A Growing Asset Class: Nature Climate Solutions

A Growing Asset Class: Nature Climate Solutions

Our team has been tracking the carbon markets and what voluntary and regulated structures may grow into over the coming years.

Like with any growing asset class or trade-able security, there are several parameters around measuring and quality that need to be confirmed. A recent McKinsey report highlighted the market size opportunity and the key details for the voluntary carbon markets. That report can be found here and we thought it was a good summary of the structural improvements required to create a more scalable carbon market.

Building on other recent work aimed at developing the voluntary carbon market, in particular that of the Task Force on Scaling Voluntary Carbon Markets (TSVCM), the paper proposes six steps to address these deficiencies:

  1. Define net-zero and corporate claims: Agreement is needed on NCS standards and certification under one commonly accepted international-standards body. This would provide a more solid foundation for companies to make and validate claims concerning targets for carbon reduction and compensation, and to show precisely how they intend to attain net-zero emissions.
  2. Highlight good practice for supply: To address public concerns about the validity of NCS in achieving real and permanent carbon reductions, practitioners need to publicize recent progress in establishing good practices—for example, more rigorous measurement and verification methods and advances in sustainable land-use policies.
  3. Send a demand signal: Carbon emitters should agree to prioritize high-quality NCS credits with large co-benefits: this would send a powerful demand signal to build confidence and solidify pricing across carbon markets, and it would encourage policy makers and credit originators to increase the project pipeline.
  4. Improve market architecture: Standards, infrastructure, and financing need to be developed to support the growth of NCS producing tradable credits, as set out in the recent TSVCM report. Necessary steps include the creation of carbon reference contracts that allow prices to reflect co-benefits of NCS, a radical improvement in the availability of quality market data, and the development of centralized carbon exchanges.
  5. Create regulatory clarity: Policy makers must focus on turning national and corporate carbon-reduction targets into actionable plans, underpinned by binding regulation. Clarity is also needed around how NCS projects can be accounted for within national carbon-reduction goals, how to integrate voluntary and compliance carbon markets, and how to organize the international transfer of carbon credits.
  6. Build trust: There is a need for greater collaboration among stakeholders in order to address the perceived credibility issues of NCS. A coalition of high-level champions can help amplify the call for high-quality, high-ambition NCS.

As I wrote to my team, the banks showing up are a proxy for the readiness of the market. The scale of the carbon markets will create many banking & fee opportunities for the investment banks. And when they show up, they will bring institutional process, credibility, and capital to help address a number of deficiencies labeled above.

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