A Sustainable Investment in Journalism

A sustainable business requires diverse revenue streams. ESG Investor now operates a subscription service as of Tuesday 14th May. To find out more please get in touch with our subscription team on subscriptions@esginvestor.net


Leverage Every Tool

We are now at the tipping point of nature-based carbon solutions, says Phil Cohn, Executive Director, Pollination.

Investment into nature-based solutions (NBS) must play a critical role in mitigating the twin crises of climate change and nature loss. Interest in such solutions has been increasing over the past 12-18 months along with a significant uplift in the voluntary carbon market (VCM). This has primarily been led by corporates’ commitments to net zero targets as well as private-sector investors diversify their portfolios to include carbon credits as a tradable asset.

The VCM is now poised to channel significant financial flows to emission reduction and removal activities, including NBS. The value of the voluntary market hit US$1 billion in 2021 and is forecast to hit over US$1.5 billion by the end of this year.

Leveraging the voluntary carbon market

Despite the recent growth, there is ongoing debate as to the extent to which carbon offsetting should be used in the transition to net zero. We think carbon offsets are critical for a number of reasons, including:

  1. Emitters are paying for their pollution, voluntarily. Most national targets and compliance schemes lag behind the ambition needed to hold warming to 1.5°C, and the voluntary carbon market can help to fill this gap by enabling emitters, large and small, to make investments in low carbon activities.
  2. Carbon projects, particularly those related to nature, can deliver a wide range of co-benefits including supporting local livelihoods, protecting and restoring biodiversity, building resilience and creating new economic opportunities and therefore provide a conduit for investments into initiatives that support the broader UN Sustainable Development Goals. Efforts to diminish the role of carbon offsetting, or restrict it to purely technology-based solutions risk cutting off billions of dollars of financing for sustainable development, particularly in emerging economies with limited government capacity and finance to achieve these outcomes.
  3. We don’t have any time to waste and need an ‘all of the above’ approach to tackling climate change. Many of the debates around the use of carbon offsets seem to assume that we have time to spare when it comes to reducing emissions. The VCM enables us to reduce or remove emissions at scale right now. As new low-carbon industrial technologies are developed and commercialised, and the deployment of renewable energy becomes universal, the need for offsetting will be greatly reduced. Until then, we need finance to flow into low carbon and nature positive initiatives, at scale.

Nature-based solutions and the carbon market

Nature-based solutions are a key asset class in the carbon market. NBS credits accounted for around one third of credit issuance in 2021 and enjoyed a price premium compared to energy emission avoidance credits.

When thinking of nature-based solutions, many reference the protection and restoration of forests. Home to 80% of the world’s terrestrial biodiversity, forests act as major carbon sinks, sequestering much of the world’s carbon. At the same time forests help prevent reaching peak temperature, reducing global warming by 0.1°C by 2055, and 0.4°C by 2100.

Beyond terrestrial ecosystems, the carbon contained in mangrove, seagrass and saltmarsh ecosystems, known as ‘blue’ carbon, could be one of the most impactful ways to tackle climate change. Mangroves sequester carbon not just above ground in trees and plants, but also deep in soils that capture sediments transported by rivers and the sea. Mangroves also support an array of uniquely adapted biodiversity, as well as being critical to fisheries dependent local communities.

Pollination is an investor and adviser to the Delta Blue Carbon project on the Indus River Delta in Sindh, Pakistan. The project, the world’s largest mangrove restoration initiative, spans 350,000 hectares, an area larger than Luxembourg. Devastated by large-scale deforestation, tens of millions of mangrove seedlings have been re-planted, restoring more than 73,000 hectares of degraded forests and tidal wetlands in just six years. In the next 60 years, the wetlands will sequester an estimated 142 million tonnes of CO2e.

Restoration of mangroves at this scale is currently only possible through the finance provided by the voluntary carbon market. The first tranche of carbon credits from the Delta Blue Carbon project were sold in March this year. Purchasers of the credits included Microsoft, Trafigura, Carbon Growth Partners and Respira International, with the initiative providing a leading example of the critical role of carbon markets in targeting finance towards initiatives that can both reduce or remove carbon emissions and build natural capital.

Maintaining integrity in a voluntary market

Integrity on both the demand and supply side of the carbon market is essential for it to scale. From a sellers’ perspective, carbon projects themselves must adhere to the highest integrity standards, and take advantage of the rapidly evolving science, monitoring technologies and data to continually improve the quantification of emissions reductions and removals and ensure they are additional, real and permanent.

On the buy side, organisations participating in the voluntary carbon market must have a comprehensive plan to decarbonise their operations, and be able to articulate how carbon offsets form part (and not all) of this plan.

Initiatives including the Integrity Council for the Voluntary Carbon Market, as well as guidance from standard setting bodies are helping to establish an industry code of practice. These initiatives, alongside countries’ domestic consumer regulatory bodies, will play an important role in guiding market players to maintain a high integrity carbon market.

Acting on the right side of history

As nature-based solutions become more established and trillions of dollars are committed to green projects, investors need to act to ensure they’re on the right side of history. Time is not on our side when it comes to the climate crisis, so every tool should be leveraged to ensure capital is unlocked and directed to the right solutions – swiftly, effectively, and transparently – if we are to genuinely move the needle. Part of ensuring that effectiveness is using what we have in front of us right now – and carbon offsetting is a mechanism that works.

This article was co-authored by Will Acworth, Director, and Lauren Drake, Executive Director, Pollination.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2024 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

To Top
Share via
Copy link
Powered by Social Snap