Building Trust in the Market

TL;DR: One of the clearest manifestations of Calyx Global's independence has been our refusal to accept payment from the developers whose projects we rate. While this continues to be our stance today, we stated before that if market conditions changed, including through increased regulatory oversight, tighter industry norms, and improved credit quality, we would assess whether our stance should evolve. 

With the EU's ESG Ratings regulation set to introduce formal oversight of carbon credit rating agencies for the first time, and with progress on some other indicators, we believe the moment to consider a change in posture has arrived. We haven't reached a decision on changing Calyx's approach yet, but we have decided to pilot a few developer-paid ratings with trusted partners to see how it would work in practice. We'll share what we learn.

Where we started

Some time ago, Calyx made a deliberate choice to stay on the "buy side" and not accept developer-paid ratings. We made that call at a moment when a crisis of confidence, driven by evidence of, and reporting on, poor-quality credits, was causing a significant pullback in the voluntary carbon market (VCM). Our reasoning was straightforward: the market needed at least one rating agency that was not taking payment from developers for ratings.

That reasoning hasn't disappeared. But the market around it has moved.

What's changed

The change that matters most for this discussion is regulatory. The EU's ESG Ratings regulation will bring third-party oversight to carbon credit rating agencies for the first time. The regulation is built around a model in which the rated entity pays for the rating, and it requires agencies to put governance, conflict management, and transparency safeguards in place. 

Alongside that shift, we've watched a change in who pays for ratings: what was once mostly funded by buyers and intermediaries is increasingly funded by developers paying ratings agencies directly. This is because other rating agencies have moved to this model in recent years. Calyx is the last major holdout.

Demand for quality has also risen sharply: buyers are looking well beyond "which program issued the credit" to the quality of individual projects, using tools such as ratings and the ICVCM's Core Carbon Principles label. Ratings, in particular, are becoming embedded in how buyers choose credits, with more buyers setting a minimum quality threshold rather than taking whatever is on offer. As a result, credit quality has been improving slowly but steadily, and buyers appear willing to pay more for it, as evidenced by the Calyx Carbon Integrity Index and the Calyx-ClearBlue Carbon Price-Integrity Index.

Together, these shifts raise a question for our company: are these changes enough to revisit our approach?

Our position

Regulation, safeguards, and oversight mitigate to some extent the conflict of interest that arises when a rating agency is paid by the party it is assessing. For example, the EU regulation requires clear policies on who engages market participants and with what scope. There are also other safeguards beyond regulation. For Calyx, this includes the independent ratings oversight panels we put in place in 2021. 

At the same time, the aligned interests of developers shopping for the highest rating and a rating agency's interest in growing near-term revenue pull in the direction of rating bias and inflation.

We acknowledge this tension.

The pilot

Rather than analyzing it in theory, and in light of the upcoming EU regulations, we are piloting several developer-paid ratings with trusted partners. The goal is to understand, in practice, how this would work within Calyx: what our internal process should look like, and whether the conflict can be managed effectively, without compromising the rigorous standards that underpin our ratings. 

We have not made a decision yet, and we're committed to sharing what we learn from the pilot to help inform good practice across the market, regardless of our decision.

Our mission

Our decision will be guided by our mission: better carbon markets for the planet and people, not better carbon markets to generate more revenue for Calyx Global. Staying true to that mission is what we believe has driven our success, and it's the same "enlightened" self-interest that guides us, knowing that a healthier market lifts everyone, including us.

We welcome your input as we work through this. Send your thoughts to our CEO: donna.lee@calyxglobal.com.