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Independent carbon ratings

  • Mani Gangadharan Venketachalam

I joined BeZero Carbon as President in January 2022. My brief was to bring to bear my 30+ years of experience in regulated financial market ratings agencies to help the co-founders build the leading independent carbon rating agency.

Independent carbon ratings and rating agencies matter because they allow anyone to assess the quality of any type of carbon project, at any stage, in any carbon market. They are essential to scaling climate action. 

Independence is what differentiates ratings as a risk metric from other types of “quality scores”, broker advisory or in-house analysis. Independence is what separates rating agencies from other market actors such as consultants, traders, or investors who typically play a direct role in transactions.  

Financial market regulations in the US, UAE, EU, UK and Singapore are now beginning to be applied to the carbon market, making the roles of different market actors more defined and easier to understand. But the process is just getting started. 

At BeZero, we welcome and encourage transparency in the market and have published all our ratings methodologies and headline ratings. We also welcome regulations and have signed up to the voluntary ICMA’s Code of Conduct. But rather than waiting for regulations we impose on ourselves seven key pillars to guarantee our independence. 

Together they give our customers and the broader market confidence that there are no activities or incentive structures in place that could prejudice any ratings outcome irrespective of who commissions it, or who our clients are.

1. No internal conflicts.

BeZero enforces a separation of commercial and analytical functions, flow of information, and compensation structures.

Once a rating has been contracted and paid for, it is delivered and managed by ratings analysts without any further engagement or involvement of the commercial team. Ratings are only assigned via unanimous consent at a committee of subject matter experts after a rigorous internal peer-review process. Individual analysts are not able to unilaterally assign ratings. The analytical team’s compensation structure is also never linked to the specific outcomes or volume of ratings. Finally, for all ex-post ratings, commercial team members learn about ratings BeZero has assigned at the same time as everyone else in the market, when they are published on our public website and platform.

2. No trading or developing carbon projects.

BeZero is not involved in any type of carbon credit or carbon project transaction or any activities specifically related to the development of a carbon project. All employees are equally prohibited from these activities and must sign a declaration attesting to this. 

The only exception to this rule for BeZero is the annual retirement of high quality credits equivalent to our annual carbon footprint by Molten Ventures, our Series A lead investor. This is a requirement under Molten’s ESG policy. Their in-house team is a subscriber to BeZero Carbon Markets and relies on our ratings to inform their purchasing decisions for all portfolio companies. BeZero is not involved in the selection, purchase or retirement of the credits ourselves.

3. No MRV consulting.

BeZero does not advise clients on any part of the auditing, accreditation or monitoring, reporting or verification (MRV) process, or provide analysis that can be used directly as an input to these processes. BeZero avoids this conflict because if we did provide analysis that was used to directly evidence a project’s issuance, and then rated the project once it issued credits, the rating would in effect be akin to “marking our own homework”. 

A carbon rating agency is not a standards body, validation and verification body, or project design consultant. It offers third party opinions expressed as ratings on the evidence provided by these entities to support a project’s climate claims. 

4. No privileged rating access.

Issued credits from accredited carbon projects with publicly available project development documents are commonly transacted in the “spot” carbon market.

BeZero makes every headline letter rating of these credits publicly available for free. BeZero releases the rating simultaneously for all audiences, and displays the rating in the same way everywhere. We have done this since we launched -

We believe the headline ratings for existing carbon projects are a public good. Our core business is the value add of providing customers access to deep due diligence and risk analysis that underlies these headline ratings. 

The only exception to this approach is for project developers who are consulted pre-rating to ensure there’s no pertinent project information missing, and always given the rating in full upon publication at no charge. They also reserve the right to respond and any material new evidence, from them or anywhere else, will be reflected in an updated rating.

We also rate pre-issuance projects - those that have not yet issued credits or completed their accreditation process. Documentation for such projects is often incomplete, non-public, restricted and / or subject to fundamental change. As such, all BeZero pre-issuance ratings are private unless otherwise agreed.

If the project starts to issue credits and we have rated these credits, the headline letter rating will be made public as per above.

5. No buyer-seller referrals.

BeZero never actively facilitates introductions between any type of buyer or seller via our platform, API or over the counter. This is regardless of whether the “match” is anonymous or known; or has a commission or not. In our view, this process is analogous to being involved in a transaction and carries the same risk of conflicts. 

6. No advisory.

BeZero will never advise on how to design or change a project, or make recommendations on which projects to buy or sell. Doing so would be in clear conflict with our independent ratings.

For instance, we never stipulate specific project conditions that, if changed, would lead to a directional rating change. Instead, we provide clear evidence-based analysis on the risks a project faces, or doesn’t, and are fully transparent in disclosing the methodology and parameters we have used to perform the rating -

7. No results based payments.

All BeZero Carbon Rating commissions are 100% flat fees, paid upfront. There are no differences in fees based on ratings outcomes. Unlike registries that typically charge based on the size of credit issuance, BeZero does not vary its fees on the size of the project. And there’s no special treatment for any client type. 

This approach reflects the reality that all carbon market participants have a vested interest in the quality of a carbon project, and by association the outcome of a carbon rating: 

  • Developers want to create better projects with better ratings to get higher prices, lower cost of capital, and ultimately raise more finance for climate interventions. 

  • Investors want to get better returns on their investments. 

  • Exchanges and marketplaces want access to reliable liquidity. 

  • Traders want to buy low and sell high. 

  • End buyers want to retire high quality credits at the lowest possible price.

  • Everyone wants to minimise performance risks that can cause reputational damage. 

Any of these actors can be on either side of a transaction with one another, and ratings provide value to the market at all of these stages.