London Stock Exchange Sets Listing Rules for Firms Financing Carbon-Reduction Projects

The London Stock Exchange Group offices are seen in the City of London, England, on Dec. 29, 2017. (Reuters/Toby Melville/File Photo)

The London Stock Exchange (LSE) established listing rules for companies that finance carbon-reduction projects in a bid to ensure greater transparency in the market.

According to the new rules, a company or fund intending to finance a project aimed at reducing carbon emissions must issue a prospectus—containing details of the project—vetted by the Financial Conduct Authority. “What this brings is proper transparency, proper due diligence, and proper disclosure, so corporates and other investors truly know what they’re buying. That’s something that the voluntary carbon markets haven’t had before,” LSE Chief Executive Julia Hoggett said to Reuters.

LSE’s push to boost the voluntary carbon market comes as the sector is expected to balloon over the next decade. The annual global size of the voluntary carbon market was around $2 billion in 2021, according to Ecosystem Marketplace. McKinsey is expecting the market size to expand to $50 billion by 2030.

At present, the voluntary carbon market is only minuscule when compared to the compliance carbon market, which was valued at $736 billion in 2021.

While the compliance carbon market is created as a result of regional, national, or international policy or regulatory requirements, the voluntary carbon market is created through the buying and selling of carbon credits on a voluntary basis.

According to Hogget, an investment fund backing the voluntary carbon market is expected to be listed in 2022, with a few others joining in next year. Later on, companies that operate carbon-reduction projects will be added.

Economics of Carbon-Reduction Projects

Once a carbon-reduction project generates carbon credits—calculated according to the amount of carbon dioxide the project removes from the atmosphere—the shareholders receive these credits as dividends.

Alternatively, the project can sell the carbon credits, collect cash, and distribute the cash as dividends to shareholders. Other firms can buy carbon credits to offset the greenhouse gasses they emit.

During an interview with Financial News, Mark Kember, co-executive director for external affairs at the Voluntary Carbon Markets Integrity Initiative, pointed out that latent demand in the voluntary carbon market has been “growing steadily” since 2015.

This is especially true when considering the last two to three years as firms are being requested, encouraged, or obliged to achieve net zero emissions.

Kember pointed out that companies are mostly looking to invest in high-quality projects. “If you’re doing this voluntarily and you’re spending money that you could spend on other things, most companies have realized that it is pretty crazy to buy something that is substandard,” Kember said.

In a write-up at The Epoch Times, Guy K. Mitchell, Jr., criticizes carbon credits and offsets as a way for global investment firms to make profits. The system of carbon credits can also end up making businesses in developed regions like the European Union pay higher costs for energy, which will affect their ability to compete in the global market.