Agnostic capital: how carbon offset funds navigate a divided market  

The burgeoning academic evidence on carbon offsets offers plenty of reasons to be sceptical. A widely cited meta-study published last year found that less than 16% of issued credits amount to real-world mitigation. Others have found quality concerns that permeate across the offset project spectrum.

Asset owner conviction in carbon credits stands divided. Some, such as German pension fund Bayerische Versorgungskammer (BVK) have historically distanced themselves from the proposition while others such as UK’s NatWest Cushon and Essex Pension Fund have invested in carbon offset funds.

One such fund is the Stafford Carbon Offset Opportunity Fund (SCOOF). Marta Jankovic, head of sustainability at Stafford Capital Partners, told Net Zero Investor more about the state of play and how Stafford navigates asset owner demand for nature-based carbon credits.

Demand-led

An asset manager with a long history of managing timber assets, Stafford currently manages $8.5bn across forestry, infrastructure and private equity. SCOOF, Stafford’s inaugural SFDR Article 9 fund, is aimed at generating carbon credits from timberland.

“SCOOF is a strategy that was developed to meet a specific market need of having access to both carbon credits and timber assets that can be held for a long period of time”, says Jankovic.

That market need, she points out, shapes Stafford’s thinking around credits.

“Our approach to carbon credits is that they can be used at the investor’s discretion. They will be either sold on the market when they are generated, if that's what the investors want, or they will be distributed in kind to the investors who want to hold them”, she told Net Zero Investor.

“This is still a reasonably new opportunity set for investors. It really depends on that asset owner's own approach to either managing their net zero targets or their desire for deploying such instruments”, she adds.

Viewed in that light, asset managers such as Stafford seemingly navigate divisions over carbon credits by being choice agnostic. The claim being that they’re in the business of offering a choice, rather than making one.

“We do not take a specific view on the choice our clients make, but we believe it is important to be able to offer it to them”, commented Jankovic.

Responding to criticism

Agnostic as they may be carbon offset funds still face scepticism over integrity, quality and reliability. Jankovic, who recognises the validity of these concerns, is confident there is a way forward – high integrity standards.

“We believe that it is necessary to stand behind these evolved and much more high integrity standards that have been developed in response to the VCM criticism over the years”, she says.

“We believe that with the right certification and the right assets, partners and credit issuance, nature-based carbon credits have a very important role to play in supporting the transition”, she notes, outlining Stafford’s house view on the issue.

Materiality

It is not hard to imagine that Jankovic’s view – that high integrity credits are viable answers to the quality crisis – is a shared one across the carbon offset fund universe. The argument however, rests on a critical assumption: that integrity is financially material to the market.

In other words, for this logic to work, it must be true that carbon credit markets place a premium on integrity. This, according to the team at Stafford, is in line with the evidence.

“We are seeing high integrity carbon credits attracting a significant price premium, and the spread between pricing for these credits and those for lower integrity credits continues to widen”, says Jankovic’s colleague Marek Guizot, a principal & carbon fund lead at Stafford Timberland.

“We believe, this means it is important that Stafford's carbon fund focuses on generating credits using the most robust methodologies and from activities that bring multiple co-benefits, since this will enable them to capture these premiums”, says Guizot, citing data from MSCI.

For offset fund operators such as Stafford that would imply that the business of offering the carbon credit choice is best served by ensuring that its integrity is maintained.

An incentive that Jankovic points out, will ensure that Stafford’s offering will stand the test of time. “I do hope that the market is going to continue to recognise the value of nature based carbon credits from afforestation, reforestation and improved forest management projects”, she says.