Understanding Pre-Issuance Assessments

In this blog, we'll explore the risk associated with pre-issuance projects, the need for pre-issuance assessments to ensure quality carbon credits, and what an industry best pre-issuance assessment looks like.

According to MSCI Carbon and our own Supply and Demand Survey 2023, demand for high-quality carbon credits is likely to outstrip supply 2:1 (in the low demand case). The need for robust carbon project validation and financial backing is therefore becoming more critical than ever.

In response to this need, pre-issuance is becoming an increasingly favoured route. Pre-issuance refers to the phase of a carbon project before the actual issuance of carbon credits (also called ‘ex-ante’, meaning ‘before the event’). Pre-issuance allows project developers to validate their methodologies, attract necessary funding, and ensure compliance with international standards before the carbon credits get issued. On the demand side, forward thinking market actors can secure supply at the right price – to either retire for their own needs, or sell on in the future.

Pre-issuance is a vital stage in the lifecycle of a carbon project, acting as the bridge between initial project conception, and the full-scale issuance of carbon credits, and for investing companies it means that they can secure access to the best projects, control quality and reduce costs. Although it’s not without its challenges…

The risks of pre-issuance projects

There is more uncertainty with pre-issuance projects compared with established and vetted carbon projects, such as: 

1. Execution risk:
   It may take a number of years for a pre-issuance project to actually deliver credits to the market, and essentially an investor bases their decision on a plan to be implemented. The implementation doesn't always go according to plan. For instance, timelines can be changed  and unforeseen obstacles may arise.‍
2. Evolving policy landscape:
   Given these long timeframes, the projects fall risk to constantly evolving scientific, policy, and market landscapes.‍
3. Risk of non-delivery:
   Pre-issuance projects are yet to deliver their credits, and hence there is the possibility that a project either underdelivers, or does not deliver at all. 

So while investors would assess the risk profile of a project in that given moment in time, the timelines of pre-issuance projects mean that they are highly susceptible to change as the project progresses and takes shape. Ongoing monitoring and assurance is necessary to combat this elevated risk, which is where pre-issuance assessments come in:

The need for pre-issuance assessments‍

Given the risks and general uncertainty associated with pre-issuance projects, it’s crucial investors engage with a neutral third party to assess the project – allowing them to thoroughly evaluate the quality and credibility of the project, and reduce the risk involved. 

These assessments ensure a project: 

• Meets investor criteria
• Reduces risk associated with project failures or overestimated carbon reductions
• Provides remedial actions in such cases when emerging risk is identified
• Verifies the integrity of the credits they might be purchasing in the future. 

Failing to source a pre-issuance assessment from a credible third party leaves investors grappling with a big information asymmetry – complicating the process of identifying, evaluating, and comparing quality projects, resulting in a challenging experience for market participants.

At Sylvera, we’ve developed a pre-issuance assessment as part of our early-stage investment solution – providing the tools, data and expertise to help investors navigate the end-to-end pre-issuance investment journey. 

Our pre-issuance assessment reviews the following risks:

1. Delivery:
   Analysing the present and potential sources of non-delivery or under-delivery of carbon credits.
   
2. Reputational:
   Surfacing the reputational implications of the project, proponent(s), project type, methodology and data disclosures.
   
3. Integrity:
   Evaluating the potential drivers of compromised carbon credit quality and project integrity across additionality, carbon accounting, permanence, safeguards and co-benefits.

As well as providing details on remedial actions to those risks.

Interested? Learn more here

Understanding Pre-Issuance: A Quick Guide

Before buying and carrying out a pre-issuance assessment, investors need to have a good understanding of the pre-issuance process in general. 

The diagram below outlines the general process of how a carbon credit becomes available for purchase and retirement. It can take years for a project to get from the initial ideation, planning and development phase to the stage where it can actually deliver credits to the market.

Download our Pre-Issuance Checklist below.