Northern Trust Bets on Carbon Credit Demand as Emission Goals Loom
Carbon credits have been around for decades but the market has lacked the maturity and infrastructure for many institutional investors, says Justin Chapman, global head of digital assets and financial markets at Northern Trust.
After years of development, Northern Trust is launching a digital carbon credit marketplace early next year where institutional investors can transact with developers selling them.
Few purchases have taken place on the platform so far. But it has proven capable and will go live early next year, as more governments, companies and organizations voluntarily — or under existing or future mandates — turn to carbon credits to meet their net emission goals. The current addressable market for voluntary carbon offsetting is around $2 billion annually in transaction volume. But Northern Trust says it could grow to between $40 billion and $50 billion by 2030.
Carbon credits have been around for decades but the market has lacked the maturity and infrastructure for many institutional investors, according to Justin Chapman, global head of digital assets and financial markets at Northern Trust.
Chapman’s job is to make sure that Northern Trust, which manages $1.1 trillion in assets and is a custodian to more than $10 trillion in assets, is doing everything it can to help connect clients to all kinds of markets: equities, fixed income, cryptocurrency and more. The carbon credit marketplace is using tokenization — blockchain technology, or data ledgers — to facilitate transactions and track assets.
Institutional investors — companies, corporate and public pension funds, endowments, and insurers — started focusing more on their carbon emissions two years ago, Chapman said. They are trying to figure out ways to make their buildings more efficient, reduce their travel and, in some cases, materially alter how they operate. For example, a company’s process to manufacture its widgets might cause pollution and it’s trying to change that.
However, many institutions have realized they can only change so fast, if ever, so they are turning to carbon credits.
“Ideally, most of it should be done organically within the organization. But as that journey goes forward, they need to supplement that with carbon credits,” Chapman said. “The moment you start to put a target date and objective out there, you have to start doing something about it.”
Northern Trust worked with carbon avoidance and removal project developers, including Go Balance Limited, ReGen III, and a direct air capture company, to get credits on the platform for purchase. When a purchase is made, legal agreements are generated using smart contracts, and the transaction settles with fiat currency.
The marketplace is similar to other alternative investment platforms. It facilitates transactions but it’s not an exchange, where there are real-time bids and asks.
“This isn’t a carbon trading strategy at all. [Investors] are not looking to make money out of these carbon trade credits. We are looking for institutions that really want to create a positive offset and have great relationships with producers of carbon reduction or reduction credits,” Chapman said.
White Star Capital, a global multi-stage technology investment firm, worked with Northern Trust on the platform’s development. It couldn’t find any other organization doing what Northern Trust was, especially one with its history and experience. “It’s an efficient and transparent solution, in which all parties can place trust,” Tony Corbin, CFO and general partner at White Star Capital, said.
“We have immutability, we have referenceable data, which are all the things that you really want in a carbon market, some more transparency around the project information, more transparency around the data. All of these things in the platform really add value to the buyer and also actually the seller to demonstrate the value of their credits,” Chapman said.
In addition to the carbon credit market created by voluntary emission goals, public policy and regulatory changes could significantly grow the market in the future. The sovereign carbon credit market — typically sold by developing nations to preserve their forests — represents $300 billion in transaction volume on an annual basis and it could grow into “trillions” as investors approach their 2050 emission targets, Chapman said.
“If you look at the objective of 2030 or 2050 [net zero emissions], of every institution, every company globally, there is still a deficit of quality carbon credits. So as people drive to that number, the demand will grow and we feel that the projects and the governance around these will have to improve,” Chapman said.
“By adding platforms that help that process, we think that’s going to help the market really work out where the value points are for those institutions that want to participate and add some confidence to the process itself.”