Voluntary Carbon Markets: A Bank Moves Early to Seize the Opportunity

As companies race to meet ambitious decarbonization goals, leaders are looking for ways to mitigate emissions both inside and outside of their value chains. Carbon offsets should be a method of last resort—there are many other levers to pull to achieve net-zero targets—but global decarbonization targets cannot be met without them.

While uncertainties still exist, voluntary carbon markets (VCM) for carbon offsets are expected to grow rapidly to an estimated $15 billion to $30 billion in value by 2030. Banks are ideally positioned to support this market—if they move quickly to build expertise. Strategic first movers can capitalize on this growth opportunity, treating VCM as the rise of a new asset class.

We helped BankCo* seize the VCM opportunity, defining the market landscape and delivering a blueprint for its participation. We identified nearly 20 ways for BankCo to engage, prioritizing near-term actions it could implement immediately to create positive impact and significant financial returns.

What is the voluntary carbon market?

In the better-known compliance carbon market, regulators and governments mandate that companies purchase certificates for the legal right to emit greenhouse gases (GHG). In this cap-and-trade system, firms can trade excess allowances as commodities.

In the VCM, companies buy certificates that represent financial support for projects designed to reduce or remove carbon emissions. These projects include nature-based and tech-based solutions, such as reforestation, coastal wetland protection, biochar, and direct atmospheric carbon capture.

Assessing the business case

BankCo’s leaders were on the lookout for growth areas that would build on its current strengths, which include trading and expertise in project development. This leading European bank was already successful in the compliance carbon market, and potentially had access to both supply-side and demand-side customers for voluntary carbon credits.

Working collaboratively with BankCo’s leaders, we offered three perspectives to inform its strategy for participating in VCM:

1. Carbon credits market screening. Our market scan explored the competitive landscape and spotted key opportunities along the banking value chain. We outlined the current market size and its probable future trajectory, given likely regulatory challenges. And we made recommendations about the latest technology-based and nature-based GHG-abatement solutions.
2. Strategic target picture identification. We created an initial blueprint of strategic initiatives that would help BankCo seize the VCM opportunity. This included an overview of the required capabilities to participate in VCM. We showed BankCo potential gaps it would need to fill, including assessing carbon credit quality, deriving credit demand, managing a credit portfolio, and assessing the quality of VCM projects.
3. The business case. We made a high-level quantification of the potential revenue BankCo could make through VCM participation, and an initial risk assessment that included reputational risk. We mapped corporate commitments of 1,000 European companies across 10 industries and modeled three scenarios for demand growth, showing an increase of about 4x to 13x by 2030.

Capitalizing on the rise of a new asset class

BankCo was already a leader in sustainable finance, but we delivered a strategy to hasten its progress. We delivered to BankCo’s leaders approximately 20 actions it could take to engage in VCM now to lead the market by 2030. Many of these actions focused on opportunities in BankCo’s origination, trading divisions, project finance activities, and advisory services.