Carbon trading: LSE introduces voluntary carbon exchange platform

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On 10 October 2022 the London Stock Exchange (LSE) launched its Voluntary Carbon Market (VCM), in line with its aim to develop a new market offering to support publicly traded carbon funds focused on investing in climate mitigation projects, by increasing the supply of quality carbon credits worldwide and increasing the flow of financing into projects that will directly and indirectly reduce anthropogenic carbon emissions and sequester atmospheric carbon. The VCM is not intended to be a substitute for direct decarbonisation of the production processes and supply chains of the LSE’s clients, but to augment the transition to a low carbon economy by realising projects that would not otherwise be economically viable.

The LSE’s VCM intends to help fund projects which focus on either the removal or reduction of atmospheric greenhouse gases (carbon dioxide but also methane) through nature based or technology led solutions. Those eligible for designation include “all qualifying funds” (closed-ended funds admitted to trading on either the Main Market or AIM) and all operating companies admitted to the Main Market or AIM. To achieve VCM designation, applicants will need to directly or indirectly finance projects that merit carbon credits – the applicant may choose to issue the credits as a pidend-in-specie, retire them on behalf of their shareholders, or sell them on. There is no requirement for applicants to maintain a portfolio of entirely climate aligned assets. As a result, the VCM’s potential reach extends beyond specific ESG funds and companies. That said, it is more specific than the existing Green Economy Mark. Whilst the latter is open to admitted companies that trade in carbon credits, the VCM is solely available to funds / companies investing in climate change mitigation projects (which realise carbon credits). Designation is also contingent on investing in at least one “Qualifying Project” (approved by a Qualifying Body) within three years. The details of such Project will need to be disclosed in the fund’s FCA approved prospectus. In the interests of further carbon intensity disclosure, applicants will also be required to map their revenues from the rest of their portfolio to the Tier 1 or Tier 2 sectors within the FTSE Russell’s existing Green Revenue’s Classification System. The full disclosure requirements are contained in the LSE’s updated admission and disclosure standards.

The aims of the VCM are threefold:

  1. To increase the flow of finance to projects, otherwise economically unviable, intended to reduce greenhouse gas emissions and / or concentrations, by increasing the supply of carbon credits;
  2. To use a public market regulatory framework to promote climate transparency and standardise carbon intensity disclosures in the financial sector; and
  3. To provide a market for investors in carbon credits and GHG reduction schemes.

The VCM is, therefore, of direct consequence for carbon credit project developers, ESG orientated investors and LSE listed funds and companies. For the former, it should stimulate liquidity, providing upfront capital for project investment and making viable those projects which would otherwise only generate future returns (when carbon credits are awarded). It will aid the attractiveness of climate mitigation projects for investors, who will secure both future revenue generation (from the carbon credits awarded). As such, the VCM is an example of a platform that can provide a significant opportunity for project developers, catalysing access to capital and broadening their investor base. For ESG orientated funds the VCM is an opportunity to secure long term shareholder returns via carbon credits, whilst investors will have full autonomy over how they choose to deliver or retire the carbon credits and will only be required to disclose this to their shareholders.

The VCM should also be of interest to financial institutions, given its potential to augment the secondary market for carbon credits VCM designation does not, and will not, represent a trading venue for carbon credits. Respondents stressed (and the LSE supported) the view that it should instead be a mechanism for incentivising climate mitigation and / or adaption through the award of credits. With more carbon credit generating projects realised and more investors seeking to sell these credits for liquidity, there is likely to be growing demand for greater secondary trading infrastructure.