Climate change mitigation projects receive backing from the LSE’s new Voluntary Carbon Exchange Platform
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On 10 October 2022, the London Stock Exchange (LSE) launched it’s Voluntary Carbon Market (VCM). The LSE’s goal is to “address two major challenges: access to capital at scale for the development of new climate projects worldwide; and primary market access to a long-term supply of high-quality carbon credits for corporates and investors.”
How will the VCM work?
| Eligibility | The VCM is open to closed-ended investment funds and operating companies admitted, or seeking admission, to the LSE’s Main Market for listed securities or AIM (together “Issuer(s)”). |
| Designation |
An Issuer can apply for carbon market designation if it is intent on investing into climate change mitigation projects that are expected to yield carbon credits in line with market rules. A carbon credit is a tradable certificate which represents the Independently Certified removal or avoidance of one tonne of carbon dioxide or the carbon dioxide equivalent (based on a 100- year global warming potential) of another greenhouse gas.[1] The designation requires Issuers to produce additional disclosures in relation to the project they are directly or indirectly funding, including:
Issuers do not need to maintain a portfolio of entirely climate aligned assets, meaning a wider number of funds and companies can be involved in the VCM. |
| Implementation |
The Issuer then implements the projects, providing reporting against defined milestones for credit issuance (in addition to existing regulatory requirements). |
| Investors | Market investors (institutional, retail and corporate) can buy shares in Issuers with carbon market designation across the LSE markets. |
| Carbon credits |
An Issuer can issue carbon credits as a dividend ‘in-specie’ (a dividend satisfied by the distribution of non-cash assets), retire (the carbon credit is used to offset an organisation’s carbon footprint, and is therefore permanently removed from circulation by the Registry associated with its creation) or sell the carbon credits. |
| Other activity and investments |
To ensure that the Issuers are contributing to positive environmental outcomes, all other activities and investments must be mapped to FTSE Russell’s Green Revenue’s Clarification System and those businesses must be undertaking activities in Tier 1 and Tier 2.[2] |
The VCM intends to support the transition to a low carbon economy by enabling funds and operating companies to raise capital which is channelled into projects that contribute to reducing the amount of greenhouse gases in the atmosphere, both nature-based and technology led. Examples include urban forestry, sustainable transportation and clean water distribution, all of which are expected to generate carbon credits. It is also designed to “support corporates seeking to offset their residual or unavoidable emissions on their net-zero journey”. As the first major international exchange to set listing rules for carbon credits, it was an exciting development especially as the topic was debated heavily at COP27.
[1] Definition from the LSE Admission and Disclosure Standards, effective 10 October 2022 (link)
[2] The Green Revenues Classification System identifies Tier 1 and Tier 2 activities as those contributing to broader environment objectives.
