By Brad Weilbacher, Business Development Executive
For a long time, conversations about the voluntary carbon market (VCM) have been framed primarily around cost. But over the past year, I’ve noticed a clear shift in how corporates, particularly CFOs and finance teams, are viewing and approaching carbon.
Carbon is increasingly being discussed as a financial asset, not just an expense line. That change alone is reshaping how investment conversations are happening, and it raises a question I’m being asked more often: is now the right time to invest in the voluntary carbon market?
Does the regulatory environment support investment in carbon? While this varies globally, jurisdictions where International Financial Reporting Standards (IFRS) are accepted provide a useful example. We’re beginning to see IAS37 and IAS38 used to frame carbon as contingent liabilities and intangible assets. This shifts how carbon is viewed, from an expense item to a tool to minimize risk and captured as a financial asset.
Demand is an often-discussed topic: where is it, when will it show up, and what will be the turning point? I believe a number of structural changes in the market are starting to help answer these questions. The number of compliance markets allowing voluntary credits to be retired is still modest, but with another 19 countries considering this approach, that could change. As CORSIA begins to take full effect, we’re seeing increased interest in eligible credits. Insurance products are also helping to mitigate risk and encourage corporate participation and purchases.
What does the pricing environment moving forward look like? Over the past 12-18 months, the carbon market has become much more price-efficient. We’ve started to see premium pricing for credits deemed to be of higher quality (for example, CCP-aligned, CORSIA-eligible, compliance-eligible, and newer versions of methodologies). Looking ahead, the supply of these higher-quality credits remains well below predicted demand, creating an environment where prices could rise.
How sophisticated are market participants, specifically project developers? The profile of project developers in the VCM has shifted. It is now far more common to see development teams with extensive experience in both finance and carbon projects. These teams are building more sophisticated business cases and are able to clearly explain them to investors.
So, from my perspective is it a good time to invest?
The voluntary carbon market is still evolving, and it is not without risk. But the nature of those risks, and the tools available to assess them, are changing.
The regulatory environment is increasingly framing carbon as a financial asset, the market has become more price-efficient with premiums emerging for higher-quality credits, supply of those credits does not currently meet expected demand, global programmes and standards are driving future demand, and counterparties are becoming more sophisticated. Taken together, the conversation is moving beyond whether to engage with the VCM and toward how and when it makes sense to invest.
For many organizations, that makes now a moment worth taking seriously. For further discussion or questions, feel free to get in touch here.