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Maria Houchins
CIRRUS Low Carbon financing is the ONLY private financial product with a lower cost of capital when you develop or renovate with a lower carbon design. Our Low Carbon Team will even help you meet the design requirements at no additional cost.
The friends founded PT Rimba Makmur Utama with the idea of using carbon financing to preserve and restore peatland ecosystems in Central Kalimantan. The region had been seriously damaged by fires since the early 1990s. PT Rimba Makmur Utama launched the Katingan Mentaya Project to deliver on these goals, including providing sustainable livelihoods to local communities. Today, the Katingan Mentaya Project manages 157,000 hectares of land, encompassing 35 villages. It issues approximately 7.5 million metric tons of emissions reductions per year, which is, by its own calculations, the equivalent of taking two million cars off the road.2Katingan Mentaya Project.
Dharsono Hartono: If everybody had focused on risk-adjusted returns 16 years ago, we never would have launched the Katingan Mentaya Project, because it was all risk and no return. Family offices, among others, are interested in impact investing as part of their portfolios because they want to contribute to society. We know now that carbon credits can deliver a return, but sometimes you need to also take a leap of faith. Of course, not every investor profile fits with these kinds of investments, but the more people who understand what we do and the impact we create, the more willing they are to take that leap.
New Buildings Institute (NBI) has partnered with PACE Equity to develop a low carbon specification to be used as the basis for specialty financing that rewards projects for pursuing a lower carbon design and construction option. This specification is for new construction and deep renovations of commercial properties. NBI provided the technical development and PACE Equity has developed a larger program around the standard called CIRRUS Low Carbon.The purpose of creating this first-of-its-kind low carbon building program is to influence real estate developers to make incrementally more sustainable buildings that lead to improved return on equity for the developer and a better carbon footprint for the benefit of the planet. Return on equity is positively correlated to return to the environment.
Improving the performance and reducing carbon emissions associated with the operation of commercial buildings is critical to meeting climate goals. According to the International Energy Agency (IEA), the construction and operation of buildings accounts for approximately 35% of global energy consumption and 39% of emissions. To be on track to achieve a carbon neutral building stock by 2050, the IEA estimates that carbon emissions associated with buildings would need to decrease by 60% by 2030, or about 6% per year.
Capital markets have a crucial role to play in financing the transition to a green economy. However, these markets remain relatively under-developed in many developing countries. Banks and financial institutions in these countries can play an important role in lowering the carbon footprint of rapid growth by redirecting capital flows to environmentally responsible projects and innovative technologies.
Green loan portfolios of Bangladeshi banks increased from BDT24.2 billion in to BDT94.1 billion in 2018 after the central bank set a minimum annual target for banks and other financial institutions to dedicate 5 percent of total loan disbursements and investments to green financing.
Rise of the labeled Green Loan
Using loan finance to fund green projects is not new, but in December 2018, the Loan Market Association, in conjunction with leading financial institutions, developed a standardized industry framework to finance projects that provide clear environmental benefits. The Green Loan Principles (GLPs) are closely modelled on the widely recognized Green Bond Principles (GBPs) and promote the same type of transparency in project selection, fund allocation and reporting.
As global demand for sustainable finance continues to surge, the supply of these types of loans is expected to increase, especially from companies committed to reducing their carbon footprint and achieving positive impact.
Tribal Carbon Offset Assistance Grants provide funding for Tribes to support developing carbon offset projects on federally-recognized tribal lands in Washington. Through the Climate Commitment Act, a total of $5 million is available for this competitive grant program in the 2021-23 Biennium.
Proposals must be related to designing, developing, and implementing carbon projects that would occur on federally-recognized Tribal lands in Washington. Applications must include one or more of the following elements:
To avoid the worst effects of climate change and biodiversity loss, world leaders, scientists, corporations and activists agree the world needs to dramatically reduce and remove carbon dioxide emissions from the atmosphere.
Climate-smart reforestation is the most effective and lowest-cost nature-based pathway to capture carbon dioxide and prevent further global warming, while creating forests better adapted to climate change. Healthy forests mitigate climate change by absorbing and storing carbon in their roots, wood, bark and soil. In fact, in 2021, U.S. forests and forest products captured and stored nearly 775 million metric tons of carbon dioxide, enough to offset 16.7% of carbon emissions from fossil fuels in the same year. While experts agree we cannot meet our global climate goals without significant contribution from forests, high upfront costs can often be a barrier to reforestation.
The Reforest America Carbon Program connects climate-smart reforestation projects with the funding and tools to restore healthy forests to public, private and tribal lands. Utilizing markets for climate, biodiversity and other ecosystem services, the program offers solutions to barriers that have traditionally limited carbon financed reforestation, especially the challenge of high upfront costs coupled with lengthy timelines of tree growth and associated carbon benefits.
The program values transparency and integrity, using the most rigorous carbon accounting methodologies and approaches, including a dynamic, observed baseline that ensures only the carbon attributable to the presence of Reforest America Carbon Program is third-party verified as additional.
Across the U.S., the largest portion of forests are owned by families and individuals in small parcels between 20 and 1,000 acres. For these small forest owners, carbon markets provide a voluntary avenue for action, rather than a regulatory approach. And, like timber markets, signal the value in keeping their forests as forests.
More importantly, carbon markets help landowners overcome cost barriers, allowing them to bring in income from their land that helps them implement improved management practices that they would normally not be able to afford.
The good news is that carbon markets are growing. Mark Carney, chief of the private sector Taskforce for Scaling Carbon Markets, has pointed out that voluntary carbon markets will need to scale 15-fold to meet growing demand fueled by net-zero pledges made by companies. This demand and the dollars associated with carbon credits could be channeled to family and individual forest owners.
While forest carbon projects exist and are growing, the vast majority are on properties of 5,000 or more acres. Less than 1% of the current forest carbon projects are on smaller forested properties. This is due to high upfront enrollment costs.
The good news is, unique and credible private carbon programs designed specifically for family forest owners are beginning to surface. The Family Forest Carbon Program, created by AFF and The Nature Conservancy, is one example. Unlike cost-share programs, which are the only form of government support for forest management, the Family Forest Carbon Program pays landowners upfront to implement climate-friendly forestry practices that increase carbon sequestration and storage. Then using a new methodology, measures the carbon generated in a credible, yet more landowner-friendly approach.
In fact, AFF, with NatureVest, engaged 25 investors and asked about the investment returns they would expect from a forest carbon project without some sort of risk assurance or credit enhancement. None of the 25 indicated a willingness to invest without a credit enhancement at an interest rate of 4%.
By providing a loan or bond guarantee for carbon projects for small forest owners, the federal government can reduce risk to investors, unlocking the capital needed for these projects to scale.
A federal loan guarantee would require minimal to no government intervention or government funding compared to opportunities it unlocks. And this is done already by the U.S. Department of Agriculture (USDA) for other more traditional commodities and rural development.
Two different data sources and methodologies are used to compile the indicators. Emissions indicators related to securities (both listed shares and debt) are derived from the Securities Holdings Statistics dataset and are calculated at group level for the issuing non-financial corporations (NFCs). Emissions financed through loans to euro area counterparties are calculated for single entities and are based on the analytical credit dataset.
Information on carbon emissions is not available for every issuer/debtor and cannot always be statistically inferred. Therefore, the coverage of these statistical estimates varies from instrument to instrument, between countries and over time. Consequently, direct comparisons between securities and loans and across countries are not always advisable. Coverage rates are published together with the indicators to further guide users in this regard.
Carbon emissions by NFCs can be linked to the financing provided to them through both the equity and debt securities they issue and the loans they receive. In turn, holders of securities and creditors of loans in the financial sector finance these emissions via the respective funding channels. The two indicators on carbon emissions financed by financial institutions (financed emissions indicator and carbon intensity indicator) aim to provide information on the financing of high-emitting economic activities. In particular, they track the amount and share of total carbon emissions from NFCs that can be linked to funding from financial institutions based on a set of identifiable securities and loan portfolios.
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