Are carbon funds an answer to carbon reduction?

This article was originally published in DELANO Magazine, October 2022 and is reproduced with permission from the publisher.

As the world faces the devasting effects of global warming, reduction of carbon dioxide and greenhouse gases is one of the most compelling challenges of the 21st century. Can the emergence of carbon funds be part of the solution?

In response to the continuous pressure on individuals and businesses to invest in more climate-conscious projects, institutional investors, corporates and individuals have developed a significant appetite to invest in projects that aim to reduce their carbon dioxide emissions or offset their carbon emissions. One of the main challenges for these investors, in their objective to meet climate-change goals, is to find the right projects managed by the right team of experts, mitigating the risk of being exposed to greenwashing. Greenwashing is the practice of gaining an unfair competitive advantage by marketing a product as environmentally friendly, when in fact basic environmental standards have not been met.

Carbon funds offer the opportunity to invest in projects that aim to reduce or remove greenhouse gases from the atmosphere and generate carbon credits. Looking at the market, these projects seem to offer a suitable opportunity for a broad range of investors, including institutional investors, corporates and individuals to offset their own carbon emissions by directly or indirectly acquiring the carbon credits generated.

There’s a vast variety of offsetting carbon emission projects as each project has its own features. Available locally or internationally, offset carbon projects include supporting reforestation efforts by planting trees to absorb carbon dioxide from the air and the soil, fostering the use of renewable energy such as solar energy by setting up solar panels or energy generated from a wind farm, or cleaning polluted water to reduce the need for individuals to chemically treat or boil water. All these projects can generate carbon credits. As one carbon credit corresponds to one metric ton of removed, reduced or avoided carbon emissions or equivalent greenhouse gases, the carbon credits generated are used to compensate for the emission of one ton of carbon or equivalent greenhouse gases.

Carbon funds, like traditional investment funds, are used to pool money from several investors, leading to a multiplier effect on investment opportunities. The management of these carbon funds will be entrusted to skilled managers whose expertise is decisive when it comes to both the funds' performance and its compliance in a heavily regulated environment.

By way of example, when it comes to investments on the territory of indigenous people and local communities, a deep knowledge and understanding of local rules and regulations is crucial to ensure that those people's rights over carbon on their lands are complied with and safeguarded. In that respect, the expertise and credentials of asset managers are of tremendous value to help investors to make proper ESG-compliant investments.

As sustainability becomes a cornerstone topic in Luxembourg, the financial centre is positioning itself as a strategic and competitive jurisdiction for investors mindful of reducing their carbon footprint. This trend relies on having trustworthy asset managers with the specific professional knowledge and expertise required to manage carbon funds.

For more information visit our dedicated website or contact Caroline Pimpaud, Partner at DLA Piper Luxembourg.