MVGX President Michael Sheren discusses key takeaways from COP27 and the importance of regulation and high-integrity standards for carbon markets.
Earlier this month, the United Nations World Meteorological Organization (UNWMO) released yet another report stating that the internationally agreed 1.5 degrees Celsius limit for global heating is now “barely within reach”. As a result, human-attributed extreme weather events are fast becoming the norm — and often with debilitating, long-lasting consequences. This same conclusion was reached by many of the delegates, myself one of them, as we left the United Nations Climate Change Conference (COP27) a few weeks ago.
The costly and accelerating repercussions of severe climate events and their second- and third-order effects on countries and their citizens are of intense focus to policymakers. The devastating floods that have impacted over 33 million people in Pakistan had clear “fingerprints” of the human-made climate crisis, following the scorching heatwaves the country saw earlier in the year. Furthermore, as stated by a Pakistani attendee at COP27, “what happens in Pakistan will not stay in Pakistan.”
Befittingly, the discussions at COP27 on this matter were intense, as climate activists and leaders of developing countries pointed to the need for Loss and Damage compensation. In the end, the agreement to set up a Loss and Damage funding facility is the most notable achievement coming out of this year’s COP negotiations as very little was achieved in curbing global carbon emissions.
Who and how these Loss and Damage payments will be made to is largely still up for debate; however, it is clear that progress on combating climate change hinges on climate finance. A strong talking point at COP27 was the role of private sector solutions and green investments in enabling countries to meet their nationally-determined contributions as part of their net-zero targets. The climate adaptation market, in itself, is set to be worth USD 2 trillion per year by 2026, making it an untapped opportunity for investors and businesses alike.
As the discussions wrapped up at Sharm El Sheikh, the question on everyone’s mind is whether this would be another year of pledges and promises, or finally the time when the world sees true action.
More than the money
The US has emitted more CO2 than any other country in the world to date, responsible for 25 percent of historical emissions — twice that of China. Alongside the European Union which contributed 22 percent of emissions, the Industrialised North shares a significant collective responsibility for the state of the environment as it is today.
Ultimately, key well-intentioned pledges to support the Global South have been hard to complete. In 2009, developed nations pledged to mobilise USD 100 billion annually by 2020 to climate-vulnerable countries. These promises were not met, falling far short of the target. While G7 nations reaffirmed their commitment to meeting the target, extending it to 2025, actually meeting it this time around will be essential to rebuilding trust and reaffirming accountability.
Some critical progress came out of the Indonesian G20 meetings that overlapped with COP27. During this time, the Indonesia Just Energy Transition Partnership (JETP) was announced; the JETP will see USD 20 billion in public and private finance to help the Southeast Asian archipelago to shut down its coal power plants and bring forward its energy sector’s peak emissions to 2030.
Dubbed “the single largest climate finance transaction or partnership ever” by a US Treasury official, the move is a significant, tangible step in facilitating Indonesia’s green transition. However, tides remain surprisingly difficult to turn and the world will watch intently to see if the JEPT initiative is converted into action with tangible results.
The need for standard setting
Another development to come out of COP27 pertains to the US’ Energy Transition Accelerator, a new voluntary carbon market (VCM) trading scheme created in partnership with the Rockefeller Foundation and the Bezos Earth Fund. Decisively restricting access from fossil fuel companies, the Accelerator aims to boost investment in clean energy projects in developing economies. Similarly, the United Arab Emirates announced its own carbon-offset trading exchange in order to meet its carbon neutrality targets by 2050.
Yet, both initiatives were met with a lukewarm reception, with critics being quick to point out that most voluntary carbon trading initiatives merely enable polluters to keep polluting rather than reduce their emissions altogether. The reaction illustrates the absence of high-integrity global threshold standards in the voluntary carbon markets. This lack of transparent high-integrity standards threatens the veracity and tangible output of well-meaning initiatives.
To be clear, the issues surrounding VCMs stem from concerns on several levels — whether it’s the environmental integrity of the credits themselves, or the trading environment in which they are being transferred. Many critics complain about how carbon credits are positioned in the market and the extent to which their use is simply tantamount to greenwashing — all without focusing on the financial structures underpinning the system that are designed to draw capital toward green energy and regeneration.
There needs to be more clarity on whether the carbon reduction projects to which the emission reductions are tied are actually doing what they’ve promised to do. In this way, we can start building trust and confidence in the system and ensure the climate action being claimed by an entity cannot fall afoul of existing nationally-determined contributions (otherwise known as the double-counting problem).
In the face of skepticism, the market needs to be fully regulated. The financial infrastructure must be built to bring carbon (and potentially other nature-based credits) into the global financial service architecture like commodities, derivatives, and debt securities.
However, until there is a global consensus around the regulatory oversight of the issuance and trading of voluntary credits on a cross-border basis, all of the stakeholders in the market will need to take responsibility for assuring all carbon credits meet the highest existing standards. This means having a clear framework and guidelines for data collection, measurement, and accounting as this is critical to scaling these trading facilities in order to create greater liquidity and depth in the market.
High integrity standards are the central point of focus at MVGX. We are committed to advancing this by leveraging new technologies such as blockchain to imbed greater integrity and transparency in the voluntary carbon market. Further, MVGX applies globally-recognised standards, such as the Clean Development Mechanism, Gold Standard, or Verra standard for carbon credit verification, ISO 14064-1:2018 for carbon footprint verification, and PAS 2060 for carbon neutrality verification.
However, we are aware standards are improving as carbon credits move towards a fully regulated market. We are in regular discussions with and follow closely, the standards coming out of the IC-VCM and the United Nations. The UN standards, expected to be released in 2024 or 2025 will most likely be the controlling standards that global financial regulators could coalesce around. However, until then, it is imperative that full transparency around the highest existing standards be followed.
The role of new financial instruments
Throughout the past year, countries such as Singapore have made significant inroads in supporting the creation of new green financial instruments to attract green investment. Earlier this year, the city-state introduced its own Green Bond Framework in line with internationally-recognised market principles and standards.
The introduction of such a clear financial policy direction is important to lure institutional market participants to a financial center. Large global institutional investors such as insurance companies and pension funds value directional guidance and approval from policymakers and regulators.
Earlier this month, the Monetary Authority of Singapore also announced that it would be establishing the China – Singapore Green Finance Taskforce with the People’s Bank of China. The task force aims to encourage more public-private sector partnerships, in a bid to divert private capital toward the APAC region’s sustainable development needs.
This also involved cooperative agreements between the Singapore Stock Exchange and the Shanghai Stock Exchange and Shenzhen Stock Exchange to launch a family of Low Carbon Indexes that will serve as a benchmark for new green funds focused on China and ASEAN. Amid increased demand for ESG and climate investment opportunities, this initiative will channel capital toward some of the region’s leading investors.
A trusted transition
Beyond the seemingly far-off promise of holistic climate reparations, the right structures and vehicles need to be put in place to strengthen climate financing initiatives. Now, more than ever, the role of the financial services sector in facilitating a just transition for developing economies cannot be overstated. However, this, along with climate policy, needs to go hand in hand with the right technological frameworks to mandate standardisation and transparency — only then can we see greater uptake in private sector solutions that can play a significant role in enabling countries as well as businesses to meet their climate targets.
As world leaders come away from their discussions at Sharm El Sheikh, one thing is clear: while progress has been made in reigniting old discussions, now is the time for decisive action at scale and pace.
Michael Sheren is President and Chief Strategy Officer of MVGX (MetaVerse Green Exchange), which provides Carbon as a Service (CaaS) products and climate and environmental advisory services. Prior to joining MVGX, Michael was a Senior Advisor at the Bank of England for nearly a decade, and before that he spent 25 years in the private sector in leadership roles at JPMorgan Chase, GE Capital, Credit Agricole CIB and other financial firms.