Activist investor proposes rating carbon credits like bonds

Activist investor Kimmeridge proposed a system for rating carbon credits in a similar way to bonds, saying in a paper on Thursday this would help give buyers confidence their purchases would actually contribute to reducing planet-warming emissions.

Companies can choose to offset their impact on the environment by buying carbon credits, which are generated by projects ranging from tree-planting to capturing of gases from industry, in a $2 billion market which is currently unregulated.

“We have been acquiring credits and we have seen the flaws in this market,” said Kimmeridge managing partner Ben Dell.

Kimmeridge has invested in Civitas Resources (CIVI.N), which bills itself as the state of Colorado’s first carbon-neutral energy producer, and has also invested in a dedicated producer of offsets called Chestnut Carbon.

Scientists believe extracting carbon dioxide (CO2) from the atmosphere will be essential to help to meet global climate goals, but critics say voluntary carbon markets based on projects to do so are not transparent and question their environmental quality.

In its paper, Kimmeridge proposes using a common scale to grade all types of projects. It compares voluntary carbon markets with the bond market, setting out a chain of four participants: regulator, auditor, rating agency and buyer pool.

Identifying the rating agency as the “problem area” in the carbon market, it proposes a system that would “ideally be managed by a very limited number of independent entities … similar to the role S&P and Moody’s play in the bond market”.

An independent governance body called the Integrity Council for the Voluntary Carbon Market (ICVCM) published its own criteria for new standards in the carbon offsets market last month.