Northern Trust is developing a digital program to provide access for institutional buyers to buy voluntary carbon credits from project developers as institutions work to meet net-zero goals.
The platform uses private ledger digital blockchain technology to connect institutional buyers with carbon-credit suppliers, generally project developers focused on reducing greenhouse gases. Also known as smart contracts, the technology automates the workflow between both parties, and the deals are immediately settled when conditions set by both parties are met.
Earlier this year, Northern Trust worked with select project developers and institutional buyers to complete fully automated transactions on its digital platform. Live transactions are planned for later in 2023. By being a conduit between buyers and sellers, Northern Trust can offer banking services to both parties as they form long-term investment relationships.
Interested buyers include corporations, institutional asset owners and investment managers, all of whom may be starting to measure their carbon dioxide output and looking for ways to mitigate that production in both the short and long term. Northern Trust anticipates the market, one without much standardized transaction infrastructure, growing significantly over the next few years.
Bringing Efficiency to the Process
The digital platform allows for tokenization of carbon credits so buyers can directly work with project developers to offset their carbon footprints. The platform is not a trading platform to buy and sell offsets, says Justin Chapman, global head of digital assets and financial markets at Northern Trust, but was developed to enable buyers to track their credits to ensure their projects were not being double-counted.
Carbon credits are paper securities representing one ton of carbon dioxide reduced or removed from the air, using offsets including planting trees or solar projects. That market is currently valued at $2 billion and is expected to increase as businesses look to offset their greenhouse gas emissions to meet net-zero 2050 goals to reduce carbon emissions.
Chapman says using a blockchain allows project developers that are selling carbon credits to electronically capture the standards they use to certify a project and to show due diligence. For buyers, the platform helps to guarantee the process of carbon issuance, such as managing credits they have purchased.
“The platform is an enabler for those clients to offset and build relationships with projects that they trust on a platform that is an immutable record, provides standardization, provides payment infrastructure, provides all of those things that you’ll get in a typical traditional market that Northern Trust gives access to,” he says.
John Kiff, research director at the Sovereign Official Digital Association, says, generally speaking, asset tokenization on a distributed ledger technology offers a more efficient settlement process. By putting all the information on the same blockchain network, smart contracts allow a “delivery versus payment,” or DVP, settlement method, resulting in the immediate transfer of funds and goods once all conditions have been met. Asset tokenization is often used for securities, but it can also apply to other assets, such as carbon credits.
“In theory, by putting everything on the same network, that means lots of capital savings for big players that are involved in those markets,” Kiff says. “They don’t have to have massive amounts of liquidity, and there’s no counterparty risk.”
Iyassu Essayas, vice chair of the US Sustainable Investment Forum, a nonprofit organization advancing sustainable investing, says because information from both parties is on the blockchain’s ledger, smart contracts can automate much of the administrative work, thereby reducing the compliance needs to check that paperwork was signed correctly or that money was properly exchanged.
“That helps both parties focus more on their core competency or their mission,” Essayas says.
Trusting the Data
Voluntary carbon credit markets have come under scrutiny for scandals, such as some “phantom credits,” those not used for genuine carbon reductions.
While blockchain technology allows parties to see the data put on the distributed ledger, the technology cannot distinguish between good data and bad data, so it is still up to buyers to know if a specific project is a quality project or not, Essayas says.
“If it’s a voluntary market, the product developers better be making sure that whatever they are accounting for that is a carbon offset is actually carbon offset and that there isn’t some kind of shady deforestation going on in the areas that they [have claimed to have] preserved,” he says.
Chapman says while Northern Trust’s digital platform brings parties to the table, any due diligence by both parties happens outside of the platform. “The client is still going to make sure they do their appropriate due diligence,” Chapman says.. “We can’t stand in between and guarantee these things.”
Essayas says project developers can upload data such as property location, satellite imagery and other information about the area for which a buyer may purchase carbon credits, allowing the interested party to verify on its own if the project is viable.
That information, maintained and verified via blockchain, allows a buyer to confirm that the project has not been paid for as a carbon offset by another entity, known as double-
Regulators are making efforts to beef up the integrity of the voluntary carbon-offset markets, with the Commodity Futures Trading Commission in June announcing a task force to focus on addressing fraud and manipulation in carbon-credit markets.
Ciaran Kelly, CEO at Go Balance Ltd., a London-based environmental project developer working to avoid deforestation in the Amazon, teamed up with Northern Trust to develop the platform.
He says smart contracts allow his organization to fully automate the time-consuming, due-diligence aspects that go into typical contracts, including know-your-customer and anti-money-laundering requirements, saving Go Balance time so it can focus on investing money received from carbon offsets to protect rainforests.
Kelly says there “can’t be enough regulation” to build trust in the nascent voluntary carbon market. “Buyers need that confidence. They need to be able to know that when they purchase something, it’s properly regulated, it’s gone through a proper process,” he says.
Tags: Blockchain, carbon credits, Ciaran Kelly, Go Balance Ltd., Iyassu Essayas, John Kiff, Justin Chapman, Northern Trust, US Sustainable Investment Forum