2025: The Decisive Year for ESG and Carbon Markets According to Forward-Looking Analysis.

As the end of the year approaches, we have access to several reports and prospective analyses that seek to outline scenarios for the coming year. When it comes to ESG and corporate sustainability, the focus of this page, the situation is no different.

After reading a lot of material, I would like to highlight the MSCI report. In this article, I share the main highlights of the report, organized into six thematic axes that offer a comprehensive overview of the trends that could shape the climate agenda in 2025.

1. Energy Transition and Private Investments : The transformation of the energy system is one of the biggest focuses of investments, especially in private markets, with emphasis on green transport, low-carbon energy generation and storage solutions.

2. Climate Adaptation as an Investment Priority : Private finance is expanding to include climate adaptation, traditionally dominated by the public sector, through solutions such as resilient infrastructure, cooling technologies and water harvesting systems.

3. Economic Impacts of Extreme Weather Events : There is a growing consensus that extreme weather events, such as floods and hurricanes, will have significant impacts on the global economy, requiring more effective resilience strategies.

4. Carbon and Voluntary Credit Markets : Demand for carbon credits is expected to grow, driven by initiatives such as the Carbon Offsetting Mechanism for International Aviation (CORSIA) and progress in regulating the carbon market under the Paris Agreement. Domestically, we have the recent publication of Law No. 15.04/2024, which establishes the Brazilian Greenhouse Gas Emissions Trading System – SCBCE.

5. Shifting Social Risk Priorities: With the rise of technology and communications sectors, social risks such as data security and human capital have become more relevant, influencing equity markets and ESG investments.

6. Advances in Corporate Governance: Shareholder pressure for more robust governance practices, such as majority voting for directors, reflects the search for greater alignment with global standards, which can positively influence financial performance.

Based on this analysis, I will publish three articles focusing on the themes of adaptation, carbon markets and corporate governance, starting with carbon markets.

Carbon and Voluntary Credit Markets:

Based on the MCSI report, it can be said that the last few years have been a period of consolidation and self-evaluation for the global voluntary carbon credit market. The strong growth, initially, in the number of transactions and prices, gave way to a new phase, in which the quality of certain credits began to be analyzed, while volumes and prices remained stable. But all this may be about to change.

The underlying fundamentals of carbon markets have remained robust – particularly with the growing number of companies making voluntary energy and climate transition commitments aligned with the Science Based Targets Initiative (SBTi). The growing awareness of the need for a low-carbon economy in recent years is driving a gradual improvement in market quality.

New sources of demand are also emerging, such as through the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and, potentially, through “compliance” (i.e. official) carbon markets enabling the use of credits. COP29 also saw significant progress in creating the long-awaited Paris Agreement Crediting Mechanism (PACM), through which carbon credits can be formally transferred between countries and companies under Article 6 of the Paris Agreement. 2025, therefore, could be a turning point for the market.

As for the next frontier, new projects under development now also appear to be, on average, of higher integrity. This is especially true for projects, both technology-based and nature-based, that remove carbon dioxide from the atmosphere. Standard-setting bodies for carbon markets are also focusing on quality. In June 2024, the Integrity Council for the Voluntary Carbon Market (ICVCM) announced the first set of carbon credit methodologies (and, by extension, projects) that meet its Core Carbon Principles (CCPs).

Significant users of carbon credits performed better across a range of climate metrics.

One of the main criticisms that has arguably limited the voluntary carbon market in recent years is the claim that companies that choose to buy and retire credits may be doing so instead of reducing their own carbon emissions. However, the MSCI report found that of the 8,844 companies in the MSCI ACWI Index (IMI), those that used carbon credits between 2017 and 2022 performed better across a range of climate performance metrics than those that did not.

Companies that used carbon credits were more transparent than those that did not in disclosing their Scope 1, 2, and 3 emissions—and more likely to set credible emissions reduction targets. Significant users of carbon credits were also more likely than nonusers to reduce their Scope 1 and 2 emissions by a median rate of 3.6 percent per year between 2017 and 2022, compared with 1.5 percent per year among nonusers.

This analysis demonstrates that carbon credits tend to be used as part of a company’s climate strategy, rather than as an alternative.

This makes sense, since in order to offset carbon credits and make voluntary commitments, companies need a minimum level of climate governance. This includes actions such as preparing a detailed emissions inventory, setting clear science-based emissions reduction targets, creating internal committees dedicated to climate management, implementing systems for monitoring and continuously reporting environmental performance, and communicating results transparently through sustainability reports aligned with global standards such as the GRI (Global Reporting Initiative) or the TCFD (Task Force on Climate-related Financial Disclosures).

National and regional carbon markets have been cautious about allowing the use of carbon credits for compliance purposes, especially since 2012, when international carbon credits were no longer allowed under the European Union’s Emissions Trading System (ETS). This is partly due to uncertainty about the equivalence of credits compared to real emissions units, but also to the desire to keep emissions reductions within the compliance scheme region. However, with specific eligibility requirements, some countries have supported the use of carbon credits and others are following suit.

Domestic carbon credits have been part of Australia’s emissions tax and trading scheme for more than 10 years, and South Africa has allowed up to 10% of the country’s carbon tax to be offset by carbon credits since 2019. Elsewhere, Colombia has allowed the use of credits to offset 50% of the domestic carbon tax since 2022, and in January 2024, Singapore allowed carbon credits to be used for up to 5% of taxable emissions.

Meanwhile, the UK is consulting on whether to allow some types of carbon credits in its own ETS. The biggest compliance market of all, the European Union’s ETS, has signalled that it may allow the use of some credits from projects that remove CO2 from the atmosphere.

Perhaps most relevant to carbon credits in the coming years is CORSIA. Launched by the International Civil Aviation Organization (ICAO) in 2016, this mechanism requires the use of carbon credits or sustainable aviation fuels to offset any growth in international aviation emissions above its reference level, currently set at 85% of 2019 emissions.

CORSIA is being implemented in phases, with 126 countries participating in Phase 1 between 2024 and 2026. MSCI Carbon Markets analysis estimates that up to 140 million tonnes of carbon credits could be required in this first phase.

Furthermore, for the first time in three years, significant progress was made at COP29 towards establishing carbon trading under Article 6 of the Paris Agreement. For the UN-backed carbon market (established under Article 6.4, now known as PACM), high-level standards for carbon project methodologies and other rules to address environmental and social impacts were agreed. As a result, more detailed rules and methodologies could be developed during 2025, potentially allowing the first credits under PACM to reach the market by the end of 2025.

Identifying a tipping point is only clear in hindsight. But there are enough indicators to suggest that 2025 could be the year when the global carbon credit market regains its positive momentum. If that happens, the impact could be significant. The MSCI report suggests that the total value of the carbon credit market could grow from around $1.5 billion in 2024 to between $7 and $35 billion in 2030 and between $45 and $250 billion in 2050, if companies and governments stick to their climate commitments.

Luciana Lanna

Carbon Markets and ESG 2025