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Fondaction Asset Management leads $160M carbon credit fund

Fondaction Asset Management will manage the Inlandsis II Fund to offer carbon credits centred around nature-based investments and support for climate tech. (Courtesy Fondaction Asset Management)

Fondaction Asset Management, a new asset management arm of the Quebec-based retirement fund, is intensifying efforts to provide carbon credits for voluntary and compliance markets in North America with plans for the $160-million Inlandsis II Fund.

The Inlandsis II Fund will be co-managed with partner Priori-T Capital and joined by limited partners such as the Chagnon Foundation, Sabius Private Institutional Mandate, Société Financière Bourgie, HEC Montréal and Horizon Capital Holdings.

It is the second fund led by Fondaction, which managed the Inlandsis I Fund in 2017 and contributed $24 million. It closed with $115 million in fundraising to generate carbon offset programs and investments into climate tech.

Fondaction has $3.25 billion under management and makes investments for more than 200,000 pensioners in Quebec. Fondaction Asset Management, managing $400 million, was founded in June 2022 to create funds for institutional investors, family offices and foundations interested in impact investing. It manages four funds primarily in the environmental and climate-related space.

Philippe Crête, the principal of Fondaction Asset Management investment team overseeing investment in the Inlandsis Fund, said his company created the funds because it believes carbon markets are a “necessary tool to achieve emissions reductions until technology is ready and at scale for large industries to be able to reduce internally. In the meantime, we believe in the strength and the power of markets to fund emissions reductions at the lowest cost to more rapidly decarbonize the market.”

About the Inlandsis II Fund

The Inlandsis II Fund intends to raise up to $160 million over 10 years toward greenhouse gas (GHG) emissions reductions projects mostly in North America, particularly Canada and the U.S. Fondaction Asset Management committed up to $30 million toward Fund II.

It will generate and maintain nature-based assets and support investments into climate tech as carbon credits that will be sold to compliance and voluntary carbon markets at a profit. It targets projects that cater to large corporations and financial institutions seeking to reduce their GHG footprint and become carbon neutral.

The first fund supported 40 biodigester projects, methane capture in abandoned coal mines, reducing methane leakage in oil and gas projects and forest conservation projects. Fondaction Asset Management will expand on that initial “investment thesis” with bigger and newer projects in Fund II.

Crête named further development of nature-based investment solutions in forestry and agriculture as a focus of Fund II. The first example he gave was grassland conservation in the U.S. Midwest to protect grassland from farmland or real estate development. The second will place timberland under a conservation trust.

He also listed emerging carbon capture technology as likely investments, ranging from direct air capture, technology that sequesters carbon into materials like cement, and blue carbon credits that store carbon around coastal or marine ecosystems.

“It’s a bigger fund. We’re gonna target slightly bigger projects, but not too big. Essentially, we operate in a space where there’s not a lot of capital providers. Projects that are a bit too small for large funds but considered too risky for banks to come in. We have a sweet spot I say anywhere between $2 to $10 million per investment. We’ll be doing more projects in Fund II somewhere around 10 to 15 investments.”

The expected emissions reductions from the Inlandsis II Fund will be 24 million tonnes of carbon dioxide equivalent over a decade, according to Crête. It more than doubles the 11 million tonnes of tonnes of carbon dioxide equivalent that will be removed by Fund I.

Selling to voluntary and compliance markets

Inlandsis II Fund will serve clients in voluntary and compliance markets. Like the first fund, Crête said it is investing in the Western Climate Initiative (the California and Quebec carbon market) and California’s low-carbon fuel standard market. It may also invest into Alberta’s compliance carbon market.

Fondaction Asset Management is “always on the look out for new markets that are developing,” and other U.S. states are seeking to link into California and Quebec’s carbon market or form their own carbon market, he added.

The rough estimate for a compliance to voluntary market ratio for the Inlandsis II Fund is 60 per cent to 40 per cent, but that may change, Crête said.

“We try to mitigate risk by splitting our investment between market segments. We know they are dynamic; regulations change.”

Crête could not disclose clients from the first fund, but said some were large companies in sectors like metal and mining or oil and gas.

Verifying its carbon credits

Crête said Fondaction Asset Management is working to address common criticisms of carbon credits.

For voluntary markets, the asset manager is working with standards like Verra and the American Carbon Registry. In compliance markets that require an independent, accredited third-party to perform audits, he said it is certifying its credits through the provincial and state governments to check the emissions reductions before they are registered, issued, certified and traded.

“Every time we invest in a project, we do a very thorough due diligence of the emission reduction it plans on generating or should be generating, carefully looking at the baseline or reference level that each project is assessing emissions reduction against, making sure that it is indeed robust.”

To ensure emissions reductions are happening, Crête said it is monitoring methane reductions in real time and seeing the levels decline.

To steer away from unqualified markets or ones without robust third-parties certifying the credits, the first fund was almost entirely focused on compliance markets connected to California’s, which Crête said made the company feel it “was a sign of quality and robustness of the market.”

The voluntary market has become more robust and transparent in issuing credits, he also observed.

With the Inlandsis II Fund, Fondaction Asset Management hopes to build carbon market expertise in Quebec to help support markets in the province and beyond.

“We’re not interested in being the only player in the space. We’re rather interested in creating new market segments and stimulating innovation so that others can embark on this journey and generate more investments in this space and raise more capital in the space.”

Editor's note: Corrected Fondaction's funds under management and the number of pensioners it serves. We also clarified Fondaction Asset Management "committed funds" rather than "added." Fund II will support and create carbon credits for both compliance and voluntary markets, not just voluntary. We regret the errors.

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