British companies opt for domestic carbon credits in their drive towards carbon neutrality
In a recent survey conducted by Octopus Investments, it was revealed that 73% of firms are planning to offset their hard-to-abate emissions using carbon credits. However, the leading obstacle to UK businesses buying carbon credits is the lack of understanding around these credits, with 30% of respondents citing this as a concern.
Octopus Investments sees carbon credits as vital for hard-to-abate sectors and advocates for better standards in the Voluntary Carbon Market 2.0. The company believes that UK credits offer greater quality and more robust oversight than credits in other jurisdictions, reducing the risk of greenwashing. The ability to visit and directly assess carbon offset projects within the UK enhances confidence in their impact, the survey found.
Pension funds and insurance companies are increasingly being targeted by UK government policies aiming to boost transparency and require credible transition plans aligned with net zero ambitions. From June 2025, consultations have been launched to mandate UK-regulated financial institutions—including pension funds and insurers—to develop and disclose climate transition plans consistent with the Paris Agreement's 1.5°C goal. This would increase accountability and likely encourage more engagement with carbon credits and sustainable finance mechanisms.
While there is no explicit current data on sovereign wealth funds specifically in the UK carbon markets, the overall scaling of voluntary carbon markets (VCM) is designed to attract private finance, including institutional investors like sovereign wealth funds, by enhancing market integrity and business value through government-led frameworks and incentives.
The UK is advancing integration of removal credits into its compliance market (UK Emissions Trading Scheme, ETS) by 2029, requiring durable carbon storage with strict verification (minimum 200 years permanence), which should provide stronger, regulated investment opportunities, potentially appealing to institutional buyers seeking high-quality, long-term carbon assets.
The demand for high-quality and verifiable carbon removal projects is at an all-time high, according to the researchers. Removal credits, which physically remove carbon dioxide from the atmosphere, are seen as an opportunity to provide measurable environmental impact. Pension funds tend to invest in carbon credits as a by-product as part of their wider forestry strategy.
Notable exceptions among institutional investors include Canada's CPP Investments and Temasek, which are actively involved in carbon credit initiatives and supporting the development of carbon markets. Temasek is bolstering Asian efforts to support the development of carbon markets through platforms like GenZero.
Gustave Loriot-Bosreup, founder of Compass Insights, made a statement about pension funds investing in carbon credits. He said, "Pension funds are increasingly recognising the need to invest in carbon credits to meet their net-zero targets, and the UK's focus on high-integrity credits is making it an attractive market for these investors."
Interestingly, only 42% of respondents could accurately define what carbon credits are, and even fewer understood the distinction between removal and avoidance credits. This highlights the need for education and transparency in the carbon credit market.
In summary, pension funds and insurance companies are being nudged towards active involvement via enhanced disclosure and transition plan requirements aligned with climate goals, while sovereign wealth funds' participation is expected to follow as the UK carbon markets mature and become more transparent and integrated into regulated frameworks. The incorporation of removal credits into the UK ETS and ongoing government support aims to create stable, high-integrity opportunities for institutional investors in UK-based carbon credits. 76% of UK businesses surveyed prefer UK-based carbon credits to meet their net zero targets.
- Given the increased interest in carbon credits to meet net-zero targets, Octopus Investments suggests that pension funds could find greater confidence in UK carbon offset projects due to their visitability, leading to increased investments in environmental-science-related initiatives.
- As the UK government works towards mandatory climate transition plans for pension funds and insurers from 2025, and integrates removal credits into the UK Emissions Trading Scheme (ETS), finance opportunities in investment, business, and real-estate sectors might be positively impacted by the growing demand for high-quality, verifiable carbon assets.
- With only 42% of surveyed businesses accurately defining carbon credits and understanding the difference between removal and avoidance credits, there is a clear need for improved education and transparency in the environmental-science sector related to climate-change mitigation strategies, potentially attracting more institutional investors like sovereign wealth funds.
