The utopian world where carbon and crypto meet

Can carbon markets and blockchain technology be used in tandem to keep oil in the ground and stop deforestation?

Champions of the ReFi movement — or regenerative finance to those who do not lurk in crypto messaging groups — want investors and environmentalists alike to answer “yes” to this question.

But the collision of the two worlds is fast-moving and mostly unregulated. Verra, the biggest accreditation body for carbon credits, has recently opened a consultation on its approach to crypto instruments and tokens. Meanwhile, European Central Bank president Christine Lagarde is pushing the European Commission to include digital tokens in its draft regulation for cryptocurrencies.

This week we report on two examples of crypto-backed carbon projects in the Democratic Republic of Congo and Brazil — the world’s two largest rainforest areas.

Avoidance-based carbon offsets purport to account for each tonne of carbon that has not been emitted, using a given hypothetical scenario based on sometimes dubious projections of the deforestation or oil burning that would have otherwise occurred. Overlaying crypto markets and tokens (which create a digital representation of a physical asset) on top of this results in a heady mixture of the tangible and the unreal.

Also this week, Patrick reports on the mounting lobbying campaign against the SEC’s sustainability disclosure efforts — this time it is the hedge fund community warning that the agency could render the ESG acronym “meaningless”. (Kenza Bryan)

Trouble in the world’s first ‘non-fungible territory’

I was surprised to be told in a recent interview with the Democratic Republic of Congo’s hydrocarbons minister that it would allow some cryptocurrency and carbon credit start-ups to bid for exploration rights alongside oil and gas majors.

The DRC’s tender of oil and gas exploration blocks is controversial because some of the land on offer is in Virunga National Park — home to some of the world’s last mountain gorillas — or in the country’s carbon-rich rainforest and peatlands.

An online campaign is seeking to raise $50mn in cryptocurrency to buy at least one of the blocks and keep the oil in the ground — recouping the investment by issuing carbon credits to reflect the avoided emissions. Among its supporters is Flowcarbon, a new venture backed by WeWork founder Adam Neumann.

It’s an intriguing tale — and one that may be part of an emerging trend.

Across the Atlantic from the Congo Basin’s lush rainforests, another cryptocurrency start-up has been pursuing a similar track in Brazil — drawing the attention of prosecutors in the process.

Nemus sells non-fungible tokens (NFTs) — digital assets stored in a blockchain online — linked to parcels of the Brazilian rainforest, and says this can protect the area from deforestation by stopping rival buyers from snapping up the forest.

Buyers of the tokens receive a virtual card with unique geographical co-ordinates and depictions of plants and animals found in that part of the rainforest — a harpy eagle, a peacock flower or an Amazonian black scorpion, for example.

Tokens, which can be linked to land units as small as a quarter of a hectare, give the buyer the right to participate in future decisions about protecting the land (as well as online games). Those linked to larger parcels could give the owners the right to issue potentially lucrative carbon credits, according to Nemus’s website.

But the promise of a stake in a conservation project comes with risks.

The company’s website says it has claimed “possession” of 41,000 hectares of land near the city of Pauini in Amazonas state, and is in discussions to acquire a further 1.2mn hectares of bordering land. The land was acquired by a Brazilian subsidiary of Nemus, which says it intends to create well-paid jobs for the indigenous people who live there, and has plans to build eco-tourism lodges and a processing plant to revive the local Brazil nut industry.

Last month, however, the public prosecutor’s office in Amazonas state ordered Nemus to present deeds to this land. It questioned in a public statement whether Nemus had obtained consent from local people, and from the government’s indigenous people’s agency Funai, to act in the area.

The problem is that Nemus’s dreams extend beyond the digital world and into a territory so remote it can only be accessed by a 14-hour boat trip. It wants to encourage community members to use the company’s own planned cryptocurrency, and to build infrastructure including an airstrip and a road.

Apuriña indigenous people complained to the prosecutor that chestnut groves, a source of income, were at risk from Nemus’s building plans. They also said the company had asked illiterate members of their community to sign important documents.

To complicate matters for Nemus, Tasso Azevedo, a co-ordinator at satellite data imaging company MapBiomas and former head of the Brazilian forestry service, claims to have spotted recent deforestation on land that Nemus is planning to issue NFTs on later this year. Nemus did not respond to a request for comment, but said in an online post that the deforestation took place before the company was founded.

Responding to the prosecutor’s concerns about land ownership in another online post, Nemus said the land did not overlap with areas officially reserved for indigenous people. It wrote: “Everyone affiliated with Nemus is very respectful of the indigenous way of life and that will continue . . . The purchase will be finalised towards the end of 2022 from a private family-run organisation that has owned this property for almost 50 years.”

Deforestation in Brazil reached a record high in the first seven months of the year, according to preliminary data from the country’s national space institute INPE.

President Jair Bolsonaro pledged four years ago not to protect “one more centimetre” of indigenous land. Local groups say his government’s stance has hampered local people’s efforts to enforce historic claims to territory and opened it up to loggers, miners and ranchers who destroy the rainforest.

Nemus is not the first crypto-backed offsetting project in Brazil. The São Paulo-based Moss.Earth, for example, sells offsets to Gol, Brazil’s largest airline, and also issues NFTs linked to land in the Amazon, describing these as “encrypted digital ownership certificate[s].”

Nemus has gone in especially hard on the publicity front, however — including a promotional video which purports to rename the land in the company’s image. In the video, an indigenous person places his fingerprint on a document describing the land as a “non-fungible territory”, a twist on the name of the tokens being sold.

Danny Cullenward, head of policy at the non-profit organisation CarbonPlan, told me: “There’s an enormous amount of silly money sloshing around the crypto world causing people to do exuberant things a more sober investor would pause to consider.”

“This is a perfect illustration of why blockchain is a solution looking for a problem . . . as using it to record land claims does nothing to resolve the complexity of land tenure disputes.” (Kenza Bryan)

‘Meaningless’ ESG: hedge funds fight SEC’s latest disclosure proposal

On Monday, we highlighted some pushback to the Securities and Exchange Commission’s initiative to toughen rules for funds using “green” or other sustainability buzzwords in their names.

But there is a second proposal the SEC is working on involving environmental, social and governance (ESG) investing that has also stirred up the investment community.

In May, the SEC proposed to push investment companies to divulge more information about their ESG strategies. Funds that consider ESG would need to disclose more about their strategies and how they vote at companies’ annual meetings. So-called impact funds would need to do even more — such as disclose greenhouse gas emissions.

(If this sounds to you like the European Commission’s sustainable finance disclosure regulation, you’re right. The SEC nodded to the SFDR in its proposal.)

Now, this SEC effort is under siege. On Tuesday, the lobbying group for hedge funds such as Bridgewater, AQR and DE Shaw criticised the rule, saying it would “render the term ESG meaningless”. 

The SEC’s plan to regulate funds that broadly consider ESG would probably yield too much information, the Managed Funds Association said. Because ESG covered such a wide swath of financial considerations, it claimed, the SEC risked classifying nearly everything as an ESG fund.

If a fund considered a company’s rate of employee retention as an investment factor, the MFA asked, is that a “social” factor that would trigger regulated ESG reporting? Or if a fund voted for a controversial merger, then is that a governance issue that would transform a merger arbitrage fund into an ESG vehicle?

The Investment Adviser Association, another Washington-based lobby group, also called for the proposal’s ESG integration category to be scrapped altogether.

When talking about ESG disclosures, SEC chair Gary Gensler likes to compare the issue to the information stickers on milk cartons. “In that case, you can see objective figures, like grammes of fat, which are detailed on the nutrition label,” he said in May. But for all Gensler’s efforts to paint this issue in simple terms, his battle with the industry lobbyists is looking increasingly complicated. (Patrick Temple-West)

Smart read

Here’s a disturbing piece from the FT’s Sarah O’Connor, on new academic research on the fallout from sexual harassment and violence in the workplace. After episodes of male-on-female violence, one economic study found, victims tended to suffer significantly worse harm to their careers than perpetrators. Yet this trend was less visible in companies with more senior female staff. “Female managers do one important thing differently: fire perpetrators,” the authors wrote.