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Welcome to the Foresight Sustainability Series podcast

Dec 22, 2022

As corporations set net zero targets, they must demonstrate credible science-based strategies to reduce the carbon footprint of their activities. To do this, many companies are buying carbon credits to offset unavoidable and residual emissions on their decarbonisation journeys. As interim emission reduction targets are approaching, corporate demand for carbon credits is increasing. In response to this, the London Stock Exchange launched the Voluntary Carbon Market (“VCM”) in October 2022 to facilitate financing at scale into projects that mitigate climate change and generate carbon credits.

The VCM designation will be applied to funds or operating companies that are admitted to the London Stock Exchange’s Main Market or AIM and which are intent on investing into climate change mitigation projects that are expected to yield voluntary carbon credits.

In this episode Managing Director of Foresight Group LLP (“Foresight”) and Co-Lead of Foresight Sustainable Forestry Company Plc, Richard Kelly, discusses the climate challenge we face and the VCM with the CEO of the London Stock Exchange, Julia Hoggett.

Key Takeaways include:

  • Understanding what the VCM is and who it is for
  • Addressing the controversial history of carbon credits and the reputational challenges
  • Determining what a quality carbon credit looks like
  • Understanding the future demand and supply issues


The podcast is for information purposes only and without limitation, does not constitute an offer, an invitation to offer or a recommendation to engage in any investment activity. Listeners should not construe the content of this podcast as investment advice and no reliance may be placed upon the content. The opinions of speakers are their personal opinions and not necessarily those of their respective companies.

Foresight Group LLP is authorised and regulated by the Financial Conduct Authority (FRN 198020). Foresight’s registered office is at The Shard, 32 London Bridge Street, London, SE1 9SG.



Richard: [00:00:05] Hello and welcome to Foresight Sustainability Podcast, a series that explores the sustainability themes that will play a crucial part in shaping our world in the current period of accelerated change. In this series, we will be sitting down with industry experts to explore some of the major developments in sustainability-related fields and consider the challenges facing businesses in a new decade of climate change. With these sessions, we aim to inform and promote dialogue around the mainstreaming of sustainability. My name is Richard Kelly and I'm the host for this episode. I'm a managing director at Foresight Group and I'm also the co-lead and co-founder of Foresight Sustainable Forestry Company, a listed investment company on the London Stock Exchange, FSF The Ticker. We are the first and only listed investment company focused on natural capital. We are also the first and only listed investment company to have received the London Stock Exchanges’ voluntary carbon market designation. Today I'm joined by Julia Hoggett. Julia is the CEO of the London Stock Exchange. A warm welcome to you, Julia. Perhaps before we begin with you, perhaps like to give a brief introduction to yourself.

Julia: [00:01:18] Yes, thank you. Well, firstly, thank you for having me. It's a delight to be here. So, my background is a varied one. And I would say I am an African development sociologist who had a career in the last 25 years in finance and still hasn't quite figured out what I want to do when I grow up. But I've worked in the capital markets all my career, first as an investment banker, then I ran a funding program for bank, then ran a bank and back to being an investment banker, and then my role before I came to the stock exchange was as a supervisor and a regulator at the Financial Conduct Authority, and most recently I was director of Market Oversight at the FCA before I came to the LSE.  

Richard: [00:01:50] Fantastic, fantastic journey. Okay, well I have a few questions for you about climate change and perhaps we'll just kick off with - what is your view on the scale of the climate challenge that we currently face?

Julia: [00:02:01] It's huge, and I think it's a really important thing to, in a sense be able to say that out loud and to recognise the scale of the challenge, but to use that as a trigger for action rather than inertia. Sometimes I think one of the challenges with the climate crisis is that it feels so big and amorphous and the approaches that we need to take are so vast that it can almost be easier to not think about it. I actually think it's the responsibility of all CEOs of companies to think about it both in terms of directly addressing climate change, but also thinking about what they need to do and can do to be good stewards of their institutions to manage it. But it is an enormous challenge. But I think the nature of the challenge also correlates with the nature of the responsibility we have at the LSE. I always say that our job is as a convenor of capital, it’s to bring together those who have capital with those who need capital in service of an objective. And I can't think of a more important objective than the just transition to net zero. And so I think the onus is actually on us to make sure that our pipes and plumbing work in service of doing everything we can to direct capital into the investments that need to take place to achieve the transition that we will have to achieve.

Richard: [00:03:09] Absolutely. And in the spirit of that, it's exciting to see that the London Stock Exchange has recently launched the voluntary carbon market, or ‘VCM’ as it's known. What is the VCM? Who's it for and how is it different?

Julia: [00:03:22] Right. How long have you got? This is a bit of a passion project of mine, so I'll try and make the explanation as quick as I can. So, the voluntary carbon markets are the loose term for the markets that generate voluntary carbon credits, and that’s actually the thing that’s most important. Voluntary carbon credits are credits that represent tonnes of carbon either removed or reduced from the atmosphere as a consequence of the activity taking place. That activity has to be genuinely additive and not economically viable in its own right, and that therefore is something that has been hugely important in the construct of what we've been seeking to do. We have always described the carbon market challenge as a chicken and egg problem, which is that because the value from the investment comes from the value of the credits, then how do people have the confidence to invest in projects that generate voluntary carbon credits unless there is a deep and liquid market for voluntary carbon credits? How do you get a deep liquid market for voluntary carbon credits unless you have an active supply of credits? And an awful lot of exchanges have focused on trading voluntary carbon credits, whereas we have very much focused on how you solve that chicken and egg problem and how you do everything you can to direct capital into investments that will give rise to a voluntary carbon credit. And it is very much designed as a mechanism by which individuals, institutions and corporates that are on their own journey to net zero can have an asset that they can invest in that gives them that ability to get to net zero. And that is one of the remarkable things actually about really engaging with the transition. Value is changing. Understanding of value is changing. You could say it's a proxy ultimately for a carbon price because in some regards it is. But as people commit to science-based targets to get to net zero, then the ability actually to be able to invest in the things that will facilitate you getting there becomes more and more critical. And I think that's where pipes and plumbing and responsibility that we have as a venue comes in, in order to make sure that we've facilitated the mechanism to do that.

Richard: [00:05:26] So the key difference I was picking up there was that the LSE focuses on the flow of capital to projects that are creating carbon credits, whereas many others are focused on the trading of credits created. And that seems to be the key difference.

Julia: [00:05:40] It is absolutely. It's founded on a philosophical difference, which is the most important thing that we can possibly do is generate a rigorous flow and scale flow of capital into projects that reduce the amount of carbon that is in the atmosphere. That is what gets us to net zero. The trading is a by-product of having done that, but it isn't doing that in its own right. And I have always been fundamentally focused on the fact that stock exchange is doing a real-world job. The capital that is raised every day is in scales and volumes that most people think of as outside of their sense of understanding. But at the end of the day, it goes to building factories, it goes to investments in research, it goes to forestation in your case, that has a direct real-world impact and it produces jobs, employment, wages and livelihoods. And this is just another illustration of a market deliberately focusing on doing that thing.

Richard: [00:06:36] I just to pick out another point you made around connecting retail investors, financial institutions and corporates with investment companies who are creating these carbon credits. The last of those buckets - Corporates haven't traditionally invested in investment trusts much today. Do you see a big opportunity there.

Julia: [00:06:53] I do. And it is a transition in both sectors, both in terms of the transition to net zero and the psychological and investment transition for these corporates. Let me take a step back. One of the other things that I thought was so important about the structure that we've created, the designation for a voluntary carbon market, for a fund or an operating company that is meeting the requirements and genuinely investing in voluntary carbon credits, is that we also wrap the rest of the structures around it and capital markets are brilliant at investing at scale, but they also produce rules and regulations and standardisation and disclosure that produces transparency for the market and transparency for investors. And the voluntary carbon market at the moment is pretty small in terms of the total amount of carbon credits that are out there. That in itself is a problem compared to the future demands of these credits. But it's also not as transparent because there isn't standardised expectations of disclosure and it doesn't fit within the existing disclosure regimes that we have, for example, for UK capital markets. By creating a designation for existing listed funds or operating companies, what we have done is basically bring the entire voluntary carbon market within scope of listing regime, transparency regime and indeed the market abuse regime to increase the level of scrutiny, discipline and disclosure that happens around that market. And I hope that also gives investors of all types of institutional retail corporates even more confidence to invest in these projects because they are receiving the scrutiny and the discipline and the transparency that they would from any other investment that they make in the capital markets. And that, I think, is a critical piece of it. The next piece for corporates is how they think about this in the round. And let me tell you the reason why we have the confidence to generate the voluntary carbon market in the UK at this time. Even prior to COP26, the UK had made mandatory the use of TCFD for UK-listed companies. So you already had to disclose according to TCFC stance in terms of how you're thinking about climate change risk, how you’re thinking about governance, etc.. When you layer on that we're increasingly moving towards a world in the UK where companies will also have to publish their transition plans, then how they are going to meet the science-based targets that they commit to externally has a level of scrutiny and disclosure and discipline around it, actually, to be honest, doesn't exist in other parts of the world. The challenge for the voluntary carbon markets and the criticism that they've received from a range of different parties has been that they are a substitute for companies doing the hard yards of the direct investment in their supply chain and their production processes to decarbonize those. And our view has always been – no, this is a complementary piece of the puzzle. Companies, of course, need to make sure they are decarbonising their supply chains in their production processes. But when it gets to scope one, scope to scope three, depending on how they have identified their science-based target, there are and will be challenges that they cannot address yet. Either the technology doesn't exist or there are things that they cannot yet take out of the production processes. Or there are things that are outside of their control, depending on how they've articulated the scope that they want to apply. And voluntary carbon credits are a brilliant mechanism of companies being able to invest today in that piece of the puzzle that they can't resolve directly themselves and therefore on a net basis, getting to net zero but with the level of scrutiny and disclosure that they wouldn't have in any other form of route to get to that point. But it is because in the UK we have that complete package together that I hope you generate the most credible way of having a voluntary carbon market that you could.

Richard: [00:10:20] It really feels like a breakthrough, a massive step forward in terms of scaling the voluntary carbon market in one go. What is your ambition for the voluntary carbon market?

Julia: [00:10:31] My first ambition is that it works and it's used. I am a massive fan of real-world KPIs and that applies whether it's in the number of jobs or the new products that get created by capital that is raised on the market or the capacity that a company has to have the right access to working capital in the middle of Covid, which is one of the critical things that the LSE did during COVID. In this case, to me the key measure of success is how many tonnes of carbon have actually been removed or reduced from the atmosphere as a consequence of this market. That's its final, most enduring KPI, and the thing that I hope when we look back in many years to come, and it will be many years because an awful lot of the lead time in these things is serious time. But if we can see the amount of capital that’s going in today, then we can see the value of the incremental investments in reducing carbon from the atmosphere that is facilitated through this market. That to me is the most fundamental KPI achievement.

Richard: [00:11:25] So could you perhaps just explain how the scheme can help investors and corporates to actually meet their decarbonisation ambitions.

Julia: [00:11:34] So I touched on it a bit, but if you have made a science-based target, then there will be direct work you need to do. But in terms of reaching the rest of that, then investing in a voluntary carbon market asset today will give you the potential for a future flow of carbon credits that will go to the total amount that you have offset. And that fundamentally is the mechanism that corporates can use to get that. One of the tricks that unlocks this in our initial thinking about it was the idea that we would facilitate these funds paying a dividend either in cash, but most importantly a dividend in specie as a voluntary carbon credit so that the companies would actually know they had this forward flow of anticipated voluntary carbon credits that they could set against the other targets that they had set themselves and be able to demonstrate to the market who will increasingly be holding them accountable for them for how they’re meeting their transition plan, that they have actually made those investments to achieve that outcome. And the structure around the funds and the operating companies that requires the disclosure of the anticipation of the voluntary carbon credits that will be released and disclosure around the discipline of that, is part of contributing to that ecosystem and enabling people to be able to see the tangible impact that their investments are making today on their own science-based mechanism to get to net zero.

Richard: [00:12:52] So companies can invest today, elect to receive and in specie carbon credits dividend in the future and then they can because these funds and investment companies are traded on the LSE, they can presumably buy and sell more or less shares in order to adjust that due to yield requirements. And that's important, as companies don't have a crystal ball understanding exactly how much they're going to be able to decarbonise by and when.

Julia: [00:13:18] Exactly, and I think making it, in a sense, much closer to a classic treasury asset, when you spoke to a lot of companies about voluntary carbon credits, they sort of didn't quite know how to account to them and where to account for them. And this is an illustration of something that is classically in the space of a treasury asset or another asset on your books. It has a mark to market, it has a value, and exactly as you say, if you suddenly find that your route to the target that you've set yourself, you're falling short on, this is a mechanism of also investing incrementally to enable yourself to get there. And crystal ball piece is entirely right. And I think that is the other thing we feel quite strongly about as an exchange. It's actually our duty to advocate for the complexity of this. Many conversations, including around climate change get reduced to very binary things. This is complicated. If the transition to net zero was easy, we would have done it right. And the simple reality is we will learn a lot about what is most effective and what works as we make direct and the greater level of direct investments into this approach, and therefore recognising that the system will iterate and learn and that this is also a mechanism for potentially exploring technologies etc, is a really important part of the market.

Richard: [00:14:28] The carbon credits have had a somewhat controversial history and they're not particularly new assets or thing. How is the voluntary carbon market addressing some of those sort of historic reputational challenges?

Julia: [00:14:42] And this goes back to the thing I was saying about the sort of brickbats that they receive from civil society. And I understand that because it is important that actually we all take accountability, whether personally or from an institutional point of view, on our direct impact on the planet, because that's ultimately how you get to net zero and stay there fundamentally. But I think it has been badged as kind of, you can keep doing this bad stuff over here and offset it by doing this nice stuff over here. And therefore, it's a bit of a fudge at best, I think is probably a polite way of paraphrasing some of the bad stuff. And that's why I said what I said about the importance of the UK framework. When you have the foundation of TCFD disclosure, you then layer onto it transition plans. You have an increasing number of corporates who are setting science-based targets. Then exactly where the voluntary carbon credit fits within that transition is absolutely transparent. So that I think addresses quite a lot of the ‘it's a polluters’ kind of option to pay off, as it were. That is one piece of it. The other piece is that this produces as I said, the market disciplines around disclosure and scrutiny that give confidence to the quality of the credit. And one of the things I'll be honest, I worried about when seeing lots of different exchanges set up trading of voluntary carbon credits, is the risk is that you seek to kind of win market share on price? To be blunt, we're trying to set the market standard on quality such that actually it becomes harder for people to justify buying voluntary carbon credits that don't have the level of scrutiny that our market will produce. Because that level of scrutiny is the confidence that that activity is genuinely offsetting activity. Money is genuinely going where it needs to go, and the companies that are interacting in this market have the right credibility, the right controls, the right disclosure disciplines in order to fulfil that requirement. Because again, it's all in service of one thing, just taking carbon out of the atmosphere. And that to me is why we've started from this route, because the London market is a great market for standards and discipline and regulation. And in this case it's an incredibly powerful thing that this month that the carbon market needs.

Richard: [00:16:58] So the VCM is looking to sort of facilitate a market in the creation of high-quality voluntary carbon credits. And what does the LSC think are high-quality carbon credits?

Julia: [00:17:08] Well, we've set standards around the standards bodies that we would accept, and that was part of the process that we took around developing the market in the first place. We took a reasonably unusual step, actually, which was rather than just saying, here's a new market, we're opening it today. We announced that we intended to open the new market, which was a relatively unusual thing for the LSE to do. And the reason for doing that was to then engage with market participants on how best to structure it, and that some of that discussion was on the standards bodies that we would approach. And we've used a company to set some of the initial standards. But obviously, we will get to a point where we have the legacy of the task force on the scale of the voluntary carbon markets, setting core carbon principles. It's now the Integrity Council and the voluntary carbon market and we can increasingly, as those standards articulate and evolve, we can incorporate those by reference into our rule set as well. The intention is make it very clear what standards any listed entity is applying, the accounting methodology that they're using and that they've audited it as well. So it's making sure that the rules that set some of those expectations out so that it's very clear. What we didn't want to be was to be too didactic and say it has to be this set of rules and none other, because you actually want people to be able to determine the one that is best for the nature of the activity they're doing, but make it crystal clear that it's of sufficient standard and that they’re disclosing to those standards.

Richard: [00:18:31] So we've seen corporates increasingly making net zero pledges and science-based targets. Net zero pledges are almost on an exponential rise, they've more than doubled in number to over 4000 companies making a science base pledge in the last year. How do you see that translating into the future demand for voluntary carbon credits and also the pricing of them?

Julia: [00:18:53] There are lots of studies on what the price could be or should be. I haven't seen one that says it goes down if I'm honest. The way I frame it is in quite simple terms, which is that if you have set a net zero target of 2050, then if you start thinking about voluntary carbon credits you need to invest in 2040, A it'll be too late and B it will be really difficult to find them because the lead time to generate credible, legitimate credits is not insignificant. Therefore, fundamentally, unless we address the supply problem, we will have a massive demand problem. And I don't think even at the rate that we feel we can grow a market, we'll be addressing the supply problem as quickly as we need to existentially. And therefore, the upward pricing pressure on carbon credits I think will only increase and my instinct is that we'll see both demand and price go up. I think we are at a bit of a turning point and I do think that implementing transition plans is one of the pivot points for that, because that's where the kind of final accounting of the pathway really is where the rubber hits the road. Increasingly, investors will demand evidence from the people that the companies are investing in to show me your glide path to get there. Show me all the steps you're going to take. And what is your unknown bit right now that you haven't solved? And that will become increasingly tangible and cogent as a challenge for certain issuers with the corporates and make the need to engage and invest in the voluntary carbon market increase. I don't think we should also underestimate the retail problem. So one of the challenges that you quite often see from retail point of view is that retail absolute demand and desire to focus and invest in assets which have a really direct kind of transition benefit - but also additive. And one of the challenges often is, is this activity that would have been happening anyway or is this activity that is genuinely new and additive to the sum total of direction of travel that we're taking? And if you think our risks are that our current pathway is at least 2.6, 2.7 degrees and nowhere near one and a half degrees, then the need for additive activity is crystal clear. This is one of those markets that absolutely does that thing in a way more than almost any other green asset because of the nature of what a voluntary carbon credit is in and of itself. So, I hope that increasingly that dynamic will become part of people's focus as well. But if I'm blunt, I can only see demand and price going up with the current dynamics we have with the market. It's one of the reasons why the quality of the credit is so important. Because in those circumstances you don't want low quality, actually not delivering credits to flood the market. You want a steady stream of capital flowing to high quality credits.

Richard: [00:21:36] It's all about high-integrity credits. The London Stock Exchange launched the voluntary carbon markets at the beginning of October. How do you see it progressing and evolving?

Julia: [00:21:46] Well, as I said, I think we have been thrilled by the pace at which it's actually evolved. We’ve been thrilled by the engagement we had with the community across capital markets to develop the standards in the first place. It's been great to see the first funds, first company come to market and get the designation. It's wonderful to see. It was a very joyous day in the exchange I think, the day that that happened. And I do see more coming. I mean we see fund managers looking at this interestingly, we see sovereigns looking at this because they're sitting on a lot of these assets and thinking about how to make sure that they, in a sense, use them to benefit future generations. So it is one of those unusual markets where, given the direction of travel and the absolute need and commitment to get there and the need to re-engineer pipes, so that capital can flow in service of that objective, you can see a growing emphasis and energy behind it. So I can only see it going from strength to strength. But then I, I operate on the basis that you need to be kind of ruthlessly frank in terms of your - I describe it's a scrupulously honest mark to market about the problem. And I think we have to be when it comes to climate change, but intensely optimistic about our capacity to resolve it once we're pragmatic about the understanding of the problem. And I think there is a level of focus and momentum now around addressing it and making sure that the capital markets play their part in addressing it, that I hope that we've hit the right point to harness and accelerate the focus.

Richard: [00:23:11] Yeah, it feels like the market has hit something of an inflexion point and it's a sort of an inevitable drive whether we'll get to one and a half degrees exactly. But it feels that there is sufficient momentum now with corporates, governments behind this. Well Julia, thank you so much for joining us on this sustainability podcast. It's been an absolute pleasure to have you on this and many thanks. And congratulations on the voluntary carbon market. It really does feel like a breakthrough in the UK's fight against climate change.

Julia: [00:23:39] Well, thank you and congratulations to you as well for being a first recipient of the designation. I think it's a testament to the focus and the nature of the work that you do. But also, I hope that we can both look back in years to come to say that that was the starting point against which thousands of tonnes of carbon was offset, and we got closer to one and a half degrees and that wouldn't be a bad way to look back on the future of work in the capital markets.

Richard: [00:24:05] Yeah, absolutely. Julia, thank you so much.