Wall Street prepares to profit from 1 trillion climate market

Wall Street prepares to profit from $1 trillion climate market – Yahoo Finance

(Bloomberg) — As the carbon offsets market gains new momentum from the COP28 climate summit in Dubai, Wall Street and City of London bankers are preparing for a slice of the negotiations they say are coming .

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Banks that have established underwriting and treasury divisions include Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and Barclays Plc. They want to finance the development of CO2 sequestration projects, trade loans and advise corporate customers on purchasing offsets. They are also interested in supporting local projects in emerging markets that currently lack the financial clout to scale up their work.

“Many project developers don’t have huge balance sheets and are struggling to raise money,” said Sonia Battikh, global head of carbon offset trading at Citi. “A bank like Citi can play a role in bridging this funding gap and channeling money into projects.”

Wall Street is struggling to gain a foothold in a market that has the potential to reach as much as $1 trillion as offsets offer a way for companies to reach net zero without actually eliminating all of their emissions . Rich Gilmore, chief executive of investment manager Carbon Growth Partners, said it was already clear that there would soon be an acute shortage of high-quality loans given the demand.

With that in mind, “Wall Street giants will need to balance speed to market with a deep understanding of the rules, norms and expectations” as the voluntary carbon market evolves, he said.

At the moment, it's a market still trying to emerge from a long list of controversies.

Many of the credits generated have been criticized by climate researchers for allegedly failing to meet the environmental needs of those who sell them. Last month, the chief executive of South Pole – the world's largest seller of carbon offsets – resigned as the company vowed to investigate allegations of greenwashing and “learn from the experience”.

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Bankers who study the market say such episodes must not undermine confidence in the future of carbon offsetting. “It would be a shame if the criticism, even if well-intentioned, undermined the flow of money into these projects,” said Kiru Rajasingam, head of European power, gas and emissions trading at Citi.

And in his speech at the COP28 summit in Dubai, US climate negotiator John Kerry described himself as having “a firm belief in the power of carbon markets to drive ambition and action”.

Ingmar Grebien, head of the Commodities Sustainable Solutions unit at Goldman Sachs, said the markets he studied “remain fragmented and in their infancy in terms of efficiency and transparency.”

At Goldman, which last year hired former Gazprom executive Leigh Smith to a role that includes carbon trading, the “focus is on expanding trading and financing solutions for sustainable commodities such as carbon, renewable energy and other emerging environmental products said Grebien.

JPMorgan hired its first voluntary loan dealer in Houston earlier this year and asked not to be named because it discussed information it is not authorized to disclose, according to a person familiar with the matter. A JPMorgan spokesman, who declined to name the new hire, said the company was “adding carbon trading capacity.”

The largest U.S. bank offers trading in carbon credits as well as capital, advisory and market-making services. It is an “increasingly important” area of ​​focus for JPMorgan, the spokesman said.

For some, the entry of global banks into a market that is not yet properly regulated is a worrying development.

“After a year of revelations about how terrible the voluntary forest carbon projects have been,” it's “astonishing that people are again saying we need this without a complete overhaul,” said Michael Sheren, a former senior adviser at the Bank of England, who is now in office is a fellow at the Cambridge Institute for Sustainability Leadership.

“The VCM is like a multi-headed snake that has been resurrected at COP28,” he said.

Although climate scientists have long cautioned against relying on offsets to achieve net-zero emissions, they also recognize that such products are crucial in tackling residual emissions in sectors that are difficult to reduce are.

Limiting global warming to 1.5C above pre-industrial levels “will require significant carbon reductions,” Carbon Direct, a carbon management company, said in its annual report. The voluntary carbon market “is an important tool for developing carbon solutions at scale,” it said.

And in the name of exorcising the ghosts of the past, a new era of cooperation began in the first week of COP28. The largest voluntary carbon standard setters agreed to align best practices and improve transparency, while key organizations plan to establish a comprehensive integrity framework for carbon credit programs.

The U.S. Commodities Futures Trading Commission, which regulates derivatives markets, used the COP28 summit to unveil standards for carbon-offset, high-integrity futures trading. United Nations officials are expected to announce new guidelines for the voluntary carbon market at talks in Dubai, based on guidelines drawn up by experts last month.

Voluntary carbon credits “will not solve the climate crisis,” Rajasingam said. “But at the same time, we don’t want valuable projects to go unfunded because of reputational stigma.”

CO2 prices are currently at historic lows. There was a 12% drop in demand last year, with a further 5% drop in 2023, according to BloombergNEF.

“But the fundamental drivers underlying demand have not changed,” BNEF’s Layla Khanfar wrote in a recent research note.

Drivers include the sheer fact that many companies will not be able to achieve their net zero targets without using offsets, as well as the prospect of national restrictions. Such dynamics create the conditions for a significant price increase by the middle of the century, estimates BNEF.

How offsets work:

The purpose of the voluntary carbon offset market is to generate carbon credits, which are then typically purchased by companies to offset their emissions. A carbon credit is a paper security intended to represent one ton of CO2 reduced or removed from the atmosphere through projects such as wind farms or tree planting. Project developers partner with intermediaries like South Pole to sell the loans. Buyers can trade the units or use them to offset their own emissions. In this case, they must withdraw the credit to avoid double use.

Citi's carbon markets team currently consists of four traders based in London and four sales representatives covering the voluntary carbon market. As Bloomberg reported last month, Barclays has hired an industry veteran from Shell Plc, Oliver Morning, to lead its carbon trading operations.

Adding to the long list of unknowns surrounding the carbon offset market is the element of technological innovation that could suddenly boost the carbon removal sector. This can make some project financing feel more like a “venture capital-style risk,” Rajasingam said.

“Carbon credits are best suited when prices and methods are fixed, rather than for technologies that are still in development,” he said. “However, we intend to be very active in relocations as they increase.”

Michael R. Bloomberg, founder and majority owner of Bloomberg LP, the parent company of Bloomberg News, is the UN Secretary-General's special envoy for climate ambition and solutions. Bloomberg Philanthropies regularly works with the COP Presidency to advance climate action.

Bloomberg LP, the parent company of Bloomberg News, is partnering with South Pole to purchase carbon credits to offset global travel emissions.

(Adds comments from Carbon Direct in 18th paragraph.)

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