There are currently 10,173 commercial banks (IBIS World, June 2024) around the world and the US Asset Management market alone has $48.22 Trillion (Mordor Intelligence, 2024) assets under management. Yet the combined turnover of retired credits in the voluntary carbon market (VCM) is roughly $1.5B per year, according to our research.

This $1.5B pales in comparison to the $4.787 - $7.764 Trillion needed (Climate Policy Institute) by 2030 to keep global organisations on the path to Net Zero for 2050.  

Can the VCM help to crowd in private investment to combat climate change? What role can the financial services sector play in channelling funds to projects?

AlliedOffsets Data

Over the past four years, we have gathered, cleaned, and structured the most comprehensive data set on the VCM in order to answer questions such as these. At an aggregate level, this data is useful for assessing the market’s size, breadth, and direction. But as the VCM continues to mature, market participants are requiring ever more specific insights to inform their decision making processes. To support this, we are happy to introduce our first Sector Spotlight Series on the Financial Service sector.

This blog series will be focused on the data and insights that can help increase investment, reduce risk and improve revenue generation in the VCM. It is designed to provide value for banks, asset managers, private equity, venture capital, and traders either actively participating in the VCM or those who are considering getting involved.

In time, we will create additional sector spotlights series to increase knowledge, and analysis, in additional targeted sectors.

VCM Current Size and Forward Projections

Much has been written about the current size of the VCM  as well as future predictions about a market of  $40-$80B by 2030 (McKinsey) . 

Below you can see highlights regarding the current size of the VCM from Aug 1, 2024.  

Current Financial Service Sector Participation in the VCM

Overall FS sector participation in the VCM is still relatively small.  The graph below highlights that at its peak only 70 unique FS firms retired Voluntary Credits with a total of just over 7,000,000 credits.  While this is only one measure of participation, it is indicative of broader participation.

Key Players in Financial Services: VCM Participation

Chart from AlliedOffsets - to access full chart, click here

Financial service first movers include firms familiar with commodity markets, those who have history investing in early stage companies with unproven or unscaled technologies, and firms who have taken a strong stance on sustainability and the role carbon offsets play in a net zero world.

Active Financial Service Participants in the VCM

Active FS participants currently operate in 3 main areas: 

• Investing: Providing capital to carbon market participants 
• Trading, Insuring: Increasing liquidity/infrastructure for carbon markets 
• Advising: Developing and supporting corporate clients on their carbon strategy 

Many are using the skills and knowledge from other commodities/activities to drive their activities in the VCM.

Investment Firms and Their Role in the VCM

• Investment firms (Asset Managers, Private Equity and Venture Capital) - tend to have a higher risk tolerance than traditional banks and are comfortable with the process associated with early stage investment in unproven or nascent industries. They are applying their processes/ methodologies in the carbon markets, but at a relatively small scale. A recent interview with Stafford Capital CEO Angus Whiteley highlights how Private Equity firms can participate in the VCM.

Trading Firms: Increasing Market Liquidity

• Trading firms can, and are, providing much needed liquidity to the market but the  lack of scale, transparency, and infrastructure has to date limited their participation. Vitol, Mercuria and Trafigura are active in the space but have been quoted recently calling for more standardisation to drive greater participation.

Banks and Their Strategic Advisory Role

• Banks have begun advising their corporate clients on carbon strategies which often leads to the establishment of a trading or origination function to support their clients execution efforts. Many are also identifying and investing in specific projects which can generate the credits needed by the bank and its clients. Industry stalwarts Goldman Sachs, Citigroup, JPMorgan Chase, and Barclays are often mentioned as backers of the carbon markets potential as highlighted here.

Insurance Companies: Infrastructure and Risk Mitigation

• Insurance companies are providing much needed infrastructure and risk mitigation to the markets, most currently offer a few products with a number of new ones on the horizon. CFC, Oka, and Kita have all recently launched products to support the VCM.

Hurdles to Participation: Challenges Facing the VCM

So what will it take to get participants to commit to the market in more meaningful ways?  

Risk Dynamics and Their Impact on VCM Participation

We need to see the “risk dynamics” in the market shift. Currently, market participants face a number of risks (market, project, reputational, country, regulatory, etc.) that outweigh the benefits (offsetting their emissions, positive brand image, meeting of SBTi or NetZero goals, reduced costs of operation) of engaging with the VCM.

Strategies for Overcoming VCM Participation Barriers

In order to flip this “risk dynamic”, the expected value must outpace the risks. To accomplish this the market needs to focus on:

• Improving and standardising the quality of credits/projects
• Building and optimising the infrastructure required for capital flows and trading
• Increasing the sophistication of market participants further up the value chain to interact effectively with investors
• Coordinating with, and communicating about, the interplay between the compliance and voluntary carbon markets
• Determining a baseline for a fungible ton of carbon and the price differentiation for co-benefits associated with a project

The Importance of Data in the VCM

Data and information are key components of managing the risks and maximizing the value of participating in the VCM. Our upcoming blogs will explore each of the hurdles above and how they can be overcome with clear and actionable data insights.

Upcoming Topics: Exploring the Future of the VCM

• Current market size, trends and capital flows
• Quality and integrity of projects and credits: how they enable the VCM and encourage investment
• Current market trends and Forecasts: Implications on trading and investment
• The convergence of compliance and voluntary carbon credit markets: impacts on investment opportunities
• 1 ton of carbon: Is it all equal?  How co-benefits impact price