5 minutes

COP27: the COP of Regenerative Finance

Published By
Mariquita de Boissiere
November 5, 2022

This year’s COP27 in Sharm El-Sheikh, Egypt, marks thirty years since the United Nations Framework on Climate Change (UNFCCC) was first adopted. In that time, the scientific consensus around the severity of the climate crisis and the attribution of its impacts to human influence has shifted from “inconclusive” to “unequivocal.”

Meanwhile, the very real human cost of the crisis is already being felt by communities across the globe. The latest findings from the Intergovernmental Panel on Climate Change (IPCC) confirm that there no longer exists an inhabited region of the world that remains unaffected by extreme weather events or rapid changes across ecosystems and cycles. Yet, it continues to be the world’s most vulnerable populations, particularly those based in the Global South, who continue to bear the brunt of a crisis that they have contributed the least to.

It is in this context that the key question for COP27 becomes one of implementation: How to ensure the commitments laid out in the Paris Agreement are met while ramping up ambition in order to meet the 1.5-degree Celsius target? High up on the agenda, to confront the crisis both urgently and equitably, is how to effectively scale and execute Nationally Determined Contributions (NDCs) while ensuring financial flows close the ever-widening gap between deadly Business As Usual (BAU) scenarios and regenerative systemic change.

Moving beyond a ‘do no harm’ framework towards one that actively centers values of justice, equity and regeneration requires innovation on a scale not seen before. At the heart of it, meeting this challenge calls for nothing short of a deep rethink of global financial flows and a refreshed understanding of what determines value – all underpinned by unparalleled levels of social trust and cooperation.

Such aims, especially following the decades of deadlocks and disappointments that have come to characterize the COP process, may sound lofty. However, sustained by Web3 and the public Distributed Ledger Technologies (DLTs) that underpin it - we can already help realize these goals. The technology is mature and actively addressing real-world problems in ways that promise to disrupt the status quo.

At Hedera, we are building the vision of a sustainable, borderless and accessible future into the very fabric of our network. Carbon-negative, yet combining high throughput with the highest-grade security, the Hedera ecosystem is providing the trust layer foundation for building out the kinds of open-source, decentralized solutions to the multiple, intersecting crises facing life on earth.

It is in the interest of creating a sustainable future, and bringing trust and transparency to the markets that will enable it, that The HBAR Foundation has allocated USD$100 million to the Sustainable Impact Fund (SIF) in 2022. For climate, our goal is simple yet powerful: to bring the balance sheet of the planet to the public ledger. Through science, we can identify – with mathematical precision – the narrow margin of carbon that stands between us and the “unavoidable increases in multiple climate hazards and present multiple risks to ecosystems and humans" (IPCC AR6 WGII, p.13) that hitting 1.5C would wreak. It is time to apply this level of precision – and greater – to the projects and policies meant to keep us within that threshold, and the actors responsible for them.

Public DLT not only offers the means to achieve levels of accountability previously unseen; It also has a vital role to play in reducing the barriers to green financial access that small-scale businesses – particularly those within the world’s most marginalized communities – have traditionally faced. It’s for these reasons, amongst others, that COP27 is shaping up to be the COP of Regenerative Finance  – or ReFi.

Like Decentralized Finance (DeFi) more broadly, the deployment of smart contracts on ReFi cuts out reliance upon the apparatus of Traditional Finance (TradFi), opening up possibilities for borderless, immutable, Peer-to-Peer transactions. In this way, ReFi holds the promise of driving down transaction costs while ensuring a more efficient allocation of capital. But as the name suggests, it goes one vital step further than this. The underlying logic of ReFi is one that shifts from an extractive, zero-sum approach to business and finance that forfeits responsibility for the protection of our commons and public goods, to another that places value upon the regeneration of the environment – all while centering social inclusivity and access.

It is these fundamental principles that inform The HBAR Foundation’s investments and work within the climate space. Our commitment to bringing the balance sheet of the planet to the public ledger is sustained by three objectives; each of which is designed to help seed a new paradigm of regeneration and cross-border collaboration from the ground up. These goals – namely, auditability, data discoverability, and enabling liquidity to discover a global carbon price – pave the way for a set of tangible, and publicly verifiable outcomes.

Over the twelve days of the COP, we will be releasing a set of articles that break down what each of these outcomes is and how they reinforce each other while introducing some of The SIF-funded projects on the ground that are delivering these outcomes already. In order, these outcomes are as follows:

•        Make Climate Finance Auditable

•        Digitize & Open Source Methodologies

•        Scale Validation & Verification

•        Discover a Global Carbon Price

•        Make ESG Reporting Credible

Creating the conditions for a fossil fuel phase-down and just transition, as outlined in the Glasgow Climate Pact, means mobilizing and redirecting financial flows at the global scale. It also means engaging all sectors of society, from our governments and institutions to the private sector and civil society. But driving cooperation at scale is only possible through trust.

Yet, the very instruments and mechanisms that have been proposed to help finance a climate-resilient future, such as green bonds and carbon credits, have long been mired in opacity and controversy.

Just as consensus has grown around the need to embrace a just transition so has recognition of the pivotal role that green finance inevitably must play in keeping with the 500 GT – or ideally 400 GT – carbon budget so as not to leave tipping 1.5C too much to chance.

Carbon markets have swelled in the wake of COP26 , particularly following the COP26’s initial attempts to provide international governance guidelines, as laid out in Article 6. While there is more work to be done to achieve consensus on Article 6, this growth is only set to increase. According to S&P Global Commodities, the voluntary carbon market (VCM) alone is projected to reach $200 billion by 2050. Academic, financial, and non-governmental sectors alike are calling for urgent measures to ensure that the carbon credits generated are ‘high-quality’. But what does that really mean in a current context where lack of visibility across the project chain routinely results in the kinds of issues –  including brokers gatekeeping access to markets and taking significant margins – that were highlighted earlier this year by investigative journalists at Unearthed?

Financial auditability has a fundamental role to play in building trust. Ensuring that each of the roles associated with any given project – from the consultants who design a project, to a project developer and the registry to the verification body – is fully accounted for, is a necessary first step toward creating that trust. The need to guarantee this level of financial auditability is even more true in the case of carbon forwards or ex-ante projects such as green bonds, which have been found to be woefully ineffective in terms of delivering genuine emissions reductions.

But financial auditability alone is not enough. While the work of investigative journalists and critical not-for-profit organizations shines a necessary light on the agendas and issues that the powerful and connected would often rather keep in the shadows, relying on having enough ‘boots on the ground’ to hold actors to account is not realistic. At Hedera, we are facilitating a radically different  approach to Monitoring, Reporting and Verification (MRV) that is digitized from end to end and made accessible by open-sourcing methodologies.

Not only does digitizing and open sourcing methodologies create visibility into a project down to the metric ton; it also acts as a cornerstone for making finances fully auditable, from an equity perspective. By putting workflows on-chain, the barriers to access for small-scale projects from around the world to participate in markets are radically lowered, as are the risks that more powerful organizations will extract the benefits of their labor on the international market.

As things stand, the process of getting methodologies submitted, approved and launched is slow, cumbersome and expensive. Under current estimates, if a project methodology were to be launched through conventional channels and processes today, it could take as long as until 2030 – or beyond – for the project to finally become operational. By then, the fate of our climate will be baked in.

While the current process of registering and certifying methodologies is slow, it is far from smooth. As well as being convoluted, they are error-prone; yet another factor in driving up costs and keeping many projects locked out. Digitizing methodologies and making them open-source, by contrast, is focused on shipping projects quickly and creating rapid feedback loops to correct issues along the way. Software may have been eating the world since the turn of the century, but climate finance has remained stuck in a paradigm that relies on manual processes and the centralized decision-making of a small number of organizations concentrated in a handful of the world’s major capitals.

Breaking the grip that the twenty-seven organizations currently charged with verifying carbon projects have worldwide is another fundamental step in scaling markets and lowering risks of market manipulation. But it’s also about flattening the North-South power asymmetries that have historically defined carbon markets while creating access for those close to the projects on the ground to play a role in validating them.

Disintermediation, as facilitated by DLT, is also paving the way for a new, more efficient – and, ultimately, fair – means of exchanging goods. Rather than relying on conventional market makers to facilitate trade, Automated Regression Market Makers (ARMMs), combined with Machine Learning (ML) can be leveraged in conjunction with digitized project methodologies to distinguish between various asset attributes and match them with those that are valued by each buyer. In this scenario, carbon is no longer treated as a homogenous, fully fungible commodity – much like a barrel of oil tends to be today. Instead, a buyer can discover the assets that reflect certain preferences such as country of origin or for particular third-party verifiers. Building on top of the auditable, open-source nature of project methodologies discussed above, this mechanism makes high-quality assets discoverable, thereby galvanizing ambition while pushing up the price of carbon.

Finally, making ESG credible is about much more than carbon markets. 2023 has been set as the deadline for the UNFCCC Global Stocktake. Recent surveys suggest that only 10% of businesses have realized a comprehensive analysis of their carbon emissions in 2022 – a figure up 1% from the previous year. Much of the data submitted by businesses within the EU to the Sustainable Finance Directive is based upon second-hand information. But it doesn’t have to be like this. Not only is the first step in resolving a problem understanding that there is one and what it looks like; but solving the deeper interconnected ecological and social crises facing humanity means approaching them holistically. The aim of the HBAR Foundation, to bring the balance sheet of the planet to the public ledger, ultimately needs to be inclusive of the full scope of biodiversity – from protecting water rights to incentivizing the regeneration of our global commons.

Driving each of these five goals is The Guardian, a Hedera-native modular open-source policy workflow engine.In practice, The Guardian allows for assets, such as carbon credits or renewable energy certificates (RECs) that are tokenized on-chain to be tied to granular dMRV data. By abstracting away technical complexity, it also lowers the bar to entry for Subject Matter Experts (SMEs) to access markets. Most developers using The Guardian are able to build a policy within just weeks. As such, businesses can stay focused on how to deliver climate outcomes and avoid getting lost in the complexities of programming.

At Hedera, we are providing the ecosystem for building scalable bottom-up solutions to the climate crisis. And at The SIF, we want to connect with and support the next wave of leaders who can help move the needle on the five goals outlined in this piece. Our team will be on the ground at COP27, sharing some of the breakthroughs and lessons from the previous year as well as contributing to discussions that get to the heart of the intersection between crypto, sustainability policy and finance.

Throughout the summit, we will be in the Digital Information Pavilion at 13:00 Eastern European Time (EET) showcasing a handful of the multiple dApps we have been proud to build with at the HBAR Foundation. Such dApps include India-based KrypC, which is helping organizations digitize project workflows on Hedera (Wednesday 9th); Tolam, whose mission is to make carbon markets liquid (Saturday 12th) and Tymlez, hailing from Australia, which is leading the charge to make ESG credible for businesses around the world (MondayAs well as showcasing the progress made so far, we want to meet the next wave of builders and The SIF grantees at COP27.

On Tuesday 8th we’ll be kicking things off with a session with FlowCarbon. On Wednesday 9th we will be hosting a joint event with the Global Blockchain Business Council to discuss ‘Decarbonizing Crypto: What are the next steps?’, which will be followed by a Regenerative Finance Happy Hour.

Join us for the UNFCCC Panel on Thursday 10th before we wrap things up on Friday 11th at the Hedera Regenerative Finance Forum.

If you’re unable to make it to Sharm el Sheikh during COP27, we still want to hear from you. You could be selected from others engaging with the hashtags #HBAR4Climate #ClimateCrisis #ReFi #ReFionHedera #COP27 to win 1,000 in HBAR for your contributions to the ecosystem. We will also be selecting the most insightful posts on how you or your organizations are building on, or using dApps on Hedera. Winners will each be awarded 1,000 HBAR.

From wherever you are, make sure to join the global conversation on Twitter and LinkedIn. Together we can make #COP27 the COP of #ReFi and raise global ambition beyond Net Zero.