Financials

<h2 style="text-align: justify;"><span style="font-size: 12pt;">Q1. Could you start by giving us a brief overview of your professional background, particularly focusing on your expertise in the industry?</span></h2><ul style="text-align: justify;"><li>I am a consultant and experienced advisor who has worked with a wide range of investors, companies, and organisations in the UK, Europe, the Middle East, and the US</li><li>I support boards and leadership teams with their strategy, communications, capital markets transactions, and how they address the business and capital risks driven by the EU Green Deal, Net Zero, and carbon and climate regulation</li><li>My career started working in Westminster for former Prime Minister Gordon Brown on the Millennium Development Goals. I have advised and worked with a broad range of global investors and companies, including Microsoft, Sony, Mubadala, Saudi Aramco, M&amp;S, the Carbon Trust, and the governments of the UK and the UAE</li><li>I have experience in global carbon markets. In 2024, I worked with the BBC on their global investigation into the markets, covering the economics and regulation</li></ul><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">Q2. What is the projected growth trajectory of the global carbon credit market, and how might it influence investment strategies?</span></h2><p style="text-align: justify;">In many ways all bets are off with the forecast and growth of the global carbon markets, and I would caution anyone accepting the figures which are thrown about. My own conservative analysis going back to 2023/2024 was that the EU carbon markets would be valued at between &pound;28 - &pound;32 billion by 2030. Other consultants and analysis suggest the projected growth could be as much as $250bn, but I am not sure of this analysis. &nbsp;</p><p style="text-align: justify;">Tightening emissions regulations, corporate net-zero commitments, and the expansion of compliance and voluntary markets drive this growth. What the last twenty years have shown us and a point that Professor Dieter Helm of Oxford University makes, is that without a carbon tax and clear government policy, constructing competitive markets where the economics works is very elusive.</p><p style="text-align: justify;">For investors, this means more uncertainty and risk. Without clear direction, it is hard to establish long-term capital flows into carbon project development, trading platforms, and technologies like MRV (Monitoring, Reporting, and Verification).&nbsp;<br>Regardless, I still find myself working with companies and investors who want to start understanding the market's mechanics, economics, and value chain. Depending on size and emissions, they need to start thinking about developing their portfolios and internalizing pricing.</p><p style="text-align: justify;">However, on the positive side, we have more focus from the EU. Large markets like India are starting to regulate and create policy, which is leading to the development of the functional economics of the market.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">Q3. What role does the implementation of Article 6 of the Paris Agreement play in accelerating international carbon trading?</span></h2><p style="text-align: justify;">Article 6 of the Paris Agreement is a crucial framework for international carbon markets, allowing countries to cooperate on emission reductions. If implemented well, it does have the potential to be a game-changer for the markets. There are several key things that Article 6 is looking at or trying to fix, including:</p><p style="text-align: justify;"><strong>Market-Based Cooperation</strong>: Article 6 enables countries to trade carbon credits, helping them meet their climate targets more cost-effectively. This includes Article 6.2, which facilitates direct trading between nations, and Article 6.4, which aims to establish a UN-supervised carbon market.</p><p style="text-align: justify;"><strong>Standardization &amp; Transparency</strong>: Recent developments at COP29 have focused on setting clear rules for carbon trading, ensuring integrity, and preventing double-counting of emissions reductions. The finalization of these rules is expected to unlock international carbon markets.</p><p style="text-align: justify;"><strong>Flexibility &amp; Participation</strong>: Countries can issue unilateral authorizations for cooperative approaches, allowing diverse participation in carbon markets. This flexibility is crucial for enabling both government-led and private-sector initiatives.&nbsp;<br>If Article 6 is implemented accurately, it could create the legal and operational framework for countries to trade emissions reductions through Internationally Transferred Mitigation Outcomes (ITMOs).</p><p style="text-align: justify;">However, this will require global cooperation, which we are currently lacking due to geopolitical shocks, and standardisation of the market, which will chase out and close many of the standard setters and verification bodies who should have been put out of business a long time ago.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">Q4. Which companies are leading in the development of sustainable data centres, and what are their competitive advantages?</span></h2><p style="text-align: justify;">Currently, leaders in innovation and capital investment include Microsoft, Google, and Equinix, all of which are investing significantly in renewable-powered data centres and advanced cooling technologies. Scaling and growth are complex processes with many aspects that must be considered.</p><p style="text-align: justify;">There is a consensus on the necessity of data centres to meet and leverage AI's economic value and potential, which offers a wide range of social, business, and equality benefits. This technology has the potential to revolutionise various economic sectors, drive efficiency, and empower small businesses and communities to compete economically. However, it is essential to observe market developments and ensure equitable access to AI tools.</p><p style="text-align: justify;">While the potential of AI to enhance energy efficiency and address carbon and climate issues is frequently discussed, conclusive proof and large-scale results are awaited. By measuring global capital flows and investments into this asset class, it is evident that demand is substantial but must be approached in a balanced and equitable manner, considering all direct and indirect economic, social, and environmental factors.</p><p style="text-align: justify;">The issues of waste, energy, and water usage cannot be ignored. Current practices have not been coherently regulated, and 'sustainable' data centres cannot be claimed if their energy usage increases carbon outputs or if the water used is diverted from agricultural and natural resources. In this context, data centres represent another technological advancement competing for scarce critical natural resources.</p><p style="text-align: justify;">Historical data, dating back to the first industrial revolution, indicates that any technological transition within an industry sector leads to the displacement of people, companies, and other sectors. It is important to recall that, at one time, cotton garments produced in northern England were impacting tailors and manufacturers in cotton-producing countries like India.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">Q5. What new sustainable finance products are emerging to address climate resilience and risk management?</span></h2><p style="text-align: justify;">New sustainable finance products that are emerging to address climate resilience and risk management include resilience bonds, sustainability-linked derivatives, and parametric insurance products. These instruments are designed to de-risk climate exposure and align capital with long-term resilience goals. As the risks associated with climate change become increasingly evident, the financial industry is innovating to create tools that help manage and mitigate these impacts.</p><p style="text-align: justify;">Resilience bonds fund infrastructure adaptation, ensuring communities are better equipped to handle extreme weather events and other climate-related challenges. Sustainability-linked bonds effectively tie financial instruments to environmental, social, and governance (ESG) key performance indicators (KPIs), incentivizing companies to meet specific sustainability goals.&nbsp;<br>Collectively, these products represent a significant advancement in sustainable finance, aligning investment strategies with the imperative of climate resilience.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">Q6. What are the potential risks associated with the relaxation of sustainability reporting rules in the EU?</span></h2><p style="text-align: justify;">What we are talking about here is the pushback of what has been called the Omnibus, which means reform mainly of the EU CSRD reporting and disclosure directive. The main risk is that we move faster to a +3C world, break through the planetary boundaries, and drive-up heat, forest fires, famine, and drought. Economically, this brings uncosted damage to supply chains and natural capital, and we derail growth.</p><p style="text-align: justify;">The decision was taken by the EU as a political move in response to the chaos from the Trump Tariffs and the geopolitical shocks. In addition, the EU is facing significant inflation, debt, growth, and internal political polarization. The EU is a non-hegemonic superpower, which is its strength, but it also makes it challenging to keep it together. &nbsp;</p><p style="text-align: justify;">Relaxing these rules could undermine transparency and investor confidence, and the EU central bank and large insurance firms have come out against the rollback. Industry itself has geared up so there is not a huge desire for a rollback from government.</p><p style="text-align: justify;">So, the situation is very fluid, and the EU climate law still legally binds all EU nations and regional governments to meet their decarbonisation targets by 2030. Really, the decision is up to companies. Stop all the reporting and wait for more regulation to come in, or finish what you have started and be ahead of the transition curve.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">Q7. If you were an investor looking at companies within the space, what critical question would you pose to their senior management?</span></h2><p style="text-align: justify;">I'd ask:</p><ul style="text-align: justify;"><li>How is climate risk integrated into your core business strategy and capital allocation decisions?</li><li>What is the carbon and climate risk at the operational and supply chain level? &nbsp;</li><li>Do you know the capital costs and risks you are exposed to from the EU green deal and carbon and climate shocks? This question goes beyond ESG as a compliance issue and probes whether the company truly embeds sustainability into its long-term value creation model.</li></ul><p style="text-align: justify;">The companies that will win and be valuable in ten or twenty years are the ones that aim to get ahead of the transition, work to diversify their energy supply, reduce unrequired high carbon from their supply chain, understand their natural capital impact, understand their risk of regulatory and supply chain whiplash which are inevitable as we have passed a 1.5C level.&nbsp;<br>The key is not to fall into or listen to the voices committed to the politics of nationalism and economic destruction who are promoting an anti-net-zero narrative and inaction. Supply chains and sectors are changing; the transition is underway. Along with AI getting the right side of carbon and climate will define the companies and businesses that will be of real value and deliver dividends in the future.</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p><p>&nbsp;</p>