, supported by technological advances and ongoing demand from multinational businesses.
