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Co-authored by Jonathan Rackoff (VP, Head of Global Policy) & Wes Geisenberger (VP, Sustainability & ESG) and Hania Othman (Director Sustainable Impact EMEA).
PART I: Opening The Books On Climate Finance: How we’re catalyzing higher climate mitigation with transparency, credibility, and equity at scale
I. Introduction
The HBAR Foundation (THF) Sustainable Impact Fund (SIF) exists to bring the balance sheet of the planet to the public ledger. Our core mission is to bring the balance sheet of the planet to the public ledger, utilizing a combination of powerful new digital infrastructure tools , to enhance transparency, credibility, and equity across an array of climate and sustainability projects across six continents on Hedera.
Our focus is values driven and highly intentional. We selectively target credible efforts to accelerate the carbon and biodiversity credits markets; to democratize access to climate finance; to improve GHG emissions accounting and disclosure accuracy; to enhance Monitoring, Reporting, and Verification (MRV) through automation and digitization; and finally to de-risk corporate environmental reporting, triggering higher ambition, and in turn, greater accountability. Throughout our investments, we stay mindful of the 17 UN Sustainable Development Goals (SDGs), striving to leverage technology where it might amplify the efforts of indigenous people and local communities (IPLCs), often land stewards in developing economies, whose knowledge and expertise is so often vital to the success of nature-based solutions.
Running through each of our investments is one common thread: the central, enabling role played by Digital Public Goods (DPGs). In our view, creating and driving broad adoption of interoperable DPGs – open-source code, open data, open artificial intelligence models, open standards, open content – will be indispensable to climate-related digital transformation, especially in the vulnerable communities least responsible for, but most affected by climate change. This is, at least in part, how we begin to halt global temperature rise, regenerate nature, and unlock a Just Transition for the Global South: by letting cutting-edge innovation in digital infrastructure technology that is free and open to everyone catalyze a step-change in sustainability-related transparency, accountability, and standardization. Over the last 12 months, the SIF has applied all its energies towards that end.
In this Earth Day inspired, two-part series, we review our progress to date and consider the road ahead. In December 2023, the SIF’s core team spent 12 days on the ground in Dubai for COP28. Our goal was to highlight the accomplishments of dozens of Hedera ecosystem partners and showcase how THF’s bold investments since COP27 – in digital environmental asset supply, in tech readiness for the Global South, in ESG disclosure credibility, and many more – are starting to bear fruit. In Davos for 2024’s World Economic Forum, we reaffirmed for the new year and beyond our Fund’s continuing commitment to its Five Goals. First announced ahead of COP27 and refined in Sharm El-Sheikh, these goals represent our investment thesis as well as the backbone of our climate impact strategy. They are the mission-aligning touchstone for everything we do, and include:
Below, we speak directly to progress on Goal (1.) and to a lesser degree Goals (3.) and (4.) by exploring how, with support from targeted policy advocacy and amplification by Hedera’s value-aligned Guardian user community, a synergistic mix of key investments, development breakthroughs, and strategic partnerships has enabled us to open the books on climate finance for first time.
II. Continuing Shortfall of Ambition
Global GHG emissions reached a record high of 57.4 GtCO2e in 2022. According to the IPCC AR6 Synthesis Report, National Determined Contributions (NDCs) submitted by all Parties to the Paris Agreement for 2030 continue to fall well short of projected emissions. Already the 1.5°C redline of “safe” warming has slipped. Overshoot is looking increasingly unavoidable. Fully implementing current policies and continuing mitigation efforts of pre-COP28 unconditional NDCs implies an emissions gap of 21–24 GtCO2e. That puts the world on track for a catastrophic 2.9°C of global temperature rise by 2100, according to the recently released 2023 edition of UNEP’s Emissions Gap Report. Adding conditional NDCs may lower this to ~2.5°C, but that is hardly desirable either. The first global stocktake concluded last month at COP28 may trigger new NDCs with more ambitious targets for 2035, but will they bend the curve of worldwide GHG emissions downward fast enough to limit global temperature rise to between 1.5 and 2°C? With negligible movement on NDCs since COP27 and global average temperatures last September hitting 1.8°C, expectations for policy breakthrough at COP28 were low. Opinions differ on how much was achieved in Dubai, but it has never been more clear that private-sector capital to fund mitigation activities has to surge. This includes rapidly scaling CO2 and CO2e removal (CDR) techniques, enhancing global carbon sinks, driving higher efficiency fossil fuel use cases, transiting to solar, wind, geothermal, and nuclear electric generating capacity, and facilitating electrification in the transport sectors.
But here too, there are widening disparities between the mitigation finance needed and the private capital currently allocated. Of course progress is being made. But it remains fragmented, unequally distributed, with key barriers unaddressed, and low income communities left behind. Yes, climate finance flows almost doubled year-over-year in 2021/2022, reaching nearly $1.3 trillion – including $439 billion in accelerated mitigation finance, mostly from the energy and transport sectors. Unfortunately, at barely more than 1% of global GDP, this is still far less than needed, now and certainly into the out years. To avoid the catastrophic damages projected under business-as-usual (BAU) scenarios, the world needs an average of $8.1 to $9 trillion in annual climate finance through 2030, then at least $10 trillion per year thereafter. Adaption finance is especially lagging. The $63 billion committed last year – 98% by public actors – is less than one third of the $212 billion necessary for developing countries alone. In fact, only 23 billion of climate finance, or less than 2% of global total, went to the ten countries most impacted by climate change. But as the Sharm-El-Sheikh Adaptation Agenda (SAA) reveals, at least $1 trillion in annual finance will have to be secured by 2030 to enable developing countries to take effective climate action and restore nature.
Those shortfalls are daunting, but pale next to the capital requirements for energy transition technologies, which the International Renewable Energy Agency (IRENA) estimates will reach $131 trillion by 2050, the bulk coming from corporate sources. Last year, private finance accounted for 49% of total climate spending worldwide. The voluntary carbon market (VCM) issued an estimated 279 million metric tons of carbon credits. Unfortunately, this accounts for less than 1% of global emissions, and weighed against the estimated 5,586 metric tonnes of CO2e emitted by the United States alone, falls well short of the carbon reduction and removal activity levels needed. The VCM needs to grow to over $50 billion by 2030. Narrowing to high quality CO2 removal (CDR) specifically, the industry saw nearly 700% growth or 4.7 megatonnes of offtake as of September 2023, but again, multi-gigatonne scale is needed by 2050. In regulated carbon compliance markets, the world’s 29 emissions trading systems (ETSs) had $909 billion in deal flow, reflecting 17% of global emissions. Yet, even this much larger sector could reach a projected $2.68 trillion by 2028, if blockers to scale could be removed.
III. Perils of Opacity and Promise of Digital Infrastructure
The challenge inherent in narrowing this gap in climate finance spans myriad, long-standing frictions that have slowed growth of climate and sustainable finance markets for decades. Investment in the VCM is widely seen as constrained by a lack of trust in credit quality as well as data integrity. This is compounded by prevailing doubts about the reliability and scalability of traditional MRV and legacy analog systems tethered to labor-intensive and error-prone manual inputs. Registry data is often locked in hard-to-access PDF documents, leading to costly market and operational inefficiencies, doubts about the long-term environmental integrity of nature-based offset projects, and increased risks of double-counting, misreporting, and fraudulent claims. Buyers and sellers are forced to manage credit inventories using non-transparent spreadsheets in rudimentary databases, preventing real-time visibility into the underlying characteristics of their portfolios (transaction history, durability, co-benefits, impact, negative externalities, etc.).
In turn, this perpetuates the fiction that all environmental credits may be properly treated as fungible commodities, interchangeable because they represent the same value in emissions reduced or removed (or, as the case may be, biodiversity preserved). Perhaps fungibility, at specific times and carbon intensities, is appropriate for Renewable Energy Credits (RECs), which are standardized to represent proof of 1 MWh of renewable energy production independent of generating facility, but carbon projects, with varying degrees of SDG focused impacts, are highly variable, issuing credits with unique attributes material to fair pricing. Meanwhile, verification costs remain prohibitively high, triggering project financial stress; project review pipelines frequently experience backlogs that stifle market growth; and, in the absence of regulatory clarity, fragmented voluntary standards and methodologies have prevented consistent, transparent reporting across projects, especially those spanning legal jurisdictions, natural ecosystems, or sociocultural or geopolitical boundaries.
Like other industrialized sectors in recent years, digitization promises climate finance a transformative cure for these ills. And at least conceptually, it couldn’t be simpler: daylight. Notwithstanding the challenges just discussed, there is strong public support for diverting investment flows away from carbon-intensive projects towards climate finance. The Pew Research Center reveals that 74% of Americans support national participation in multilateral efforts to reduce global emissions, while 67% believe major corporations are underinvesting in climate mitigation and adaptation. The C-Suite seems to agree. Corporate capital spend on climate has been increasing nonlinearly for over a decade, and while levels of ambition vary, McKinsey reports that at least 83% of the global Fortune 500 have voluntarily set quantified, time-bound, outcome-oriented climate targets across their entire organization. Beyond the obvious ethical motivation, self-interested upsides are numerous: superior ESG ratings, lower costs of capital, improved risk mitigation, government relations, strategic communications, brand value, customer loyalty, and employee recruitment/retention.
Why, then, is mobilizing private-sector climate finance so difficult? Because, when measured against the complexity of today’s sustainability landscape – from VCM, to regulated Carbon Compliance Markets (CCMs) like the EU Emissions Trading System (EU ETS), to quasi-regulatory emissions accounting frameworks and third-party defined success metrics such as the GHG Protocol and Science Based Targets Initiative (SBTi) respectively – prevailing levels of transparency simply aren’t enough to justify trust and de-risk higher ambition. While transparency is a prerequisite to trust in any market, carbon market participants are so often skeptical of credits precisely because they so rarely have enough information to be confident of their integrity. Urged by stakeholders to lead on climate, many businesses consider dedicating vast sums to carbon offset projects with less due diligence and weaker supporting evidence than they would be willing (or allowed) to accept in any other circumstance.
We speak about the VCM and CCMs as commodities markets, but that label doesn’t quite fit (even where treated as such by financial regulatory authorities). In truth, these are environmental benefit markets. To buy a carbon credit is to buy a non-fungible, intangible asset representing its sellers’ promise to deliver a particular environmental benefit (e.g., one metric tonne of CO2e removed) at a particular time (e.g., at a future data for Forward Contracts or Forward Offtake Agreements; at settlement for OTC deals on the spot market) under a particular set of circumstances (e.g., sourcing through Kenya’s Mikoko Pamoja mangrove reforestation project in Gazi Bay, conditioned on local communities receiving no less than 70% of PES income for water and sanitation projects). This particularity matters. It directly implicates fair pricing. Without transparent access to demand signals, historical pricing data, current and future supply estimates, and transaction volumes, as well as the full panoply of environmental and related social attributes that define and describe the particular asset offered for sale, buyers and sellers will be unable to accurately value it or, if a transaction settles, to trust that fair value was paid or received. Knock on effects will include higher volatility, increased rates of fraud and market manipulation (e.g., through dissemination of material misinformation), rising transaction costs (e.g., from stepped-up due diligence), declining liquidity (e.g., as potential buyers sit on the sidelines), and eroding public confidence that deters new entrants from investing in climate finance.
To increase carbon-intensive businesses’ willingness-to-pay, expand origination of the carbon offset and sustainable finance projects that mitigate their emissions, discover and apply upward pressure on a global carbon price, and incentivize buyers to reduce their own costs through innovative decarbonization – and all of it equitably, without reducing biodiversity or perpetuating Global North-South wealth inequality – facilitators of carbon asset supply must join with climate policy makers, quasi-regulatory NGOs, and ESG industry leaders to enable radical transparency spanning the full life-cycle of a climate project, from its inception, financing, and execution through credit issuance, sale, and retirement. Nothing less will answer the urgency of the moment. Nothing less can divert us from our now-ever-more-likely 3°C future. In its pursuit, we can afford to settle for nothing less than “opening the books” on climate finance.
IV. DLT-Enablement and Hedera Guardian Ecosystem Synergies
“Opening the books” is a tall order, we admit. Feasibility constraints abound, known and unknown. Legacy interests, parallel initiatives, regulatory uncertainties, knowledge gaps, governance debates, tech readiness limitations – all of these or any of them could present significant delays or block the work entirely. The good news, which COP28 gave us a propitious opportunity to share, is that mutually reinforcing breakthroughs across Hedera’s sustainability-focused Guardian ecosystem since COP27 have combined synergistically to drive transparency-enhancing digital infrastructure and policy milestones faster and farther than we at the SIF ever planned or anticipated.
A long road lies ahead, but this fast-growing Ecosystem, with its SIF-supported community of application developers, service providers, platform operators, and standard-setting bodies, has leveraged the Guardian (our requirements-based, DLT-enabled tokenization service and policy workflow engine for minting and creating digital MRV with auditable links to ESG assets such as carbon emissions, carbon offsets, renewable energy certificates, and conservation tokens) in conjunction with the Hedera network (the carbon-negative public distributed ledger network) to open up and illuminate six historically opaque domains of climate finance. We take each in turn, highlighting the opportunity, the Ecosystem’s key accomplishments in 2023, and the work still remaining.
1. Asset Identity
Rapidly scaling climate asset markets will be important to global mitigation for years to come – even more with Article 6 infrastructure finalizing and the imminent new round of higher-ambition NDCs increase demand for ITMOs – but climate asset purchasing decisions are not fundamentally different from any number of buying decisions we face as consumers in a developed economy: buying a house, applying to college, selecting a wedding venue, even booking a hotel in an unfamiliar city for a long-awaited vacation. All are significant enough not to be taken lightly, yet still procedurally straightforward. Before offering on a house, you consult Zillow or Redfin, gather MLS listing data, attend one or more open houses, commission an inspection, perform a title search, and study regional pricing data for comparable properties. Before submitting a college application, you tour the school in question, interview with admissions, gather financial aid statistics, review the curriculum, attend a class, and speak to current students. Before getting married, at a minimum you personally visit the venue and taste the food. Before going on vacation, it is enough simply to visit the hotel’s website.
Due diligence varies with the stakes, but what each of these decisions have in common is the absolute necessity of empirically investigating the unique attributes of the specific asset in question; of that house, of that college, and so on. It is not enough, for example, to know only the home’s square footage and zip code, or the college’s student-body size and tuition cost. Without more, that would paint a one-dimensional, black-and-white picture of the asset’s identity – too impoverished and bereft of relevant details to price accurately, too laden with risky unknowns to buy at any price.
To make rational economic choices aligned with their preferences that buyers and sellers can reasonably believe are fairly priced, they must be able to comprehend the nature of the asset changing hands. Especially for climate assets – which derive all of their economic value from promised environmental benefits claim to be delivered in other places, at later times (or gradually over time), by parties other than the seller herself (usually loosely affiliated third-parties at best) – this requires a vast quantity of highly reliable granular data obtained from multiple trusted sources pertaining to numerous attributes of interest to buyers, which is presented in standardized, interoperable formats enabling discovery of all underlying roles, actors, liabilities, encumbrances, or other material contextual facts. Climate assets operate no differently.
In the second half of this Earth Day series, our upcoming “PART TWO: Enabling 3D, Full-Color ESG Data,” we excavate more deeply what types of data are needed, in what categories, and possessed of what qualities, to describe climate assets fully. For now, it is enough simply to reiterate how fully transparent, auditable credits minted on Hedera via the Guardian embed such a high resolution picture of their underlying attributes that doubts about financial and environmental provenance quickly vanish. Guardian-issued assets can be:
In this way, SIF-grantee Envision Blockchain, a maintainer of the open-source Guardian – with ongoing contributions from THF and other ecosystem participants such as Swirlds Labs, DOVU, Tolam Earth, atma.io by Avery Dennison, BlockScience, TYMLEZ, Meeco, ServiceNow, Nova Institute, among others – has “opened the books” on climate finance and data in the most direct and potent way available: by illuminating the very assets themselves. Because the Guardian uses the Hedera Token Service (HTS), our tokenized assets contain anchored Verifiable Presentations (VPs), meaning that they bake-in cryptographically provable links to each and every material actor or attestation. These are also simultaneously logged as individual messages on Hedera, ensuring that any tampering will break the chain of trust. In conjunction with applications building on the Guardian to enable search functionality, auditability is not reserved to coders. Every climate-asset buyer will now be able to know what she is buying before she buys it.
2. Project Execution
The ability to generate climate assets based on open-source methodologies such that their underlying financial and environmental attributes can be fully understood is a breakthrough for transparency; however, the impact lies in the implementation. If “opening the books” refers only narrowly to what individual buyers and sellers understand about specific projects and credit vintages, yes, transparency will be enhanced, but overall impact – on VCM growth, on expansion of the CCMs, on the success of Article 6.2 as well as Article 6.4 markets – will be minimal and muted. Asset-level auditability will benefit climate market dynamics incrementally as Guardian-issued climate assets gain market share. But scaling climate finance until, by 2050, trillions of US dollars are being invested annually, it won’t be enough just to “open the books” technically; we need those “opened books” to go viral, with millions of people across the global reading together, discussing and debating, asking questions and learning. This is what counters ongoing negative media storylines that carbon markets are riddled with fraud: climate data transparency at scale.
Towards this end, the SIF’s previously announced partnership with ALLCOT and ALLCOT IO, the digital arm of established carbon management leader ALLCOT, represents a significant milestone. The deal, is one of the most ambitious climate-asset digitization projects we’ve undertaken and seen in the industry, will see ALLCOT transition its entire 500 million metric tonne portfolio of carbon-credit generating projects to the Hedera Guardian Ecosystem. Conceived to span the full carbon project lifecycle – from initial Project Idea Note (PIN) and Project Design Document (PDD) to asset issuance and eventual retirement – our collaboration will catalyze the development of bespoke digital public goods powered by DLT to link valuations of climate assets generated by ALLCOT projects, and by implication the ex ante financial assessments of ALLCOT project economics by climate finance providers, directly to concrete, measurable evidence of beneficial impact. No longer will ALLCOT customers be forced to accept environmental integrity on faith. No longer will consumer confidence in the assets offered for sale collapse into the reputation of the seller. ALLCOT’s reputation is sterling, but in the VCM as it exists today, one bad apple is more than enough to spoil, not merely the barrel, but the entire orchard, upstream.
Government regulators in an array of jurisdictions are beginning to take note. Whether to participate in the financial benefits of carbon markets, to ensure alignment with NDC obligations under the Paris Agreement before selling their national carbon sinks to foreign interests, or simply to police commerce in these intangible, non-financial, PDF-bound environmental-benefit assets like any other consumer protection law, domestic rulemaking and enforcement – whether by environmental agencies, financial watchdogs, or both – is well-suited to addressing integrity, equity, and land-owner protection questions. Indeed, stakeholders across the VCM now embrace government intervention of some kind, and with intense media scrutiny last April triggering, fairly or unfairly, the high-profile resignation of the CEO at the world’s largest registry, stepped-up oversight looks increasingly likely.
The SIF stands ready to aid regulators in developing narrowly tailored, cost-effective policies to address the VCM’s weaknesses without unduly slowing its growth. Our policy team will continue to leverage proactive, evidence-based advocacy and education in combination with participation in key agency and quasi-regulatory NGO notice-and-comment rulemaking processes to shape the coming legal landscape. But nor can we afford to wait. With the leadership of ALLCOT, the VCM will quickly come to regard access to auditable dMRV data flows in standardized formats and frameworks generated by transparent, open-source DPGs and recorded immutably on public ledgers as table stakes. Verifying that carbon projects and the credits they issue truly reflect all of the environmental and social-economic impacts claimed – e.g., that GHG reductions/removals are real, additional, permanent, verifiable, and leakage avoidant, and counted only once, SDG co-benefits are in fact present, and demonstrable progress toward a Just Transition is being made – will not require legal coercion (mandates) or the threat of legal consequences (penalties). It will not depend (as much) on third-party Validation and Verification Bodies (VVBs) operating under the quasi-regulatory egis of registries. The criticality of validation will rise, but verification will become simpler as digitization proceeds; as simple as consulting the data.
3. Scientific Integrity
For intangible assets wholly dependent for their value on demonstrable environmental benefit, the importance of broadly vetted, scientifically sound methodologies – encompassing all policies, protocols, processes, and procedures - for delivering and documenting impact is hard to overstate. There are numerous offset methodologies in circulation today. Principally designed to quantify GHG emissions reduction potential, they animate technology-based carbon removal efforts, such as Direct Air Capture (DAC); nature-based solutions (NbS), including biochar, enhanced rock weathering, and afforestation and reforestation; and SDG-focused projects, from improved cookstoves to energy-efficient lighting projects – to name just a few.
Unfortunately, methodologies in the VCM have traditionally been opaque and inaccessible. The lion’s share are maintained by a mix of quasi-regulatory NGOs operating in the VCM, including the UNFCCC-run Clean Development Mechanism (CDM), the larger carbon registries, Verra, Gold Standard, and the American Carbon Registry (ACR), and niche providers such as the California Air Resources Board (CARB), the Climate Action Reserve (CAR), and the Carbon Offsetting and the Reduction Scheme for International Aviation (CORSIA). Under the structure, transparent, science-based definitions and universal industry standards to govern project quality across impact categories have been slow to emerge. Absent standardization, doubts about whether carbon assets do in fact consistently embody real, quantified reductions or drawdowns of CO2e have persisted. The result: would-be buyers have remained on the VCM’s sidelines.
Industry groups such as the Integrity Council for Voluntary Carbon Markets (IC-VCM) have moved in the right direction. Their recently announced Core Carbon Principles (CCPs) propose open and transparent minimum criteria for high-quality assets that embody verifiable impact and derive from the latest science and established best practices. But governance is not the primary root of this problem, infrastructure is. The solution to boosting trust in climate assets does not lie (only) in forging and enforcing a better, top-down consensus on what constitutes a “good enough” methodology, scientifically. It lies in using digital infrastructure to “open the books” on the methodologies we have.
Merely weighing the flaws of competing methodologies to pick winners and losers on environmental integrity grounds may be useful to a point; no one wants “junk science” undergirding newly issued climate assets. However, suppressing diversity in available methodologies carries its own risks. To successfully reach Paris Agreement temperature goals, the world needs an expansive, “all of the above,” criteria-based portfolio approach to environmental project development. We cannot sacrifice integrity, but nor can we define it so rigidly that potentially helpful mitigation activity slows or contracts. The answer is to give project developers and every other carbon-market participant who previously lacked the capacity to efficiently search, analyze, reference out, cross-compare, and identify relevant differences between existing and newly added methodologies between, and certainly within, registry libraries a precise, cost-effective way of flexibly matching PINs with fit-for-purpose methodologies across environmental impact categories.
Through innovative work by grantees like Envision and dramatically expanded Guardian integrations across Hedera’s worldwide sustainability ecosystem between COP27 and COP28 – which now spans dozens of technical enablers, capacity builders, application developers, and impact catalysts – the SIF has effectively catalyzed an industry-scale, DLT-enabled policy workflows for digitizing existing libraries of analog methodologies and producing new ones in natively digital form. Digital transformation gives climate scientists, project developers, carbon registries, environmental regulators, and offset buyers easy and equal access to methodologies that are auditable and cross-comparable with respect to enforcement rules, operational data, and project participants. Independent review will be enabled by default in an open-source format directly linking assets to their corresponding trust chains.
Transparency at this level is unprecedented compared to prior analog norms, where complex, infrequently updated PDF-bound methodologies applying different standards inconsistently across projects were often challenging for non-experts to access, review, understand, or compare, and external scrutiny was limited by registries keeping full documentation and validation reports “close hold.” Moreover, methodologies could take years to crawl from submission to approval, with frequent errors and upfront costs to project developers often exceeding hundreds of thousands of dollars. The Guardian lowers those barriers to entry. Hedera’s open-source, accessibility-first strategy has already built the world’s largest repository of digital/digitized climate-action methodologies, “opening the books” on arguably the most important stage of climate project development: selecting the methodology capable of delivering the environmental benefits to which every asset the project will ever originate attributes its value.
To maintain public trust in the veracity of those assets over time, any participant, from developer, to investor, to buyer, needs democratized, decentralized access to the social and environmental datasets underlying those valuations – and these must extend to the extreme edge, revealing any calculation serving to conceal or obfuscate source data. DLT-enabled digital infrastructure will permit such environmental integrity data to be audited at the project level in real time without extensive training or excessive cost. Coupled with our requirements-based tokenization implementation, best-in-class identity management, DLT libraries, account-to-account traceability, visibility into corresponding actions, and data submissions keyed to actor and role, methodology digitization will yield faster search and discovery, more comprehensive analysis, simplified referencing and cross-referencing, as well as a level of granularity in comparisons between next-best-alternative policies that earlier analog processes could never support.
4. Transaction Dynamics
Roots of the trust deficit in climate finance extend deeper than what menu of offset methodologies is available to carbon project developers or how effective third-party VVBs may be at validating projects’ conformity to applied methodologies. Information asymmetries surrounding key carbon-market transaction dynamics are pervasive. Market fragmentation, lack of standardization, regulatory inconsistencies, and poor liquidity stand in the way of equal and efficient access to valid data about specific assets and market fundamentals overall. Climate asset pricing fails to accurately reflect valuations incorporating all up-to-date material information. Corporate buyers looking to offset substantial residual emissions do not hesitate to increase their carbon-credit positions simply because environmental integrity might be low. Rather, they lack trusted ways to evaluate three key determinants of carbon-asset demand:
Right now, the VCM too often operates as if carbon credits are fungible commodities; each reflecting one metric tonne of CO2e reduced or removed and nothing else. But this is a fiction, one inadvertently perpetuated every day by some of the VCM’s largest top-down, centralized, business-to-business (B2B) trading platforms. Employing oversimplified price benchmarking and modeling tools, they have prioritized volume and liquidity at the expense of transparency, systematically obscuring and backgrounding the myriad unique descriptive attributes buyers use to distinguish assets on the spectrums of quality, value, and desirability.
SIF-grantee Tolam Earth, founded by Object Computing and THF in association with BlockScience to create an OS-level, AI-driven model for tomorrow’s environmental markets, is collaborating with Envision, Allcot, and other Hedera ecosystem partners to “open the books” on carbon-asset pricing dynamics. Their joint goal is to surface and give new pricing traction to the key attributes material to buyer demand, with particular emphasis on ecological veracity and financial equity. Those data, as explored in section (IV)(1), turn out to be impressively diverse and variable in real-world applications, project-to-project. Tolam’s approach sidesteps the arduous, resource intensive, manual-labor heavy, often ad hoc due diligence processes historically needed for buyers to prove an asset’s environmental impact, let alone paint a rich, detailed picture of all its relevant contextual features.
By leveraging the Guardian’s dMRV capabilities to durably associate devices and personnel with defined roles in workflows enforcing registry standards and executing project-specific methodologies, Tolam plans to enable Guardian-created assets defined by their attributes – in other words, with granular data about their attributes “baked in.” Immutably recorded in verifiable trust chains publicly accessible on Hedera from origination to retirement, aligned with industry data taxonomies and frameworks, and compatible with automated auditing, Tolam’s Automatic Regression Market Maker (ARMM) technology will be able to read, ingest, and process this attribute information using machine learning and provide highly accurate market-price estimates to buyers for a wide range of asset and attribute combinations. Buyers will be able to generate custom profiles of assets they wish to acquire and let the ARMM auto-execute transactions upon matching available supply with the specified attributes at a fair price.
Long term, this price-oracle capability will become a liquidity driver. Over time, ARMM-provided transparency with respect to likely fair market price points for commonly purchased asset types will facilitate automatic buying throughout the VCM at increasing scale. As liquidity pools fill with compatible inventory to meet buyer demand, clarify about the influence of asset quality – as defined by those attributes – on market price will strengthen. In turn, higher transaction volumes will incentivize stepped-up origination, while narrowing spreads drive us towards a global carbon price. But even in the short run, illuminating the mechanics of efficient price discovery within a legacy market known for inefficiency, opacity, fragmentation, and regulatory uncertainty lets Tolam greatly simplify the learning required for Boards, CEOs, and corporate sustainability teams to greenlight the kind of large-scale, multi-year offset purchase orders necessary to meet higher ambition GHG reduction, carbon neutrality, and net-zero targets.
5. Capital Sourcing
Historically, identifying, accessing, and deploying sources of capital to fund climate, sustainability, or ESG-related projects has been the province of large institutions and major corporations. Sustainable finance involves highly complex equity, debt, and grant instruments. Rarely do small enterprises or retail investors have the background or knowledge to understand them. Nor do they tend to have the preexisting counterparty relationships (e.g., at banks, family funds, private equity shops, or among venture capitalists, government officials, nonprofit executives) necessary to pursue funding opportunities that do arise, or the legal expertise to satisfy compliance burdens, navigate complex, unclear, or fragmented regulatory standards, negotiate, finalize, and execute the necessary documents to secure financing.
These disparities are mirrored and amplified in the Global South, where, in contrast to Western, developed economies, the local and indigenous communities interested in contributing to sustainability objectives – whether in Africa, South America, Southeast Asia, or Island Countries – often lack access to data necessary for success. The pervasive lack of standardized data probative of environmental performance means that even sophisticated parties will struggle to identify sustainable-finance vehicles based on impact criteria. SIF grantee and Hedera Guardian Ecosystem member Evercity, a green debt and carbon origination platform, has addressed these information asymmetries and accessibility constraints directly with a streamlined, Hedera-enabled platform that uses automation to pair sustainability-focused partners with fit-for-purpose project finance opportunities.
These may involve auditable, traceable, Guardian-minted digital environmental assets (carbon-linked green bonds, tokenized carbon credits, etc.), or upfront financing (carbon forwards, loans, etc.) sourced through Guardian-Ecosystem partners like Solid World. The former aligns with the preferences of long-term institutional investors (e.g., pension funds) who value the combination of lower rates (over conventional bonds), an available supplemental financial return (over the bond yield), and the prospect for environmental benefit (incentivized by its direct linkage to the aforementioned supplement return). The latter aligns with the needs of stakeholders in the Global South, whose developing economies often present insurmountable financial barriers to early-stage projects, absent subsidies.
Evercity also solves for liquidity by integrating with carbon-forward trading platforms and facilitating access to their liquidity pools – and small additional yields prior to carbon-credit issuance – for Hedera Guardian Ecosystem participants. Looking ahead, Evercity expects to leverage Guardian-enabled digital MRV to deliver granular visibility into every stage of carbon project development by mid-year 2024, ensuring that market confidence in the legitimacy, quality, value, and environmental integrity of its ESG assets remain high, while lowering the costs of compliance, and simplifying reporting. Finally, Evercity fosters complex relationship building, streamlined collaboration, and ongoing expert guidance by increasing awareness of resources available to Guardian Ecosystem participants and matching them with mutually beneficial counterparties, from finance providers, to consultants, to auditors, to project developers.
Through its strategic collaboration with THF, Evercity successfully exploited, not just the Guardian’s native features, but the force-multiplying qualities of the Guardian Ecosystem in toto. The result: Evercity is “opening the books” on carbon-linked bonds and carbon forwards, a highly technical domain of sustainable finance long inaccessible outside of banking circles. By enhancing their auditability, discoverability, and liquidity, Evercity has raised stakeholder awareness of, knowledge about, and ease-of-access to these instruments and others like them, especially in developing economies; facilitated up- and down-stream tracing and reporting, to ensure green financial flows are equitably allocated cradle-to-grave; and mobilized the capital necessary for small and medium enterprises (SMEs) focused less on global emissions than climate adaptation and sustainable development in the Global South to invest for a Just Transition.
6. Equity Assurance
The science is stark and undeniable: global emissions of CO2e must drop by at least 5% per year or we risk an unstoppable cascade of increasingly catastrophic impacts to every domain of human flourishing. Instead, they continue to hit record-breaking highs; rising by 1.2% annually in 2022; projected to rise up to 1.5% in 2023. There is no more urgent priority for humanity than reversing this trend. And with media watchdogs continuing to attack carbon projects as “junk or worthless” – projects called “essential” by the IPCC – the importance of data showing the opposite cannot be overstated. But trust in environmental integrity gets the VCM only so far. We have to bridge climate and development needs in tandem. Transparent data must remove all reasonable doubts about social and financial equity, inclusivity and participation, resilience, education, job creation, technology readiness, economic diversification, and capacity building. If the socio-economic benefits of new projects are not shared fairly with local communities, or if their distributional effects simply remain opaque, project developers may lose social license to operate, growth in carbon-credit originated will slow, and negative perceptions of the VCM as inequitable and exploitative will further constrain demand.
While price terms are defined before settlement, parties to over-the-counter (OTC) carbon-credit transactions rarely have visibility into what originators receive. Preventing circumstances in which intermediaries take a disproportionate or unwarranted share of project rewards is more challenging as a result. Tolam Earth is working with ALLCOT IO to change that. With wraparound guidance from the SIF and in close technical partnership with Envision and other ecosystem actors, they are consulting with leading payment processors to develop a transparent on-chain payment flow with DLT-enabled transaction capabilities to be implemented by ALLCOT. This will render the purchase price of ALLCOT’s climate assets and their subsequent distribution of funds visible on Hedera’s public ledger for all to see – without compromising buyers’ legitimate privacy interests in the process. In this way, Tolam is creating a first-of-its-kind climate-finance equity framework replete with novel metrics for assessing distributional fairness.
Sellers will factor those metrics into carbon pricing decisions like any other attribute. Socially conscious buyers will differentially seek out – and offer higher bids to acquire – more highly rated assets. Project developers will use Totam’s platform to define clear, transparent, project-level benefit allocation plans ex ante. Intermediaries (traders, exchanges, brokers) will join with other supply-side actors (financiers, registries, VVBs) to promote the equity gains inherent in those plans to bolster public acceptance of and increase confidence in the VCM. Accountability will be policed by stakeholders throughout the carbon-credit life cycle empowered by Guardian integration to track – accurately, precisely, transparently, immutably, and in a publicly verifiable manner – whether, where, and to what extent project funds actually reached their intended local-community recipients.
Knitting all of these innovations together for dynamic, real-world impact at unprecedented scale, ALLCOT IO leverages Tolam’s climate technology stack alongside Guardian integration to return mitigation finance sourced from the Global North to local community stakeholders across ALLCOT’s diverse project portfolio throughout Global South. From blue-carbon mangrove restoration in the Casamance and Siné-Saloum regions of Senegal, to renewable energy generation from landfill gas (LFG) collection in the Province of Talagante, in Santiago, Chile, to permaculture farming in the Democratic Republic of Congo (DRC), to community conservation of communal forests in the southern plateau of Cameroon, to müsesi (revitalizing natural and cultural heritage) in Sierra Nevada de Santa Marta, Columbia through afforestation, ALLCOT is opening the books on climate-project equity, and, in the process, ensuring financial benefits from these projects and many others verifiably accrue to the adaptation and sustainable-development needs of the local and indigenous peoples at their center.
Setting an example for colleagues and competitors across the VCM, ALLCOT IO begins this transparency journey with a commitment to open its own books and embrace full disclosure and accountability throughout its value chain. In so doing, by illuminating stakeholder relationships, capital flows, and the allocation of project funds in granular detail for all to see, ALLCOT IO will quickly drive a shift in public comprehension of the power of climate data to drive climate outcomes. The local environmental stewards helping to implement ALLCOT projects on the ground will share first-hand accounts of their experiences. Because transparency drives performance, stories of those communities positively transformed by funds automatically transferred back from climate-assets sales will grow, bolstering industry credibility, tempting more VCM stakeholders to open their books, leading to an ever increasing share of credits issued against open standards with auditable, 3D, full-color data evidencing integrity and trust.
V. Next Up in PART II: Raising the Bar on Integrity and Credibility with 3D, Full Color ESG Data
Once the books are open, what does the public find? Climate data transparency is only useful to building trust in carbon-pricing – whether the VCM, the CCMs, or the coming Article 6 markets – insofar as ESG data underlying our climate mitigation and adaptation projects, assets, and activities is robust, reliable, demonstrative of environmental integrity, financial equity, and social impact, and also easily discoverable in an accessible, standardized form compatible with auditing at reasonable cost. In PART TWO, we introduce the twin concepts of “data breadth” and “data depth” as powerful but underrecognized constraints on scale throughout the climate-asset lifecycle; unpack how those metrics of trust and transparency affect the credibility of ESG reporting; and show how the SIF is leveraging Hedera and its DLT-enabled climate tech stack to build the empirical knowledge structures necessary to close the climate finance gap and drive measurable progress towards net-zero.
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