Technology startups are trying to bring quality control to the carbon-offset market as more companies seek to compensate for their greenhouse-gas emissions.
Sylvera Ltd., a London-based company that provides ratings for carbon offsets similar to credit scores, said Tuesday that it raised $32.6 million to expand its service. Sylvera analyzes satellite images, 3-D laser scans and other data to estimate how much carbon is stored in trees. It crunches that information using machine-learning technology to grade the likely effectiveness of offset projects that plant or protect forests. The company has signed up clients including Delta Air Lines Inc., grain trader Cargill Inc. and consulting firm Bain & Co. since it launched in 2020.
Carbon credits are issued by projects that aim to benefit the climate in various ways, such as preventing deforestation or paying for less-polluting cookstoves in developing countries. Each credit represents a claim by the project that its work will remove a metric ton of carbon dioxide from the atmosphere or prevent a ton of emissions. But in reality, projects don’t all deliver the promised benefits. Experts say variation in projects’ climate impact isn’t reflected in the price of offsets, which are bought and sold in private, unregulated markets. Sylvera Chief Executive Allister Furey said ratings will give buyers confidence and channel funding to projects that actually benefit the climate.
“Nominally every single credit is fungible and equivalent with another one, but in practice that’s just not true,” said Dr. Furey, who has a Ph.D. in machine learning. “Quality isn’t rewarded.”
Corporate buyers are piling into the offset market, also called the voluntary carbon market. The price of nature-based offsets, such as those from tree-planting and soil-health projects, has more than tripled in the past six months, according to data gathered by S&P Global Platts. Carlos Gonzalez-Cadenas, a partner at Index Ventures, which led Sylvera’s funding round alongside Insight Partners, predicted that demand for ratings will rise because big companies using offsets to meet climate-change targets are becoming more discerning as they face pressure to report their purchases to shareholders.
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“If you are a public company, you cannot go and spend a very significant amount of money buying stuff of no value,” Mr. Gonzalez-Cadenas said. He said reliable ratings would make it cheaper and quicker for buyers to vet projects and accelerate the growth of the market.
Sylvera has competition. BeZero Carbon Ltd., another London startup, began a trial of its offset-rating service in December and plans to launch it commercially in April, Chief Executive Tommy Ricketts said. He said roughly 100 users, including mining giant BHP Group Ltd. and other large companies, are testing the platform. BeZero completed a £2.9 million, or roughly $3.9 million, seed funding round in December, Mr. Ricketts said.
BeZero wants its ratings framework to become a key part of the way project developers, intermediaries and buyers manage risk. Mr. Ricketts said success depends on being transparent about the system.
“It doesn’t work unless people agree that this is something that they need…an information point that allows you to model the quality of projects and empower the price mechanism,” he said.
Mr. Gonzalez-Cadenas at Index Ventures said the carbon market has space for multiple ratings providers, just as the bond market accommodates Moody’s Corp. , S&P Global Inc. and Fitch Ratings Inc. The prize for early movers is to become part of the plumbing for an increasingly valuable market, he said.
“Time to market and being early is crucial,” Mr. Gonzalez-Cadenas said.
The startups’ methodologies have some features in common. They both scrutinize the documentation of offset projects, assessing whether the developers made conservative or optimistic assumptions about the likely climate impact and the risks facing the project, and combine that information with relevant scientific research.
Sylvera has the lead in gathering proprietary data about forestry projects. It works with researchers at the National Aeronautics and Space Administration’s Jet Propulsion Laboratory, the University of California, Los Angeles, and University College London and has been conducting fieldwork using tools such as lidar sensors and drones to measure how much carbon is stored in trees in places such as Peru, Gabon and the U.K.
Sylvera currently assesses only forestry credits, although it plans to expand its coverage across the whole offset market. It said its goal is to have rated 500 projects by the end of 2022. BeZero has broader coverage, having published more than 200 ratings for various kinds of offset projects on its platforms.
The emergence of ratings providers isn’t the only indication that an influx of capital is changing the voluntary carbon market. Industry groups are devising common standards for best practice. Big financial companies are entering the fray with new price benchmarks and futures contracts. Sylvera and BeZero both have partnerships with market operators catering to offset traders.
The activity reflects a widespread view that there is money to be made from addressing the lack of trust in offsets, according to Brad Schallert, director of carbon-market governance and aviation at environmental group World Wildlife Fund. The organization is working with other nonprofits on a tool for assessing offset categories, which Mr. Schallert said will be freely available early this year.
“There’s an expectation that this is going to be valuable, that there’s going to be a lot of interest and investment flowing towards carbon projects,” he said.