The Great Carbon Opportunity — Part 2: the land grab for the rails of a new asset class
In Part 1 we discussed why we believe we are moving to a world where environmental assets are priced and managed with Carbon being the leading, initial, measurement mechanism. This has the potential to change the way property and real assets — already the world’s largest asset class — are viewed and managed.
Don’t have time to read the whole post? Here’s the crux → in valuing real assets we’ve over indexed current revenue streams… carbon is being priced and becoming an asset… this is a new vector of potential monetisation of natural assets and the environment… we will need infrastructure to support this shift… carbon is just one potential way to price and manage the environment… others, such as biodiversity, will follow.
What gets measured gets managed…
This famous statement attributed to Peter Drucker can be used to sum up so many of things that modern life and business gets both right and wrong. Unfortunately, when it comes to environmental assets we have, until now, had woefully few ways to ‘measure’ their positive impact.
If you were asked to put a price on a piece of land today, your base starting point would probably be to work out a) previous sales for an indicative price/sq ft; b) how much revenue it generates, if any, (think rental, ticket sales for admission/events, etc…); and c) how much revenue it could potentially generate if it were ‘zoned’ for development. ‘Yield’ on the asset remains a key factor in the way many property investors quantify values. Compare that to previous sales and you have your estimated fair price.
Questions such as ‘how much carbon does it sequester’, ‘what is the biodiversity value’, ‘how does it impact the local area’s air pollution’ are either not a consideration whatsoever, or a hurdle to clear for a development application. This does not mean that real estate investors and developers do not care about these things — it is a problem of measurement and incentives (the opportunities and challenges are laid out here by researchers at UCL discussing the value of green spaces). We have only valued revenue streams to date. Environmental ‘externalities’ are not quantified — even if they are impacting public health.
Property is already the world’s largest asset class… what if it could be multiples bigger when we layer in the environmental value of real assets!
Carbon is being priced and measured in a net-zero world
By prioritising revenue above all else we have been systematically undervaluing our natural world. This failure to quantify environmental externalities is negatively impacting us all and has been described by a growing chorus of economists as a market failure. Thankfully this is changing. Net-zero pledges cover 68% of the global economy and this has put pressure on the unit of mechanism to get there — carbon.
As most of our modern day life results in carbon emissions we need to find ways to remove it to reach a balance. In response to climate change, and the associated societal and regulatory scrutiny that comes from inaction, the investment world has begun to price carbon as a financial risk. This makes any asset which can remove Carbon from the atmosphere a highly valuable asset.
The emergence of a new asset class — Carbon Offsets
The explosive growth of the voluntary carbon markets and natural climate solutions highlights this seismic change. Crudely speaking a Carbon Offset represents “a unit of carbon dioxide-equivalent (CO2e) that is reduced, avoided, or sequestered to compensate for emissions occurring elsewhere”.
If estimates from McKinsey and the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) are correct, the market for carbon credits could be worth upwards of $50bn by 2030.
“This is a necessary market in the transition to net zero…This needs to be a $50–100bn per annum market.” Mark Carney
Natural resources such as land, trees, water — all sequester units of carbon and are therefore becoming monetisable assets. Natural resources are not the only assets which can sequester carbon (note the size of the ‘other’ bucket above) but they are the focus of this blog.
Carbon markets are in their infancy — not unlike bond markets in the early 1900s and credit in the 2000s. The demand is there but for the market to scale from its current state where most transactions are inefficiently priced and OTC (traded off exchange or ‘over the counter’) these assets need to have a common unit of comparison, be fungible, and have more independent, commonly accepted, risk-based pricing frameworks.
Six topics for action outlined by the TSVCM:
- Core carbon principles (CCPs) and attribute taxonomy.
- Core carbon reference contracts
- Infrastructure: trade, post-trade, financing, and data
- Consensus on offset legitimacy
- Market integrity assurance
- Demand signals
None, or scarcely any, of this infrastructure exists. We not only see a huge opportunity for owners of carbon assets to monetise what they previously could not, but also for a host of ambitious entrepreneurs to lay the infrastructure for this new asset class.
Carbon is just one vector… imagine the size of the opportunity if we started to measure and value our environment as a multi-dimensional asset!
So owners of real estate and other natural assets now have a new way to quantify value — Carbon. However this is only one vector of value as we begin to price our environment.
Let’s pretend that tomorrow there is a breakthrough invention which can suck all the excess C02 out of the atmosphere… does that mean environmental assets have lost their value again?
108 central banks would argue not. In fact in this report they argue that biodiversity is swiftly emerging as the next key environmental factor which the financial system needs to take into account.
This is the beginning of the opportunity of a lifetime. An opportunity for communities to fully realise the value of their natural resources and to be rewarded for their actions that benefit the global environment. An opportunity for entrepreneurs who are building businesses to power this shift.
If you are as motivated by this change as we are then we would love to talk :)
