Have you ever felt like carbon markets operate by a different rulebook? For institutional investors and ESG leaders (Environmental, Social, and Governance leaders), this is entirely accurate. Here, environmental integrity is the real currency. The value lies in permanence, additionality, and project credibility.
Delivering on carbon investing demands a long-term mindset. Projects unfold over years, not quarters. Assessing permanence and compliance across multiple evolving standards, such as ICVCM’s Core Carbon Principles (CCPs), adds layers of complexity.
This article guides you through a sustainability-first investing approach designed for your needs, let's delve into the strategic blueprint for professionals committed to aligning carbon acquisition with organizational integrity, ESG accountability, and measurable climate results.
Carbon credits are verified carbon dioxide (CO₂) emissions cuts from projects that wouldn't exist without carbon credit financing. This market has become a real institutional investment asset class. Major asset managers are putting serious capital into it. The global carbon market hit $114+ billion in 2024, showing how a sustainability tool became a mainstream financial instrument.
Institutional momentum is accelerating, with MSCI reporting $43 billion committed between 2021-Q3 2024 for carbon credit activities, including $14 billion in 2024 alone. This surge reflects growing institutional recognition of carbon credits as essential portfolio components for climate-conscious investment strategies while purchasing carbon credits.
The investment thesis centers on three key drivers:
For example, BlackRock created a dedicated Transition Capital unit for carbon investments, while institutions increasingly view carbon credits as portfolio diversification tools with compelling risk-adjusted returns in rapidly scaling climate finance markets. This institutional adoption reflects carbon credits' maturation from niche sustainability instruments to recognized alternative investments requiring sophisticated investment frameworks.
Fig 1: Carbon market growth
Institutional investors need to understand the key differences between voluntary and compliance carbon markets when building their carbon credits investment strategies.
Compliance markets operate through mandatory "cap-and-trade" systems where companies must buy carbon credits’ allowances to meet regulatory requirements. These markets offer better liquidity and standardization, making them ideal for larger institutional investments. The EU ETS and California's cap-and-trade program are prime examples of well-developed compliance markets that trade carbon credits with established pricing mechanisms and transparent trading infrastructure. In Asia, the compliance markets of Singapore and Japan are attracting attention.
Singapore: Singapore does not have an emissions trading system but drives its climate policy through a carbon tax introduced in 2019 and the Climate Impact X (CIX) platform for voluntary carbon credit trading. The carbon tax will rise to S$50–80 (approx. US$36–58)/tCO₂e by 2030, and companies may offset up to 5% of taxable emissions with international credits, which Singapore actively promotes given its limited land area.
Japan: Japan is building on GX League launched in 2023 and is scheduled to fully implement a national emissions trading system from 2026. In addition to its domestic J-Credit Scheme, Japan actively utilizes Joint Crediting Mechanism (JCM), which generates credits through bilateral projects with partner countries. This framework provides investors with unique access to an international pipeline of mitigation activities that go beyond domestic opportunities. For more details about the Japanese market, please refer to this article.
Voluntary markets allow companies to get carbon credits beyond what regulations require. While these markets can deliver higher returns, they demand thorough due diligence to ensure project quality and authenticity.
| Market Type | 2025 Market Size (USD) | 2030 Projection (USD) | Liquidity | Access Complexity | Regulatory Framework |
| Compliance Carbon Market | $940B | $1.88T | High | Moderate | Mandatory |
| Voluntary Carbon Market | $1.89B | $4.13B | Lower | High | Standards-based |
Table 1: Compliance vs Voluntary markets comparison
Institutional investors are integrating carbon credits to their investment strategies for three main reasons.
The Science Based Targets initiative (SBTi) explicitly permits the use of carbon removals for residual emissions under its updated draft Corporate Net‑Zero Standard, particularly beyond Scope 1 and 2 emissions .
Meanwhile, TCFD-aligned frameworks (now evolving into IFRS S2) require corporate climate disclosures to include clear metrics and targets around carbon credit use, covering verification, credit type (such as removals vs. avoided emissions), and counterparty providers.
Institutional investors need systematic approaches for investing in carbon credits based on emerging market standards.
The ICVCM Core Carbon Principles provide the foundation for comprehensive quality assessment across governance, emissions impact, and sustainable development domains.
The framework integrates US Treasury's principles for responsible participation with institutional investor due diligence guidance to create systematic supplier selection and risk management procedures.
Fig 2: Carbon credit Purchase framework workflow
Essential framework components:
How institutional investors can align carbon credit investing with both climate impact and strategic risk management? Take a look at the following framework that blends diversified portfolio allocation across compliance and voluntary markets with careful timeline planning, ensuring that long-term net-zero goals and reputational risks are managed in sync.
Institutional strategies align investing in carbon credits with net-zero commitments and climate risk management objectives. This strategic alignment drives both impact and returns.
Portfolio allocation methodology focuses on diversification across compliance and voluntary markets. The key is balancing climate impact goals with reputational and financial risk considerations.
Timeline planning becomes critical when integrating long-term climate objectives with portfolio decarbonization pathways. This involves considering delivery schedules for pre-commitment credits while staying aligned with institutional net-zero targets.
Strategic considerations:
Evaluation criteria assess three critical areas: developer financial stability, technical expertise, and operational track record across multiple project types, ensuring reliable credit delivery capabilities.
Due diligence criteria dig deeper into project developer certifications and third-party verification partnerships. Compliance with recognized carbon standards including Verra VCS, Gold Standard, and Article 6 mechanisms, becomes non-negotiable for institutional-grade investing in carbon credits.
Assessment of supplier legal structure and contract performance provides insights into operational reliability.
Red flags in supplier assessment
Institutional investors who do invest in carbon credits have four primary pathways into carbon markets, each with distinct accessibility, risk profiles, and operational complexity.
Carbon ETFs (Exchange-traded funds): Easy market access for all institutional sizes, moderate risk profiles, minimal operational complexity: ideal for initial institutional participation.
Specialized Funds: Moderate entry requirements with professional management, diversified risk profiles through expert portfolio construction, manageable operational complexity, for example Offset8 Capital aims to build in Abu Dhabi Global Market a carbon investment fund with a target size of at least US$250m, the first of its kind in the Middle East, that channels institutional capital into forest (ARR), biochar, and ecosystem restoration projects across Africa and Southeast Asia, delivering both measurable climate impact and long-term return potential.
Direct Investment: Limited to well-resourced institutions, high risk profiles from project-specific exposure, maximum operational complexity through extensive due diligence and monitoring.
Trading Platforms: Broad market access through established exchanges, variable risk profiles based on market conditions, moderate operational complexity requiring robust infrastructure capabilities.
The choice of the way to invest depends on an institution's appetite for control versus complexity, plus available capital and internal expertise levels.
Direct investing in carbon credits allows institutional investors to maximize value by supporting projects at their early stages and securing preferential pricing: all while retaining control over credit quality and impact.
Forward agreements or equity-style financing of carbon projects provide access to discounted credits and deepen investors’ influence over project design and MRV (Monitoring, Reporting and Verification) protocols, translating into potential upside if projects deliver on time and meet quality benchmarks.
Due diligence checklist for direct carbon investment
For institutional investors looking to actively trade carbon credits, Xpansiv's CBL platform is one of the largest venues, holding a market share estimated at one-quarter of the global VCM (voluntary carbon market). It pioneered two-way live bids and offers, enhancing liquidity and enabling transparent, real-time price discovery: critical for portfolio-level capital deployment.
AirCarbon Exchange (ACX) is the world’s first fully regulated carbon trading exchange, operating from Singapore. Its platform enables secure custody, real-time asset tracking, and regulated trade settlement, especially appealing for institutional investors requiring compliance and operational certainty.
Intercontinental Exchange (ICE) provides a suite of carbon credit futures and options, including its widely adopted EU Carbon Allowance (EUA) futures launched in May 2025, built on its established environmental trading infrastructure. ICE represents the broadest carbon derivatives market globally and offers advanced risk management tools useful for institutional portfolios.
As for investors, the capital depends on the credibility and performance of carbon credits, treated as long-term financial assets rather than simple offsets. High-quality credit investments require multi-stage verification frameworks, rigorous metrics, and continuous monitoring to safeguard environmental and financial outcomes.
Verification Standards require systematic evaluation across multiple stages: project design review, pipeline listing with public comment periods, third-party validation by independent VVBs, formal registration approval, implementation monitoring, third-party verification of achieved carbon reductions, credit issuance, and continuous oversight.
Key Quality Metrics focus on environmental additionality, permanence, robust quantification, no double counting, independent verification, and transparency standards ensure environmental integrity. Monitoring Protocols include continuous MRV processes, regular VVB evaluations, and lifecycle tracking to maintain credit quality throughout operational periods.
Fig 3: Quality assessment framework
| Project Design Assessment | Evaluate technical feasibility and methodology selection |
| Pipeline Listing & Public Comment | 30-day public comment period for project review |
| Third-Party Validation And Verification | Independent evaluation of a VCS (Verified Carbon Standard) project that a validation/verification body (VVB) conducts to determine if a project meets the VCS Program rules and requirementsVVB confirms that the outcomes set out in the project documentation have been achieved and quantified according to the requirements |
| Registration Approval | Formal project registration with verification body |
| Implementation Monitoring | Ongoing tracking of GHG emission (Greenhouse Gas emission, a key component of a carbon footprint) reductions during monitoring periods |
| Credit Issuance | Formal VCU (Verified Carbon Unit) issuance upon successful verification |
| Ongoing Oversight | Continuous quality assurance and project reviews |
Comprehensive risk management frameworks confront multiple danger zones in institutional investing in carbon credits: operational, regulatory, environmental, and reputational risks that can devastate financial returns or derail climate objectives.
Man Group's institutional investor risk assessment framework exposes how carbon markets unleash unique financial, structural/regulatory and reputational risks demanding specialized mitigation strategies. MSCI analysis of over 4,000 carbon offset projects reveals a brutal reality: fewer than 10% achieve AAA-A integrity ratings, exposing massive quality risks across the market.
Investment risks specific to carbon credits span delivery risk, regulatory risk, and price volatility. Smart risk mitigation demands diversification across project types, geographic regions, and credit vintages to slash concentration risks. Portfolio construction must cap exposure to individual developers while maintaining geographic diversification to survive jurisdiction-specific regulatory and operational challenges.
| Risk Category | Probability | Impact | Mitigation Strategy |
| Delivery Risk | Medium | High | Diversification, performance guarantees |
| Quality Risk | High | High | Rigorous due diligence, independent ratings |
| Regulatory Risk | Medium | Medium | Policy monitoring, compliance systems |
| Price Risk | High | Medium | Forward contracts, portfolio hedging |
Table 3: Risk matrix with mitigation strategies for each risk category
Operational risk management addresses project execution challenges preventing carbon credit delivery or reducing environmental outcomes. Contract management establishes clear delivery obligations, performance milestones, and remediation procedures for operational shortfalls. Delivery risks typically include project performance failures, inadequate verification procedures, and developer capacity constraints.
Delivery risk mitigation requires diversification across multiple developers and regions reducing dependence on individual projects. Performance guarantees and alternative sourcing arrangements ensure portfolio delivery targets despite individual project delays.
Regulatory risk assessment evaluates potential policy changes, jurisdictional requirements, and compliance obligations affecting carbon credit validity, pricing, or usability. The regulatory landscape continues evolving rapidly with new frameworks and compliance requirements emerging across jurisdictions. Policy monitoring systems track regulatory developments including CFTC's 2024 VCC derivative guidance, ICVCM Core Carbon Principles implementation, and Article 6 mechanisms. Compliance requirements vary significantly across credit types, with CORSIA-eligible credits requiring host country authorization while domestic programs maintain separate verification standards requiring enhanced due diligence procedures.
Effective performance monitoring frameworks track financial returns and environmental impact across institutional carbon credit portfolios while providing transparent stakeholder reporting. KPI measurement systems capture investment performance, environmental outcomes, and operational efficiency metrics supporting comprehensive portfolio evaluation.
Portfolio management requires ongoing assessment of allocation targets, rebalancing needs, and strategic adjustments based on market developments. Dynamic management approaches enable institutions to capture market opportunities while maintaining appropriate diversification.
Fig 4: Portfolio monitoring dashboard showing key metrics
Impact measurement frameworks quantify environmental outcomes from institutional carbon credit investments while providing transparent stakeholder reporting regarding climate action progress. Carbon impact reporting aligns with recognized standards including GHG Protocol guidelines and Science Based Targets initiatives.
Environmental outcomes assessment addresses additionality, permanence, and measurement accuracy ensuring reported impacts reflect genuine climate benefits. Third-party verification of impact claims provides additional assurance that institutional reporting accurately represents environmental achievements.
Impact measurement frameworks quantify environmental outcomes from institutional carbon credit investments while providing transparent stakeholder reporting regarding climate action progress. Carbon impact reporting aligns with recognized standards including GHG Protocol guidelines and Science Based Targets initiatives.
Environmental outcomes assessment addresses additionality, permanence, and measurement accuracy ensuring reported impacts reflect genuine climate benefits. Third-party verification of impact claims provides additional assurance that institutional reporting accurately represents environmental achievements.
Offset8 Capital is a global emissions investment and management group founded in Abu Dhabi, United Arab Emirates. At COP28, Offset8 announced the Middle East's first carbon market fund with a target size of $250m.
Offset8 seeks to finance nature-based solutions in Africa and Southeast Asia, as well as provides financing in the form of prepayments and offtake contracts for the delivery of verified carbon credits, with subsequent sale of the carbon credits under compliance markets (such as CORSIA and regional ETS), Article 6 of the Paris Agreement or voluntary purposes.
Offset8 Capital has an existing pipeline of approximately 70 projects: the investment portfolio includes such projects as CORSIA-eligible iRise (Malawi's largest reforestation and clean cooking program), Sawa (Indonesia's largest biochar carbon removal project).
Successful institutional investing in carbon credits demands a structured approach that combines long-term strategic alignment, technical capacity building, and disciplined portfolio execution, leading institutions embed carbon markets into their broader investment frameworks, treating high-quality credits as financial instruments that deliver both climate impact and risk-adjusted returns.
Implementation phases:
| Governance framework development | Establish program governance and investment authorityDefine decision-making processes for transparency and accountability |
| Team building and expertise building | Assemble cross-functional teams with expertise in climate finance, sustainability strategy, risk management, and regulatory frameworks.Invest in training to enhance internal capacity for evaluating and monitoring carbon credit investments. |
| Technology and monitoring systems | Implement robust performance tracking and reporting tools, including MRV systems, registry access, and ESG data integration, to ensure portfolio transparency and credit quality assurance. |
| Pilot investments | Launch targeted, small-scale positions in selected carbon projects or funds.Use these initial allocations to test investment hypotheses, understand market dynamics, and refine risk models. |
| Full operational deployment | Scale investments in carbon markets in alignment with corporate Net Zero targets or climate-aligned portfolio mandates. Maintain compliance with voluntary and regulated frameworks while optimizing climate and financial outcomes. |
Carbon markets are undergoing transformative structural change, driven by convergence between voluntary markets, Article 6 implementation, and compliance schemes like CORSIA. This shift is creating scalable frameworks for institutional-grade climate investment with heightened transparency and international alignment.
The rise in credit retirements, reaching 95 million in the first half of 2025, demonstrates increasing demand for high-quality carbon assets, underscoring market emphasis on integrity and investor confidence.
Institutions excelling in carbon investment are those integrating rigorous credit quality assessment, advanced risk management, and continuous performance monitoring – leveraging ratings, jurisdictional intel, and MRV frameworks to guide capital toward high-impact and resilient assets.
As regulatory and market sophistication accelerates, value accrues to investors with systems-driven strategies – capable of rapidly adapting to evolving standards, maintaining high-quality credit exposure, and delivering measurable climate outcomes alongside sustainable financial returns.
Disclaimer
*Disclaimer: This commentary is for informational purposes only and should not be considered financial, investment, or regulatory advice. Offset8 Capital Limited is regulated by the ADGM FSRA (FSP No. 220178). No assurances or guarantees are made regarding its accuracy or completeness. Views expressed are our own and subject to change
Institutional evaluation to buy carbon credits focuses on supplier track record, financial stability, project pipeline depth, and third-party verification partnerships. Key criteria include demonstrated delivery capability, regulatory compliance history, and alignment with recognized standards.
Institutional carbon credit investments carry risks including delivery shortfalls, non-permanence (for example, reversals), and environmental integrity concerns such as flawed additionality or double‑counting; these can undermine both carbon performance and financial outcomes. Additionally, investors must manage exposure to regulatory shifts, price volatility, counterparty defaults, and reputational damage stemming.
Portfolio structure should diversify across project types, geographic regions, credit vintages, and delivery timelines to minimize concentration risks. Allocation between pre-issuance and issued credits depends on institutional risk tolerance and return objectives.
Critical standards include Verra VCS, Gold Standard, Climate Action Reserve, and emerging Article 6 mechanisms providing institutional-grade assurance. Third-party verification by accredited bodies ensures environmental integrity and regulatory compliance for institutional investments.
