How to rectify the mistakes of commodifying nature

by Tommy Ricketts, CEO and co-founder of BeZero Carbon

Governments, businesses, and climate change experts watched on as climate negotiations stuttered at the Bonn Climate Change Conference earlier this month. The question holding back any real action, and the question that will remain at COP28 later this year, has been the same for years: how can we accelerate the climate transition when real financial and political trade-offs make it impossible to agree on greater climate ambition?

The same question is on the minds of some of the biggest financial institutions who have committed to Net Zero – how is it possible to reach climate targets when some of their emissions, and the emissions of companies they invest in, have no realistic possibility of reduction in the short term?

The answer lies in leveraging the Voluntary Carbon Markets – where participants can buy, sell, or trade carbon credits to meet their Net Zero commitments.

Despite some recent volatility, the market is on a rapid upward trajectory, projected to be worth billions in the next decade. Corporates across the globe are turning to carbon credits to support their Net Zero strategies – 96% of FTSE350 companies currently use carbon within their ESG portfolios in some form. These credits are vital in sectors which will struggle to reduce their emissions, but most importantly, they minimise the issue of trade-offs which has been preventing actionable commitments for years.

Financial institutions and the UK’s burgeoning fintech industry have been on the cutting edge of innovation for the last decade, bringing new tools and products to improve customers and investors lives in rapidly growing markets.

Stripe is a great example of this – creating a globally integrated payment platform amid a boom in online sales, to support global currencies and markets from day one. Now, with the increase in popularity of carbon markets, the sector faces a new frontier – and a new place to innovate.

Governments all over the world are beginning to consider imposing regulation and binary standards on the Voluntary Carbon Market – in the UK, a consultation has been promised on this very market by the end of this year. Of course, not all regulation is bad, and indeed if done in the right way it could improve the market.

But if financial institutions and fintech players do not join the conversation now to craft this promising market, they risk being left with an over regulated, stifled, and failing market – and a lost environmental and financial investment opportunity.

Minimising climate trade-offs must be at the heart of any discussions about the role of carbon markets. This will only become possible when we begin to treat the trading of carbon credits like a global financial market – prioritising quality and analysing risk before making an investment.

So far, the VCM has been treated like a commodities market – where credits that meet certain criteria are traceable and fungible. But this is only partially the case – carbon credits are delivered as a standardised unit but exhibit a broad spectrum of quality based on observable and unobservable factors.

One-size-fits-all, commodity-style standards in this burgeoning space falls to capture nuance, and risks harming investor trust if left as the only threshold for integrity assurance.

Assessing carbon credits solely on the basis of being a commodity is also an own goal. Media scrutiny has rightly drawn attention to major issues with the quality of some carbon credits, proving that credits differ vastly in quality from one another.

This is no basis for scaling a growing market, particularly one that is so critical to addressing climate change.

Fortunately, financial markets have a solution to this problem.

The answer lies in rigorous risk assessment, and ratings agencies have been providing this to mature financial markets for decades. The future of carbon markets belongs in a framework that mirrors bond markets – where ratings provide a helpful touchstone for investors to be informed by risk, rather than rigid standards.

This is why I founded BeZero Carbon, to provide the information infrastructure needed so businesses can make informed environmental investments. Much like credit rating agencies in financial markets, we use swathes of data at our disposal to provide world-leading insights and ratings on carbon credit efficacy – helping scale investment in the market to the size needed to tackle climate change.

The financial sector, encompassing new and cutting edge fintech companies and some of the most respected financial institutions alike, has experience in disrupting the status quo and tackling new and exciting challenges in emerging markets.

We need that expertise to be applied to the Voluntary Carbon Market – and for this sector to join the conversation and shape the market’s future, before it is too late. Mirroring financial markets is the only way forward – and with the right structures in place, carbon markets can unlock new capital and scale into a multi-billion-dollar industry with unbridled potential for climate investment.