Building an intelligent portfolio of CO₂ certificates

Just as companies rarely have a single supplier for a specific product, investors rarely invest in a single asset. Therefore, we recommend all our clients purchase carbon credits from multiple carbon projects. This reduces dependency and protects them from potential losses.

When building a portfolio of carbon credits in the voluntary carbon market, we can leverage some concepts from traditional portfolio theory. This involves a structured approach to managing the risk and return associated with your purchase of carbon credits.

Here's how to apply the relevant concepts (diversification, risk and return, and efficient portfolio) to build such a portfolio:

Diversification

Diversification is just as important in the voluntary carbon market as it is in traditional financial markets. To effectively diversify your carbon credit portfolio, consider investing in a mix of different types of carbon credits, such as:

• Project types: Invest in carbon credits from different project types. The Oxford Principles provide a detailed breakdown of what this might look like. It's important to consider your overall goal (e.g., net zero, mitigation beyond the value chain) and align project types with that goal.

• Geographical regions: Spread your carbon credit purchases across projects in different geographic regions to reduce the risk of region-specific risks, regulatory changes, or climate impacts. You may want to support projects in the Global South, where the impacts of climate change are more noticeable, or projects that are connected to your company's history.

• Credit standards: Diversify between carbon credit standards or certification programs such as Puro.Earth, Gold Standard, or European Biochar Certification to minimize the risks associated with changes in standards and methodologies.

When we look at case studies, we see a wide range of projects supported by a company in a given year. At the high end, you'll find large companies like Microsoft and JP Morgan supporting more than ten different projects simultaneously. For small businesses, we recommend purchasing carbon credits from at least two projects.

Risk and return

Evaluate the risk and return characteristics of each carbon credit project or category. Consider the following factors:

• Expected return: The return of a project is the amount of carbon dioxide avoided or removed. Projects that promise to remove carbon dioxide in the future must be analyzed with caution, as they may not be able to keep that promise. Projects that only generate a CO₂ certificate after CO₂ has already been avoided or removed are much simpler.

• Risk assessment: Analyze the specific risks associated with each project, such as regulatory, operational, or market-related risks. Projects with lower risks are naturally more attractive and often more expensive. There are different risks associated with each project type and the specific project. A careful analysis is required before purchasing carbon credits.

Efficient portfolio

To build an efficient carbon credit portfolio, you need to balance risk and return. Apply portfolio theory to select the optimal mix of carbon credits that delivers the desired number of tons with the least risk.

• Set your risk tolerance: Determine your risk tolerance and your climate strategy, as these will determine your portfolio construction.

• Create a diversified portfolio: Use the information you gained from diversification and risk-return assessment to build a diversified portfolio of carbon credits. This may mean allocating a certain percentage of your budget to different project types and regions to achieve a balanced portfolio.

• Continuous optimization: Monitor the market regularly and consider updating your portfolio as new projects emerge that are a perfect fit for your business. As market conditions and regulations change, it's important to ensure your portfolio aligns with your goals.

Final tips

• Consider your climate strategy goals: Ensure your portfolio aligns with your specific sustainability goals, such as “achieving net zero” and “making a contribution to climate action equal to your current emissions.”

• Building a portfolio of CO₂ certificates in the voluntary carbon market is not just a matter of financial costs, but above all a contribution to environmental and sustainability goals. By applying some elements of portfolio theory, you can structure your budget sensibly to achieve both financial and environmental impact goals.

Contact us to build your portfolio of CO₂ certificates on Freeze Carbon.