Longer developer track records, more bankable projects and more transparency is helping the voluntary carbon market attract more institutional investment, according to Climate Impact Partners.
Sherri Hicock, CEO of Climate Impact Partners, told Environmental Finance that institutional investors are showing greater interest in voluntary carbon markets because developers have shown that projects can be bankable.
“As these projects [and developers] start to get more of a track record, there's a real reality of this being a returnable investment,” she said. “We were the first to develop what we consider to be a replication of a bankable contract structure from [the] renewables [sector], we did that on our India Panna [afforestation] project.
“That has us as the developer, private capital coming in … as institutional investment, and then an offtake [agreement], like you would see in a PPA [power purchase agreement] in renewables.”
Hicock said such a structure can help prevent some projects from failing, as often a developer may receive investment but fail to obtain an offtake agreement.
“Then the investment will fall apart because there's nothing bankable about it, or they get an offtake but can't get the funding, and it falls apart because they can't move the project forward,” she said.
Mo Safdar, commercial originator at Climate Impact Partners, said times had changed since the “golden years of the voluntary carbon markets” between 2021 and 2023, when prices went “through the roof”.
During this period, inflows poured into projects from many investors that “hadn’t done carbon before, but wanted to and liked the idea of doing something good” alongside making returns, Safdar said.
Amid concerns about integrity, the market consolidated and Safdar said institutional investors have focused on a limited number of players with proven track records.
He highlighted the recent partnership between Climate Impact Partners and Aviva Investors’ Carbon Removal Fund in a 13,600-hectare carbon sequestration project in Colombia.
“Once you have an anchor investor like Aviva … what that allows you to do is scale the project accordingly,” he said. “One of the really interesting parts about these carbon projects is that they become self-funding a few years into their life cycle. They begin to generate credits, and you can structure it in a way that the first credits sold from the project are used to cover the project costs.”
He said this helps to ‘de-risk’ the project from an investor standpoint and provides proof of concept, allowing them to link the performance-related incentives and long-term structuring outcomes to the successful implementation of the project.
“Investors no longer feel that they are putting up all of the money for all of the risk,” said Safdar.
Hicock expects a “less bumpy” market in coming years, as there is more harmonisation and standardisation, but warned growth would “not be linear”.
“I won't predict that it will be a smooth few years. I think the market will see consolidation, which I think it needs [because] it's quite fragmented,” she said. “But I do expect we will start to see harmonisation and standardisation across systems and tools, not necessarily in specific standards per se, but how we do the work … and us [to] be able to show the transparency that everybody is looking for.”