COP27 can't make any progress on carbon credits, but Wall Street can!
Big names are moving in on the carbon offset industry
Every year, government officials from around the world get together to talk about what they’re going to do about climate change.
Yielding disappointing results year in and year out, these gatherings give life to the phrase “talk is cheap”.
2022’s meetings were no different.
I’m talking, of course, about COP27, or the 27th Conference of Parties of the UNFCCC (United Nations Climate Change Conference).
This year’s meetings were of particular interest to us here at GritALTS because carbon credit markets were in focus and key policy decisions around their governance were being brought to the table for discussion.
Unfortunately, the historical uselessness of the meetings was too much to overcome and the policy decisions remain tabled for COP28.
While we knew better than to get our hopes up, we can’t help but feel a touch disappointed in the lack of progress made this year in Egypt as many important issues were left in limbo.
Fortunately, this lack of progress made by public officials has done little to stop the private markets from powering the industry forward (and towards the goals set by those public officials).
A couple of weeks ago we highlighted the resilience of venture capital investments into climate & emissions tech startups, noting that companies in the space have raised $10.7 billion so far this year and are on pace to surpass last year’s record total.
Today, we’ll take a quick look at a few major developments underway that aim to accomplish what COP27 members couldn’t – progress.
T. Rowe Price woodlands shopping spree – worth the wait
Oak Hill Advisory is an alternative investment firm and a subsidiary of T. Rowe Price.
Historically, Oak Hill (which manages some $56 billion) has specialized in corporate debt, but the company recently set its eyes on the carbon offset market.
Last year, it was looking to spend $500 million on woodlands with the intention of harvesting carbon offsets from trees (rather than timber) through a partnership with climate startup Bluesource which creates and sells carbon credits.
Though it took over a year for Oak Hill’s vision to play out, its bullishness on the space was enough to rally another $1.3 billion in funding which culminated last month in the biggest purchases of US timberland in years.
At 1.7 million acres, this makes it one of the top 10 largest timberland owners in the US, and the only one in that group to be focused on cutting credits over trees.
TPG gets big-name support for carbon-credit business
The carbon offset industry’s biggest criticism is a lack of transparency.
Inconsistent standards make it difficult for credits to be verified, leaving many to wonder aloud whether the projects they represent truly reduce emissions to the extent to which they claim to.
Private equity firm TPG is pouring $300 million into a new venture aimed at addressing this issue directly, and they’re bringing former Bank of America COO Tom Montag out of retirement to lead the charge.
To get the new business off the ground, the firm will be looking to raise an additional $700 million and has already received commitments from Bank of America, JetBlue’s venture arm, and NGP Energy Capital.
To finally bring ever-elusive transparency to carbon credits, Rubicon is partnering with brokers and satellite monitoring companies whose sole job is to verify projects and register credits (as a side note – one of those partners, Anew Climate, is also overseeing those 1.7 million acres of timberland we mentioned above).
To further reduce risk, rather than offering offsets linked to individual projects, Rubicon’s credits will be backed by a diversified portfolio ranging from nature-based to industrial projects.
As the firm’s new chairwoman, Anna Finucane, puts it, Rubicon wants to be the “Good Housekeeping seal of approval” on the behalf of businesses buying carbon credits.
Manulife deviates from its business model
Managing roughly 6 million acres of woodlands, Manulife Investment Management (a subsidiary of Manulife Financial) is one of the US’ biggest timberland owners.
By acreage, it’s also the world’s largest Timberland Investment Management Organization, which is effectively a timberland-focused private equity firm.
A week ago, it revealed plans to move into the offset game and announced its intention to raise $500 million for the purchase of timberland for the purpose of sequestering carbon from standing trees.
Along with T. Rowe, Manulife joins several other big players who have established footholds in the space, including BP (which bought Bluesource rival Finite Carbon in 2020) and JPMorgan (which bought timberland manager Campbell Group last year).
The voluntary carbon market nearly 4x in 2021 to $2 billion from $520 million in 2020.
Full data isn’t available yet for this year, but Bloomberg marked the total value of exchange-traded carbon products at $2.8 billion in February.
As we laid out in the venture capital data, investments into early-stage startups (and their valuations) remain strong.
To gauge the temperature on demand for carbon credits in the public markets, we look to KraneShares Global Carbon Strategy ETF (KRBN), the most popular ETF tracking the most traded carbon credit futures contracts.
Going back one year and working our way in, KRBN is outperforming the S&P 500 on all time frames, suggesting the issues that were too much for COP27 to overcome do not pose a similar obstacle for investors.
In fact, the outperformance has come despite the lingering nature of these growing pains, all of which are being attacked by the companies we highlighted above and more.
With over 1,000 companies having officially set emission-reduction targets, the demand for carbon credits and the financing for the projects that power them aren’t going anywhere.
Neither are we.
Until next time…
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