Unlocking climate finance for social impact

Published: 10 October 2023

Smoke pouring out of a chimney stack
We’re engaging with prominent actors in the voluntary carbon market to understand how high-impact enterprises could unlock carbon revenues. Here are some proposals for collective action. 

The problem

Since 2007, Social Finance has been at the forefront of efforts to address some of society’s toughest challenges, both in the UK and internationally. We have worked across a range of sectors – including employment, health, education, water and sanitation, and more – to ensure finance and funding models better address the challenges that have led to poor social outcomes. Climate change drives some of them. 

Environmental and social outcomes are inextricably linked, and those in low- and middle-income countries are disproportionately impacted by the effects of climate change. Left unchecked, climate change will push up to 130 million people into poverty over the next 10 years – unravelling hard-won development gains – and could cause over 200 million people to migrate within their own countries by 2050, according to the World Bank. Its effects will cause approximately 250,000 additional deaths per year, from malnutrition, malaria, diarrhoea and heat stress between 2030 and 2050, in addition to the humanitarian crises resulting from increasing severe weather events.

Realising our ambition

We work with high-impact social enterprises whose activities generate both environmental and social benefits for customers and the broader communities where they operate, across a range of sectors: 

  • Water: By providing access to safe water via filtration technologies, water enterprises reduce carbon emissions by displacing the need to boil water using biomass and help reduce the disease burden of communities switching from contaminated water sources. 
  • Clean cooking: Enterprises selling cookstoves that use more climate-friendly fuel (or use less of traditional woodfuel), reducing the emissions from household cooking activities, and produce less particulate matter which is linked to long-term negative health effects.
  • Sanitation: Enterprises offering on-site sanitation services in low-income settings – particularly those with a container-based business model that quickly contain, collect and treat waste – eliminate almost entirely methane and nitrous oxide emissions that stem from anaerobic waste digestion, while improving public health outcomes.

But a major obstacle for enterprises operating in low- and middle-income country contexts is what’s called the commercial viability gap – the funding gap between customer revenues and the costs to sell a product. Customers are often low-income, with low purchasing power, while upfront capital and ongoing operational expenditures are high. This limits their ability to attract financing to scale up.

These enterprises can generate additional revenue streams by selling carbon credits through the voluntary carbon market (VCM). Carbon credits are measurable, verifiable emissions reductions from certified projects that reduce, remove, or avoid greenhouse gas emissions (GHG) – effectively a type of results-based finance for climate-positive projects. The VCM is expected to grow exponentially in the near-term, and forecasts suggest a valuation of $40 billion by 2030 is possible. 

130 million 
pushed into poverty over within 10 years if climate change is not addressed 
$40 billion 
potential value of voluntary carbon market by 2030 

This growth is driven by a surge in demand from corporates wanting to achieve net-zero targets. These are commitments to balance the amount of greenhouse gases they emit with an equivalent amount removed from the atmosphere or avoided altogether. 

The architecture of the VCM enables the buying and selling of these carbon-focused credits, but is not optimised to monetise the social impact of carbon projects (also known as social co-benefits). This means high-social impact enterprises can struggle to (1) access this revenue source and (2) secure a fair price for their credits, reflective of the dual environmental and social impacts they are delivering. 

Our response to these barriers

Over the last year, we’ve engaged widely with prominent actors in the VCM to understand how high-impact enterprises could unlock carbon revenues. We believe that these access and pricing challenges can be overcome. Here are some proposals for collective action.

We can work to boost carbon credit prices for projects delivering social co-benefits

This means encouraging the carbon market to move away from the ton is a ton” mindset – the belief that all carbon credits are inherently equal no matter how they are generated – and accepting that some carbon projects are more effective at delivering deeper and more sustained impact than others. For example, a utility-scale solar installation can help decarbonise a power grid but does nothing for unconnected low-income or rural households. 

By contrast, when an off-grid solar company sells solar home lighting systems to households previously dependent on kerosene lanterns, it both helps to reduce fossil fuel usage and provides cheap, safe, and high-quality energy access. The latter is more impactful than the former, and the credits generated should sell for a premium. 

We can improve the integrity of claims by adopting new forms of measurement

Recent investigations by The Guardian and Corporate Accountability have raised concerns about whether carbon methodologies are accurately measuring emission reductions. This has led to a dip in demand and prices for some credit types. Efforts to boost the price buyers are willing to pay for the highest impact carbon could be supported by the deployment of new measurement methodologies and remote sensing technologies that provide higher levels of assurance that what is being claimed in terms of impact is being delivered. 

For example, ATEC has integrated Internet of Things (IoT) technology into its electric cookstoves which allows them to see robust, real-time usage data for every stove they have sold. With this technology, they’ve entered into a long-term partnership with ENGIE for the purchase of up to 11.5 million tons of their 100% data-verified carbon credits. 

We can work with a group of committed corporate buyers interested in bringing together corporate social responsibility and climate action

Some market players are moving in this direction. For example, the Climate Policy Initiative and Salesforce recently released a Corporate Climate Finance Playbook which explores the different forms of capital that could be deployed for climate impact. Social co-benefits are included in the playbook’s decision-making framework, but as a secondary consideration. 

There is an opportunity to bring considerations of social outcomes further upstream in the decision-making process. Corporate first movers are influential voices in the market, and if we support them in prioritising investments delivering social impact alongside climate mitigation, we can help increase demand (and prices) for these credits. 

We can make it easier for small-scale enterprises and projects to access the VCM

Relationships are key to accessing the VCM, as brokers and traders are responsible for a large volume of transactions. Small enterprises don’t always have the capacity or resources to build these relationships – and the lack of scale of their operations makes their projects less attractive to these intermediaries because of the large fixed costs associated with project due diligence and verification. 

One potential solution is aggregation platforms that can deliver due diligence at scale to carbon credit buyers for a portfolio of projects. Rabobank’s Acorn platform connects smallholders adopting proven agro-forestry techniques to a curated buyer group committed to supporting transformative agricultural practices. 

Another approach is to disintermediate the market by facilitating direct transactions between projects and credit buyers. This allows a higher share of carbon revenues to accrue to those delivering the impact. The CaVEx platform is being developed to ensure that climate finance can flow more easily to smaller projects and enterprises. The platform aggregates 100% data-verified carbon credits from projects overlooked by most VCM buyers because of their small scale. Thanks to the platform’s digital architecture, proceeds from credit sales flow directly to the projects, so margin isn’t lost to intermediaries along the way. 

What’s next?

Our learning journey isn’t over. An honest assessment of where the VCM has worked well and where it hasn’t can offer valuable insights on how to capture – outside the VCM – the value that high-impact social enterprises generate. To date, we have not seen significant demand for buying standalone’ social outcomes, but we’re beginning to ask ourselves what sort of building blocks could facilitate its emergence. 

In our next blog, we’ll share some of our thoughts on the four pillars needed for a standalone social outcome market and where we see opportunity to accelerate its development. We invite you to join us on this journey and in the discussion.

If you’d like to follow up, please reach out to Cooper Renfro.

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