1 February, 2023 / Comment
LSE’s voluntary carbon market explained
By Stewart Worthy, M&A and capital markets partner, Dorsey and Whitney
What does the future of carbon credits look like?
What is the LSE VCM and who can use it?
The LSE’s Voluntary Carbon Market (VCM) is a new designation available to operating companies and investment funds listed on AIM or the Main Market of the London Stock Exchange and which intend on investing (directly or indirectly) in nature-based and technology led climate-change mitigation projects that are likely to generate carbon credits.
The VCM platform gives these operating companies and investment funds a means to raise funds and use the money on projects that cut GHG emissions. In return for their investments, investors can get carbon credits in place of cash dividends.
The VCM designation means that the ever-growing number of ESG investors and companies looking for carbon credits as part of their decarbonisation strategy, can easily and confidently identify sustainable solutions and invest in climate mitigation projects that are making a real difference.
What makes it different to other exchanges is that it gives investors and companies a greater degree of transparency and comfort in their investment – the LSE’s stated overarching principle behind the VCM is transparency through disclosure.
Will this become more prevalent?
The LSE’s move is indicative of a wider groundswell in the ESG space. According to a December 2022 Business Wire report, the global voluntary carbon market was valued at $2.4bn in 2021, is expected to reach $17.11bn by 2027 and could reach $1trn by 2037.
Net zero is almost certainly impossible without carbon credits playing an important role in offsetting and on this basis it will be interesting to see if other international exchanges follow the LSE’s lead. The public markets are uniquely positioned to help scale the VCM, whilst driving greater transparency and providing access to a wider range of investors.
Although investors and large carbon emitters can currently obtain carbon credits through intermediaries, it can be hard for them to find information on the underlying projects or monitor them with confidence. What’s more, this lack of transparency can make it hard to find what suits their requirements and preferences. There is no lack of demand in the VCM, but there needs to be more high-quality carbon credit projects brought online to address the supply and demand imbalance.
The key to the LSE’s VCM success will be in the exchange’s ability to attract new issuers seeking the VCM designation to market. Note that the requirements for a VCM designation are in addition to the existing requirements of LSE Admissions and Disclosure Standards and applicable rules (including the requirements for admission to trading on the Main Market or AIM). It is no short-cut to market.
After Foresight Forestry achieved the first VCM designation in December last year, we’re seeing more funds and, importantly, carbon project developers, consider a London IPO with a VCM designation as an attractive means to raise funds.
What does it mean for business’ ESG goals?
For businesses, our view is this is a step in the right direction. It creates conditions for more open and transparent reporting. What’s more, it gives a greater degree of confidence in the decisions they’re making when it comes to net zero. Those businesses that are starting on their ESG journey will likely find that it’s an easier decision to invest in a company that has the LSE VCM designation rather than through an intermediary or sourcing themselves.
If ongoing efforts by various stakeholders to create standardisation across the carbon offset market are successful, we see LSE’s VCM platform and the wider the public markets playing an important role in helping businesses work towards net zero.
A part of the Mark Allen Group.