Carbon or emission credits are certificates that measure and incentivise reducing greenhouse gases.
Organisations earn carbon credits through activities or carbon projects that reduce, avoid or capture these greenhouse gases.
Examples of these projects are reforestation, building renewable energy and other carbon offset technologies and projects.
Sustainable finance is often described as financing that incorporates ESG (Environmental, Social and Governance) factors.
In other words, sustainable finance aims to drive sustainable growth while minimising the adverse environmental and societal effects.
Examples of sustainable finance are green financing (green bonds and green equity), impact investing (social or sustainability bonds), and climate bonds that finance climate change mitigation, to name a few.
As the types of sustainable finance products continue to increase, a link can be drawn between the measuring and reporting of carbon credits and returns, access and availability of sustainable finance products.
The ability to report credible and verifiable emissions information is an integral part of the sustainable finance ecosystem, as the environment is a crucial pillar of financial sustainability.
A functioning carbon credits trading incentivises organisations to embrace carbon offset projects through carbon reduction, capture, and avoidance.
These markets have the added benefit of generating carbon credits, which can be traded and sold.
As a result of a functioning market for carbon credits, there will be an increase in projects stimulating demand for sustainable finance instruments and requiring funding that generates returns comparable to or better than conventional financing.
For example, Goldman Sachs notes that from 2016 to 2021, Euro-denominated green bonds at an aggregated level outperformed their non-green equivalent by 52 basis points annually.
Markets are equally reporting a greenium phenomenon with green bonds where investors pay a premium for them rather than conventional bonds.
Therefore, the impact of measuring and reporting on carbon credits cannot be over-emphasised on sustainable finance products in an economy.
Regulators should bar greenwashing, build trust through verification of emissions reporting and set standards for sustainable finance.