“We Work With Project Developers So They Can Attract Large-Scale Funding From Pension Funds,” Luke Leslie, CEO Carbon Neutral Royalty

"We Work With Project Developers To Make Sure They Can Attract Large-Scale Funding From Pension Funds," Luke Leslie, CEO Carbon Neutral Royalty Ltd - Carbon Herald
Credit: Carbon Neutral Royalty Ltd

Restoring natural habitats has a profound effect not only on biodiversity but also on climate change. Voluntary Carbon Markets play a vital role in providing capital streams that help restore essential ecosystems that act as carbon sinks. Carbon Neutral Royalty Ltd is a permanent capital vehicle that supports the development of vital natural carbon sink and emissions reduction projects that also improve life in vulnerable communities.

We sat down with Luke Leslie, co-founder and CEO of the company, who explained the nature of the enterprise, the importance of nature restoration projects, and their impact on society.

Can you tell us a bit more about you background and experience?

My first role was as a management consultant at Accenture back in 2004, where I actually worked in carbon markets. I wrote a paper on how to value forests, incorporating the value of the stump land, biomass and carbon credits. That piece of work was patented by Accenture.

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I spent subsequent years in various other roles, including investment banking at UBS. I have also held operational roles and worked on the investment side. 

What is your motivation behind starting Carbon Neutral Royalty Ltd? Why did you decide to take that step?

I began my career in the carbon market, so for me, there’s an element of coming full circle. I co-founded the company with another gentleman who is on the board, called Eric Zurrin. We were both living in Mauritius at the time. I was moved by the very tangible impact of climate change, as at the time the coral reef surrounding the island was being visibly impacted by rising sea temperatures.

I got really into oceans and the visceral impacts on nature caused by climate change. I’ve been following the climate and carbon markets since pretty much my first role at Accenture. My view is that the conditions have finally become mature enough for the voluntary markets to really take off. So, it was the right timing.

And what is Carbon Neutral Royalty Ltd? What is your business model explained in more detail?

What we do is find and finance the best voluntary carbon assets out there. The process is very analytically driven. We work a lot on filtering different carbon solution categories. Then, within the categories we like, we forensically map the different players within each category, different developers, and provide them with funding. We finance those projects in return for a share of some of the carbon credits that may be issued.

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How do you raise the funds that you need to invest in these projects?

We’ve raised just under C$60 million so far, with most of that money coming from North America. It includes a North American pension fund, and a large Canadian institutional investor.

Apart from providing funding, do you also take part in the development of these carbon removal projects? 

We don’t want to be developers, but we do want to work closely with developers to make sure what they’re doing is of a high-enough standard to attract the type of investments that come from pension funds. They need a degree of sophistication. They need certain standards of governance and circumstances when it comes to legal contracts.

Relevant: Carbon Neutral Royalty Raises Over $18M For Climate Projects

I actually think that there is a big role for groups like us to play in the voluntary carbon market (VCM) at the moment because for institutional investors, some of that professionalism isn’t present in the VCM yet. That’s where we are engaged, but we are not a project developer. That is not something that we want to be doing, or that we have the expertise to be doing.

Who are the parties that take part in the allocation of the carbon credits from the projects and what is their distribution in percentage terms among them?

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The allocation is different for each project. For the cookstoves of BURN Manufacturing that we subsidize – our largest investment – we take a minority share of the carbon credits. The customers who might be in countries from Nigeria to Somalia pay a nominal amount for the cookstove, but we effectively subsidize most of it and we take a minority share of the credits. We haven’t published it, but our share is less than 35%.

What do you do afterwards with your share of the carbon credits, do you issue them on the VCM?

What we do is we sell those credits. We haven’t actually sold any yet, as we are a young company. However, we have made quite a lot of investments, and what we intend to do from Q4 of this year is to sell our first set of credits to corporates. Then, we will reinvest that money into new carbon assets.

What type of projects are you currently focused on investing in? Also, what is the total number of projects in your portfolio that you have already invested in?

There are ongoing debates about the cookstove category, but it’s very impactful. We think it will be a surviving category and we have made big investments. We also like blue carbon a lot, mangroves specifically. Last year, we planted 3.75 million mangrove trees. We are focused today on soil carbon, peatlands, and biochar. Biochar is an emerging opportunity.

Relevant: BURN Joint Venture With Carbon Neutral Royalty Ltd Will Expand The Company In Africa

In terms of the number of projects, we’ve got 8 projects with BURN Manufacturing in eight different countries… We have projects with Worldview in Myanmar and they have an MOU with the government of Sri Lanka. We have a royalty in Canada and a Redd +project in Mozambique. In total, we have projects in 12 different jurisdictions. 

Can we see those projects listed online?

The majority of them are still waiting to get onto the registry. Our project with Worldview can be viewed on Verra. BURN will be registered on Gold Standard’s database.

Can you please explain what exactly is the meaning of a blue carbon project?

Blue carbon refers to projects that are derived from the ocean. The three project types are mangroves, seagrass, and salt marshes. Mangroves are particularly interesting because they grow in the inter-tidal zone. There’s typically less competition with communities for land.

They also perform a very important service, both to biodiversity and local communities as they provide natural defense against storm surges and flooding. They typically are home for a large number of different fish species. Research has shown that when mangroves are restored the fish stocks there will often increase by 50%. They also happen to be a very intensive carbon sink.

How is your portfolio divided between the types of projects? 

Cookstoves account for the majority of funding deployed today. We have very large mangrove concessions through Worldview. We completed our first phase last year and the survival rates are very good, based on the last two verification reports. We’re currently exploring other jurisdictions for mangrove planting including Indonesia and Panama.

As cookstoves take the majority of your portfolio, could you tell us about your partnership with BURN Manufacturing? Also, how are the cookstoves changing the lives in the community?

BURN Manufacturing is an amazing organization, they are very sophisticated. When we benchmarked different operators and distributors, we found BURN cookstoves to be the most efficient and durable compared to other cookstoves. It’s a local business in Kenya, which makes a difference when you don’t have to ship cookstoves from other parts of the world.

They manage their own distribution lines as well. While they do still sell to some distributors, they are increasing direct distribution. Their operations are very impressive. Our partnership with them includes an exclusive right to finance everything they do.

We have funded 926,000 cookstoves to date. They haven’t all been distributed yet as that will be ongoing for the next few months. It’s a combination of charcoal and wood stoves, and we are looking to finance their new electric stoves as well, which we’re very excited about.

Could you also share more details on how the cookstoves reduce emissions?

The emission reductions differ by country depending on the baseline. A typical Somali family will cook on an open fire. That has a lot of negatives – purchasing the wood for those fires and causing respiratory illnesses.

A lot of deaths from respiratory disease result from household cooking, and a lot of family members are also under pressure to help with this work instead of going to school.

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The cookstoves are very fuel efficient, much safer and cleaner. They can use forest residue and they don’t need to use large logs. There are many benefits and the big one is the household savings. Using one of these cookstoves really pays the customer many times over.

How do you ensure the credibility of the carbon credits that are issued from these projects? Do you verify them internally or do you use a third-party auditor?

We spend a lot of time investigating projects before we make an investment. A third-party verification body then verifies the projects.

What I can tell you is that, prior to making the investment, we look a lot at the arguments of additionality and validity. We look at the research, for example, in cookstoves, which suggests different types of crediting baselines and different inputs.

We look at that on a jurisdictional basis to test the impact of different assumptions. We are aware of the different viewpoints out there in the market. Ultimately, the credits are audited by the registry but we do follow the debates within the categories that we offer and encourage developers to be conservative with their approach.

We like to do our own work on the crediting. Even though ultimately, it’s determined by the registering bodies, we would like to understand the crediting models and the different subjectivity within those models. We want to understand the different approaches and we are very much attuned to the over-crediting risk.

In terms of recent criticism saying that a large proportion of carbon offsets are worthless, how do you manage to overcome this problem?

That is much-needed scrutiny and we absolutely welcome the debate. We would like more regulation and more rules around what types of credits should be issued. When you have articles that come out that are really interrogating a category, it’s ultimately something that we think is a good thing.

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It’s still a very young market but it’s experiencing some growing pains. Another thing I can say is that categories are different. For some categories, it is much, much, harder to quantify the number of credits to be issued. However, there are lots of different ways to generate carbon credits and some are much easier to measure than others.

Could you please give us some examples of types of carbon credits that are more difficult to issue and measure?

Any project where you have to run a counterfactual analysis on versions of the future. When you run a post-mortem on these projects, even with the best intentions in the world, you’re likely to find the actuals are different from the estimates.

If you are planting trees, for example, you can measure the carbon that has been sequestered, you are not having to make assumptions based on what could have happened in the future.

What is next for Carbon Neutral Royalty Ltd?

We are excited about our existing projects and how they have evolved. We’ve got 1500 hectares of mangroves that have been planted. We have already spotted some of the vulnerable species within our project area, which is encouraging.

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The same with our partnerships, we have distributed a lot of cookstoves and we want to see the impact of them. We are also broadening out into other categories. We want to support the best developers out there and make sure they have access to the necessary funds to grow. We are really focused on peatlands, we would like to do more blue carbon projects and biochar.

What does the VCM need to increase its growth rate and impact?

Just to emphasize, Carbon Neutral Royalty works with developers to make sure they can attract new large-scale funding from pension funds or corporates, to be really deploying at scale. That is what I think the VCM needs to really take off. I think a lot of these projects will benefit from the work that we have done to increase the appetite for those types of investments.

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